O.C. Debt Has Big Projects on Indefinite Hold

By SHELBY GRAD

April 22, 1997 12 AM PT

TIMES STAFF WRITER

SANTA ANA —

The county needs space for 7,000 more inmates so fewer criminals will win early releases from its overcrowded jails.

Another emergency shelter is needed for a growing number of abused and neglected children, some of whom now sleep in the foyer of a gymnasium.

South County needs to replace its courthouse, where the hallways are overflowing with people and where judges handle more cases on average than any other municipal court in the state.

And the Probation Department needs additional and more secure facilities to house increasingly violent inmates at Juvenile Hall, which was designed for 374 youths but often houses more than 500.

Two years of austere, post-bankruptcy budgets have left Orange County with a slate of critical big-ticket projects that have little chance of being realized as long as the county remains saddled with a low credit rating and $800 million in bankruptcy debts.

Today, the Board of Supervisors begins the task of crafting a comprehensive strategy to reduce the massive debt load ahead of schedule and convince a skeptical Wall Street to upgrade the county’s credit rating, making it possible for the county to resume borrowing money for capital projects.

“With the bankruptcy, there is a lot of pent-up demand” for capital outlays, said Gary Burton, the county’s chief financial officer. “Orange County is still a growing county. At some point, we are going to have to address these needs for more services. We can’t be in bankruptcy mode forever.”

Burton, Chief Executive Officer Jan Mittermeier and other top county officials have spent months preparing what is being called the “credit and debt management strategy,” which they hope will solidify the county’s fledging recovery from bankruptcy and improve its tarnished image in the financial world.

The plan calls on supervisors to set aside $140 million over the next four years for early repayment of bankruptcy debts. The savings would be used to redeem some of the $800 million in bonds the county issued last year to pay off creditors and emerge from bankruptcy.

Officials said the strategy would lower the county’s debt from $572 to $481 per resident by 2001. More important, they hope the early repayment plan will build enough goodwill on Wall Street to win the county an “investment grade” bond rating in two years and a “A” rating in four years.

The strategy seems simple enough, yet it is filled with risks and uncertainties. By embracing an aggressive early repayment plan, supervisors must reject requests to fund other worthy programs, from health care and children’s services to trial courts.

“To pay off debt early might make business sense, but county government is not a business,” said Jean Forbath, founder of Share Our Selves, a nonprofit charitable service organization in Costa Mesa. “The business of government is serving people.”

Moreover, no one is certain exactly what it will take for the county’s credit rating to rebound.

Orange County’s “is the only bankruptcy of its kind, so there are really no rules of thumb,” admitted David Brodsly, a vice president of Moody’s Investor Service, one of the bond-rating agencies that rates the county’s credit-worthiness.

“There is really no road map for this situation,” Brodsly added. “Sometimes the market has a short memory; sometimes it has a long memory.”

Some of Orange County’s bondholders will not soon forget how they got burned in the largest municipal bankruptcy in U. S. history, which occurred on Dec. 6, 1994, after a county-run investment pool lost $1.64 billion on risky Wall Street securities.

The bankruptcy forced the county to lay off hundreds of workers and slash department budgets by as much as a third.

Before the financial collapse, the county had an “AA” bond rating and one of the best financial reputations in the state. Now, nearly a year after emerging from bankruptcy, Orange County has the worst credit rating of any major California county.

The county’s “Ba1” rating makes it prohibitively expensive to raise money with new bond issues because of the higher interest it would have to offer, or the special insurance it would be forced to buy. So Mittermeier’s office has vowed to avoid short-term borrowing until the rating improves.

“Orange County does not have a good reputation” in financial circles, Burton acknowledged. “I can’t say how important it is to let the financial world know that this is a safe place to invest. . . . People who buy our bonds have to trust us.”

Some investors said they are willing to give Orange County a second chance--but only after its credit rating improves.

“It doesn’t matter who sells them; I buy them because of the rating,” said Charles Schonfeld, a Bay Area investor who held more than $1 million in Orange County bonds at the time of the bankruptcy. If the county’s credit rating were higher, “I wouldn’t have a problem investing in the county again,” he said.

An improved credit rating would also free up about $108 million in county funds that could be used to help finance capital projects or repay additional debts.

As part of the court-approved bankruptcy recovery plan, the money was held in reserve to cover short-term borrowing needs the county might have while waiting for property tax collections. Normally, the county borrows money to cover cash shortages that invariably develop between the beginning of the budget year and the collection of property taxes five to eight months later.

With its low credit rating, such short-term borrowing is now prohibitively expensive.

But if the rating is upgraded and short-term borrowing becomes feasible again, the $108 million would become available.

The need for an improved credit rating was underscored last month when county officials revealed that overcrowding at Juvenile Hall and the Orangewood Children’s Home had hit record levels.

The Social Services Agency wants to build a second emergency children’s shelter in South County, but lacks the money for construction or operations. The Sheriff’s Department, which because of overcrowding annually releases thousands of inmates before their jail terms expire, needs millions to expand the Theo Lacy Branch Jail.

Sheriff Brad Gates also wants to upgrade and expand the James A. Musick Branch Jail in Irvine.

When Burton and Mittermeier first discussed the strategy with the board in February, supervisors expressed strong support for early debt repayment and efforts to improve the county’s image on Wall Street.

But as budget deliberations begin, supervisors will be bombarded with requests for funding increases. Already, the county’s trial courts are demanding as much as $13.9 million in additional funds for the current fiscal year, and millions more in the budget year starting July 1. Welfare reform could also force the county to allocate more money to social services.

“It’s going to be very tough in the short term,” Burton said.

Forbath and other activists said the Board of Supervisors needs to strike a better balance between the needs of the poor and infirm, and the desirability of an improved credit rating.

“It doesn’t make sense to keep county services and health care at minimum levels, especially if there is more money available,” Forbath said.

The county is pursuing upward of $3 billion in lawsuits against more than a dozen Wall Street firms and others it holds responsible for the bankruptcy. While these cases could produce a financial windfall, other government agencies that lost money in the county-run investment pool will get the first $600 million before county government realizes any gains, officials said.

Steve Shea, director of research for the California Debt Advisory Commission in Sacramento, said Orange County still faces challenges in its quest for an improved credit rating, but that it is off to a good start.

“You look at the personnel changes. The top people at the county and the Board of Supervisors have changed since the bankruptcy. That goes a long way to restoring credibility,” Shea said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Debt Burden

As Orange County begins paying principal as well as interest on bankruptcy debt, the amount will consume a greater share of the county’s budget:

REPAYMENT

% OF BUDGET

****

COUNTIES COMPARED

Here’s how Orange County’s credit rating, from Moody’s Investor Service, and per-capita debt compare with other Southland counties:

LOS ANGELES COUNTY: $494

Rating: A

ORANGE COUNTY: $572

Rating: Ba1