Retiring Debt Is Taxing Topic for Supervisors

By SHELBY GRAD

Sept. 7, 1997 12 AM PT

TIMES STAFF WRITER

SANTA ANA —

More than a year after emerging from bankruptcy, Orange County faces a dilemma familiar to any family juggling credit-card debt, mortgage payments and a home in need of repairs.

Should the county devote all of its spendable income to repaying the more than $800 million in debt it racked up getting out of bankruptcy? Or should it use some of its money for long-neglected projects, such as maintaining aging elevators or expanding overcrowded jails and courthouses? Like family financial deliberations, the county’s attempt to set some spending priorities is generating heated discussion among supervisors, who will decide next month how to divvy up more than $16 million in yet-to-be-allocated funds for the 1997-98 budget.

Their decision could have implications on Wall Street, where the agencies that rate Orange County’s credit are deciding this fall whether to boost its sub-par investment rating. A better credit rating is crucial to the county’s recovery, because it would enable government to borrow money without paying exorbitant interest rates and buying the municipal bond market equivalent of mortgage insurance it must now obtain.

Wall Street analysts have said that setting extra money aside to repay the county’s debts early is one way to rebuild trust with the Wall Street investment community stung by the bankruptcy.

“Paying back the debt is important, because it shows fiscal prudence,” said Amy Doppelt, managing director at the Fitch Investors Service. “And by [repaying] the debt [early], they are giving themselves more operating flexibility in the future.”

David Brodsly, vice president of Moody’s Investment Service, agreed, but added: “In the long term, they have more to do than just meet debts. They have to operate the county. They can’t just fold up shop. They have core responsibilities to the community.”

About 28% of the county’s $3.7-billion budget is devoted to repaying its debts, both for bankruptcy recovery and a variety of other items such as airport debt and pension bonds. Five years ago, this debt service load made up only 14% of the overall budget.

Despite a debt service load that has virtually doubled, Orange County’s per-capita debt of $572 is moderate, compared to that of neighboring Southern California counties. San Diego and San Bernardino have greater per-capita debts, while Los Angeles and Riverside have less.

Orange County officials are quick to point out this fact, especially when arguing that their “Ba1” bond rating should be upgraded. San Diego County, by comparison, has an “A” rating, even though its per-capita debt is $789--38% higher than Orange County’s.

Orange County has pledged to repay $800 million in bankruptcy debts over the next 30 years under a complex plan that uses diverted tax money, the fees from letting out-of-county trash haulers use the county’s landfills, and other sources of revenue.

But the Board of Supervisors has also set aside an additional $50 million so far for early repayment of the bankruptcy bonds, and plans to devote an additional $90 million for that purpose over the next few years.

Some supervisors want to dedicate the unallocated $16 million to further bond repayment.

“We have this black cloud of debt hanging over the taxpayers of Orange County, and repaying it should be a top priority,” said Supervisor Jim Silva. “We are always getting requests to spend money on new programs. But this board has to learn to say ‘No.’ ”

However, others say that the $50-million early repayment fund is sufficient for now, and that the $16 million should be used for county projects that have languished since the 1994 financial collapse.

The county is struggling to expand the Theo Lacy Branch Jail in Orange in an effort to reduce severe overcrowding that results in the early releases of thousands of inmates a year. Juvenile Hall and the Orangewood Children’s Home also face a space crunch, and officials say a new courthouse is also needed for South County.

“I think we have already addressed bond defeasance as a priority and need to look at other areas,” said Supervisor Charles V. Smith. “There is a price you pay when you don’t keep up maintenance--it ends up costing more.”

Whatever the board decides, Wall Street analysts say the county’s slow but steady bankruptcy recovery should continue.

Zann Mann, publisher of the California Municipal Bond Advisor, said the county’s robust economy and recovering real estate market are giving county government a boost that should result in a higher investment rating.

“All the indicators are looking up. The bankruptcy is being forgiven, from what I can see,” Mann said. “Orange County’s debts were never really that high. So they’ve gone from a county with very little debt to one somewhere in the middle.”

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Debt Drag

Repaying public debt related to the county’s bankruptcy and other issues makes up 28.2% of the county’s $3.7 billion 1997-98 budget. By contrast, debt service was only 14% of the county’s 1992-93 budget.

1997-98 Budget

Debt service: 28%

Health/community/social services: 21

Public protection: 17

Environmental resources: 14

General government: 8

Capital improvements: 5

Insurance/reserve/misc. 7

Comparative Load

Even with an increased debt service load, the county’s per capita debt is less than some Southern California counties:

San Diego: $789

San Bernardino: $631