Suit Challenges O.C. Bankruptcy Bailout as Illegal

A government watchdog group Wednesday asked the Superior Court to throw out Orange County’s carefully crafted bankruptcy bailout, saying it is unconstitutional.

Filed by a top official of the Committees of Correspondence, a local activist group, the 40-page complaint claims the legislation enacted to get the county out of bankruptcy siphons money from special funds and uses them in ways taxpayers never intended.

If successful, the lawsuit could force the county to make the sort of deep cuts in budgets and personnel that the recovery plan avoided. It would also create uncertainty over the repayment of $880 million in bonds the county borrowed to emerge from bankruptcy.

And it could force the county to seek voter approval to divert nearly $600 million in funds that were once intended to support transportation, redevelopment, flood control and the county’s harbors, beaches and parks.

Two weeks ago, a Los Angeles Superior Court judge declared unconstitutional a statute almost identical to Orange County’s special-purpose laws that would have shifted $50 million in transportation funds to the financially ailing Los Angeles County health system.

The plaintiff in the lawsuit filed Wednesday is Steve White, an Anaheim real estate broker and chairman of the steering committee of the Committees of Correspondence. The complaint names as defendants the State of California, State Controller Kathleen Connell, the Orange County Board of Supervisors, the Orange County Transportation Authority and several unnamed other parties.

“If, in fact, the diversion of funds is unconstitutional, let’s correct it,” White said. “Part of the reason the bankruptcy happened in the first place was the shuffling of funds from one account to another.”

Orange County officials say White’s legal challenge is distinct from the Los Angeles County case.

“If this involves the same legal claims asserted against L.A., we believe that the Orange County statute and facts are different, and that a court will find the statutes providing for the revenue diversions are constitutional,” said Bruce Bennett, the county’s bankruptcy lawyer.

Bennett said that any legal action should not affect the repayment of the county’s large borrowings. “The bonds are insured and this action will not have any impact on the insurance as far as we can tell.”

But Richard I. Fine, a Century City lawyer who won the judgment in the Los Angeles case two weeks ago, and filed the Orange County action Wednesday, said the issues in the two cases are the same.

In fact, he said, California law is so well-established on the use of tax money for situations like the Orange County fiscal crisis that the authors of the county’s legislation apparently knew it was vulnerable to a legal challenge.

In the complaint, Fine cited a legislative report that had noted when the legislation was under discussion that “potential litigation exists on the use of . . . funds as it could be challenged on its constitutionality.”

“This was absolutely a gamble,” Fine said. “I can conclude when they passed this legislation, as when they passed the L.A. legislation, they were gambling that no one would challenge them, because they had to know that if challenged they would lose.”

The bankruptcy recovery legislation consisted of a package of bills pushed through the Legislature by the Orange County delegation at the end of the session last year.

The deal generated enormous controversy when it was revealed that bus service would be significantly reduced to drain $38 million a year for 15 years from transportation funds, and that another $12 million a year for 20 years would be shifted from redevelopment, flood control and recreational uses to repay the $880 million in borrowings.

Such diversions have been illegal in the state since 1878 when a reform was written into the California Constitution after numerous municipalities that had benefited from special legislation went broke following a severe economic recession, according to the complaint.

The ban has been consistently upheld by state courts since, and the complaint quotes a 1970 decision by the state Supreme Court that describes why the Constitution was amended in the first place.

“Banks collapsed, the securities markets declined, municipalities defaulted on their bonds, businesses closed and trade stagnated. . . . Popular dissatisfaction had begun to focus on special legislation authorizing local indebtedness since it was felt that this gave undue influence to narrow interest groups . . . which would reap disproportionate benefits.”

The court went on to note: “The practice was considered to be a major cause of the inordinate mass of debt with which many communities were burdened.”

The lawsuit asks for a preliminary and permanent injunction against the diversion, that the bailout statutes be declared unconstitutional and that the transferred funds be returned to their original accounts with interest.

The case was assigned to Superior Court Judge Randell L. Wilkinson.

Late Wednesday, County Supervisor William G. Steiner said, “We have been reassured repeatedly by legal counsel that Orange County’s situation is much different than L.A.’s and that we’re on solid ground with this.”

But Patrick C. Shea, who represented a committee of cities, schools and other government agencies that shared in the $1.64-billion loss to the county-run investment pool, said the lawsuit will certainly be taken seriously.

“There’s plenty of screaming you could do about this complaint,” Shea said. “It challenges what is essentially the engine behind the recovery of the county.”

* THE SPIRIT OF 1996: Watchdog group cites historical precedence for protest. A49