Orange County Crafts Plan to Ease Debt, Improve Credit

The Sheriff’s Department needs more jail beds. The Social Services Agency needs another emergency shelter for abused and neglected children. South Orange County residents need a new courthouse. The Probation Department needs more space to house increasingly violent juvenile offenders.

Two years of austere budgets since Orange County filed for bankruptcy have left the 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 crafting a strategy to reduce the massive debt load ahead of schedule and persuade a skeptical Wall Street to upgrade the county’s credit rating, which would make 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 Jan Mittermeier and other top county officials have spent months preparing 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 would build enough goodwill on Wall Street to win the county an “investment grade” bond rating in two years and an “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 other worthy projects.

“To pay off debt early might make business sense, but county government is not a business,” said Jean Forbath, founder of Share Our Services, a nonprofit 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,” said David Brodsly, a vice president of Moody’s Investors Service, one of the bond-rating agencies that ranks the county’s credit-worthiness.

“There is really no road map for this situation. 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 Dec. 6, 1994, after a county-run investment pool lost $1.64 billion on risky securities.

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.”

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 Orange County, but lacks money for construction or operations.

Forbath and other activists said supervisors need to strike a better balance between the needs of the poor and infirm and the desire for 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.

Steve Shea, director of research for the California Debt Advisory Commission in Sacramento, said Orange County still faces challenges in getting a better credit rating, but is off to a good start.

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