Bankruptcy All But in Past, Turn the Minus Into a Plus

Esmael Adibi is director of the Anderson Center for Economic Research at Chapman University

The announcement of the Orange County bankruptcy could not have come at a worse time than it did, on Dec. 6, 1994. From 1990 to 1993, the county lost 57,000 payroll jobs, or about 5% of its employment base. The economy was suffering from an excess inventory of residential and nonresidential real estate, continuous cutbacks in defense spending and the lingering effects of national economic recessions of 1990-91.

In fact, it wasn't until the middle of 1994 that the county payroll employment began to grow again. A loss of $1.64 billion in the county's investment pool placed serious doubt on the ability of the local economy to absorb this unexpected shock and continue its expansion path.

Several days after the bankruptcy announcement, the Anderson Center for Economic Research at Chapman University issued a news release stating that the bankruptcy would not have a significant negative impact on the county's economy nor would it derail the county recovery. This analysis was based on our assumption that the entire loss would be funded through bond financing, and payments of these new debt installments would be spread over a period of 20 to 30 years. With a gross county product exceeding $80 billion in 1994, the negative impact on the economy of payments of principal and interest on the borrowing was reported to be minimal.

After nearly three and a half years since the bankruptcy filing, the performance of the Orange County economy supports our initial assessment. Since 1994, the county's economic expansion has resulted in the net creation of 114,000 jobs. This is double the 57,000 jobs lost during the 1990-93 recessionary period. Rapid economic growth at the national level coupled with the ability of our local companies to enter and capture foreign markets led to significantly higher levels of exports of goods and services to the rest of the country and the world. As a result, local employment growth steadily increased over the 1994-97 period.

Of course, the county's economic expansion could have been even stronger if the cloud of bankruptcy and the loss of $1.64 billion in our investment pool had not occurred. Since 1994, the county, cities, school districts and other municipalities that suffered losses in the investment pool were forced to cut back on employment, defer cost-of-living salary adjustments, curtail services to some county residents who rightfully deserve them and, more importantly, postpone major capital investments.

The delay in capital investment projects made it increasingly difficult for the county to provide public services that are important for the future growth of the local economy. For example, the county is now faced with a long list of needs that all require capital funding appropriations. Some of these critical choices include: jail expansion, children and family services centers, Orangewood expansion, central and south courts space needs, and deferred maintenance.

The recent settlements with Merrill Lynch and a few other financial institutions subject to the county's lawsuit litigation are welcome news. Of course, one could argue that the county is entitled to a larger financial settlement than received thus far. And, some argue that the county should settle for nothing less than the entire loss.

Although it is difficult to assess what any settlement should be, one should not ignore the numerous investment errors that were committed by county officials and the lack of appropriate oversight. Any attempt to shift the entire responsibility to other parties is little more than passing the buck and unwillingness to accept responsibility for one's actions.

There are about 20 additional lawsuits pending against other parties. It seems reasonable to assume that future settlements are forthcoming. As a result, the total accumulated amount of proceeds from all settlements could exceed $800 million. According to the consensus recovery plan, the proceeds from any settlement are shared by all entities according to a preset formula.

This is the time for Orange County officials to make prudent decisions regarding how these windfalls are to be used to enhance future economic growth and prosperity. These decisions should incorporate both a good balance of debt repayment plan, when financially feasible, and a wise capital spending schedule. This will send a clear message to the business and financial community that the county is willing and prepared to close this ugly chapter in its history.

The lessons from the bankruptcy are numerous and should not be forgotten. Orange County's superior economic comeback of the last three years, however, is not happenstance. The county is blessed with an educated and diverse labor force, a superior higher education system, a well-established industrial base and a pleasant climate. With a financially healthy and responsible local government, the future will be bright.

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