O.C.'s Dilemma: Pay Debt or Do Repairs

By SHELBY GRAD

Sept. 8, 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? The county’s attempt to set some spending priorities is generating heated discussions 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 subpar 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 $3.6-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, debt service made up only 14% of the budget.

Despite a debt service that has 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 is pledged to repaying $800 million in bankruptcy debts over the next 30 years under a complex plan that uses 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 yet-to-be-allocated $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.”

Others, however, say 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 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 needed for the south county.

“I think we have already addressed bond defeasance [early repayment] 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. When you talk about building more jail beds, it’s an issue of community safety.”

Whatever the board ultimately 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 Orange County’s robust economy and recovering real estate market are giving county government a boost that should eventually 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.”

Brodsly, with Moody’s Investor Service, said he was “very impressed” with top county managers and their long-range fiscal plans when he met with them earlier this year. “What they’ve been doing is a sign of fiscal discipline,” he said.

Still, Brodsly expressed concern over a lawsuit filed by community activists challenging the constitutionality of the state legislation that helped bail the county out of bankruptcy.

Doppelt said she was initially worried that the sharp budget cuts made after the bankruptcy would cause public outcry and political instability. “But things seem to be going smoothly,” she said. “They seem to be on target.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Debt Drag

Repaying public debt related to the Orange county’s bankruptcy and other issues makes up 28.2% of the county’s $3.6-billion 1997-98 budget. By contrast, debt service was only 14% of the cou1853126951 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 countries:

San Diego: $789

San Bernardino: $631

Orange: $572