Schools Lobby for Share of Payment to O.C.

By SHELBY GRAD and NICK ANDERSON

June 21, 1997 12 AM PT

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TIMES STAFF WRITERS

SANTA ANA — School districts and other government agencies that are still owed money from the county’s 1994 bankruptcy vowed Friday to fight for the $30 million that Merrill Lynch & Co. will pay the county as part of a settlement to avoid prosecution.

“Everybody is posturing with their hands out,” said Supervisor Charles V. Smith. “But I think it would be inappropriate, and maybe even illegal, for us to just give taxpayer money to different groups and organizations.”

The county’s school districts and related agencies still have not been paid about $107 million--or 9%--of the roughly $1 billion they had deposited in a county-run investment pool, along with nearly 200 cities and special districts.

When the investment pool lost $1.64 billion on risky securities in the fall of 1994, the county declared bankruptcy, liquidated the investment pool’s money-losing assets, and apportioned the losses among all of the pool investors.

Although all of the investors received at least 80% of their deposits, the recovery plan approved by the U.S. Bankruptcy Court has an elaborate formula for repaying the remaining balances from “litigation proceeds” the county hopes to win in civil lawsuits filed against Merrill Lynch and a dozen other firms it holds responsible for causing the financial debacle.

The recovery plan calls for the school districts to receive the first $55 million in such litigation proceeds.

School officials said Friday that they believe the $30-million settlement with Dist. Atty. Michael R. Capizzi should go to their districts to pay for computers, make long-delayed repairs to classrooms and playgrounds, and to help cover the costs of class-size reduction.

“It needs to go to schools,” said Donna Artukovic, president of Orange County’s Parent Teacher Assn. “Our children are where we need to put our money. They’re totally innocent victims in all this. If we don’t put the money into the schools, we’re just frittering away our future.”

The $30 million is scheduled to be deposited in the county’s general fund sometime next week. County Counsel Laurence M. Watson said Friday that his office is still trying to determine whether the money should go to pool investors or stay with the county.

Both sides agree that the recovery plan does not specifically address how proceeds from the settlement of a criminal investigation should be divided.

Board of Supervisors Chairman William G. Steiner suggested Thursday that at least some of the money be transferred to the schools as a show of “good faith” by the county. But others in county government seem unenthusiastic about Steiner’s idea, especially if the county counsel determines that the money does not belong to pool investors.

Smith said he would like to focus on using the $30 million to begin satisfying a host of county needs, including construction of new jails, juvenile detention facilities and emergency children’s shelters.

Supervisor Todd Spitzer said he wants to hear from attorneys representing all sides before deciding how he thinks the money should be used. “It’s premature to make that kind of decision, until I have all the facts,” he said Friday.

Supervisor Thomas W. Wilson has suggested that a portion of the settlement be used as “seed money” for a long-delayed capital project, such as a new South County courthouse. Wilson said Thursday he might also consider allocating the schools some of the money.

If the Board of Supervisors ultimately decides to hold on to the windfall, county Chief Financial Officer Gary Burton said he would recommend using it for a one-time expenditure, such as a capital project, rather than for hiring more workers, which would add to the county’s operating budget for years to come.

But Patrick Shea, an attorney representing pool investors, said the entire settlement should be distributed to his clients through the recovery plan.

“I believe this falls within the agreement,” Shea said. “It’s a settlement of claims related to the bankruptcy. The county needs to play fair with the people that trusted them.”

Pool investors could take their case to the U.S. Bankruptcy Court for consideration if the county decides to keep the $30 million, he added.

Most of Orange County’s school districts and the Department of Education are still missing anywhere from several hundred thousand to several million dollars due to the bankruptcy.

In general, schools are now pressed for cash because of two factors: Enrollment in the county is growing at nearly 5% a year, more than double the rate in recent years; and an army of new teachers is being hired in a massive push to reduce class size in primary grades.

Most school officials said they wouldn’t spend any recovered money on year-to-year items, such as teacher salaries. Rather, they would use it to make capital investments. Some said, for instance, that they would consider buying portable classrooms, which can cost more than $50,000 apiece when installed.

In Irvine Unified, which is still $9.7 million in the hole, Supt. Dennis M. Smith said any recovered money would likely be spent on repaying debt the district incurred on the bond market to stabilize itself after the fiscal catastrophe.

In Newport-Mesa Unified, another hard-hit district with $8.1 million in losses, Supt. Mac Bernd said he would recommend spending on backlogged maintenance or school refurbishing. For instance, he said, the district is reopening two closed schools in the fall in order to find space for reduced-size classes in third grade.

The cost of reopening those schools is about $2 million to $3 million, Bernd said. But he also said the district needs money to replace old carpet, repaint buildings and reseal cracked asphalt on playgrounds. “The list could just go on and on,” Bernd said. “We’ve got some long-standing problems that absolutely have to be addressed.”

Supt. Peter A. Hartman of Saddleback Valley Unified said he might spend money on teacher training. Many teachers who were just hired for the smaller classes in elementary schools are in their first or second years. “There are lots of ways we could figure out good uses for the money,” said Hartman, whose district is owed about $4.6 million.

The dispute over who will get the $30 million comes one day after Capizzi announced the settlement, which ends the district attorney’s 2 1/2-year investigation into the bankruptcy.

Merrill Lynch sold the county many of the exotic securities that contributed to the financial collapse. The brokerage house has consistently denied any wrongdoing and did not admit to any misdeeds in agreeing to the settlement.

Under the recovery plan, school districts see the first proceeds from bankruptcy litigation, followed by other government agencies including cities and the county.

“The quicker the schools get paid, the quicker everyone else gets their money back,” said John Nelson, assistant superintendent of the Orange County Department of Education. “Everyone else gets closer in line.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

School Claims

Orange County school districts and education agencies are still owed $107 million in losses stemming from the 1994 county bankruptcy. A look at each district:

District: Amount

Orange County Department of Education: $6.9 million

Anaheim City: 780,000

Anaheim Union High: 1.9 million

Brea-Olinda Unified: 740,000

Buena Park: 430,000

Capistrano Unified: 6.0 million

Centralia: 860,000

Cypress: 630,000

Fountain Valley: 550,000

Fullerton: 500,000

Fullerton Joint Union High: 2.6 million