County Gropes for Way Out of Woods

Five months after Orange County declared bankruptcy, solutions are emerging

IN burgundy-paneled Room 606 of United States Bankruptcy Court here, a gaggle of gray-suited lawyers queues up behind a fuzzy microphone.

Representing nearly 200 public entities that lost $1.7 billion in America's largest-ever bankruptcy last December, they voice recommendations and reservations over a plan that will give the investors -- including schools and city governments -- an average of 77 cents back for every dollar lost.

''I want to reiterate that this is not a cure, but progress in the case,'' says one attorney in a serious tone.

His comment encapsulates some of the sentiments reverberating through this once-affluent county. Five months after local officials made national headlines by disclosing the billion-dollar loss from risky investments, frustration remains high. Many residents are worried about future funding of their schools and if there will be police to patrol their neighborhoods.

Reason for hope

But after months of behind-the-scenes negotiating, three key events in a week have many observers heartened that substantive solutions finally may be in the works.

* On Tuesday, in the day-long hearing that drew dozens of lawyers, US Bankruptcy Judge John Ryan issued his ruling that schools, cities, and agencies with investments trapped in the bankruptcy can begin receiving notes convertible into cash as early as June.

''I want to congratulate all of the attorneys and clients in connection with this process,'' Judge Ryan said. ''You're really dealing with a compromise on on both sides.''

* On Monday, the California State Senate approved three measures designed to help the county raise much-needed cash and more effectively attract lenders. One would allow the county to get a $60 million loan and raise $10 million annually by selling off its interest in delinquent property taxes.

In another, the state could divert the county's vehicle license-fee revenue into a special fund that could be used to shore up some $660 million in new loans. A third permits the county to sell off its property and other assets more quickly by avoiding the full, public disclosure process now in use.

''This has been a very complicated process to sort out and winds up being somewhat of a jigsaw puzzle,'' says state Sen. John R. Lewis (R) of Orange County who sponsored the bills. Noting that their passage may be more problematic in a highly politicized state Assembly, Senator Lewis nonetheless says approval of the bills shows significant support at the state level for ways to solve the crisis without dipping into recession-strapped state coffers.

* And last Thursday, April 27, former Orange County Treasurer-Tax Collector Robert Citron pleaded guilty to six felony counts. Mr. Citron's stunning admission is expected to speed prosecution in the case. The counts include falsifying documents, failure to transfer public funds, and maintaining false entries in a public record.

''Mr. Citron pleaded guilty because he's guilty,'' said David Wiechert, Citron's attorney. ''[He] didn't want to put the county to the expense of a lengthy trial ... he wants to cooperate and make amends.''

Citron, manager of Orange County's investment pool since 1970, used complex strategies, including heavy borrowing, to buy securities known as derivatives. When interest rates climbed several times last year, he had to keep putting up more cash as collateral to guarantee loans. In the end, creditors demanded so much that he had to file for bankruptcy.

Besides speeding an investigative process that was expected to take months, Citron's guilty pleas are likely to affect a suit filed by the county against Merrill Lynch & Co., the nation's largest investment banking firm, alleging that Merrill Lynch sold Citron risky securities in violation of state law.

''It has taken time, but several key people have done a tremendous job in ferreting out all the things that can be done in a short time to get this under control,'' says Dennis Aigner, dean of the business school at the University of California, Irvine.

Sales-tax spat

While that suit is pending, and until further Assembly action is taken, most observers here feel a public vote on whether to raise the sales tax by 1/2 cent will assume the spotlight.

''It's a very volatile issue cutting across party lines for this very conservative, antitax county,'' says Rick Reith, editor of the California Business Journal. If passed, the measure would allow the county to borrow from $700 million to $800 million immediately and pay back the loan at about $130 million per year for 10 years.

But detractors -- about two-thirds of voters at the moment -- say such savings could be made by cutting the salaries of public employees to coincide with national averages. An additional $400 million could be transferred from funds intended to study rail transportation, they say.

''The county has not yet considered enough alternatives,'' says William Dannemeyer, a former state politician leading the antitax forces. ''More taxes will fuel the business exodus that already exists in California.''

Public anger

Meanwhile, the search goes on for more county assets to go on the sales block, more cuts of county employees, and attempts to privatize some services. All three anger citizens in every corner of the county.

''Morale is so low that people literally sit around and mope about the future,'' says Lionel McCormick, a 10-year specialist in human resources for the county who was next in line for a position that no longer exists. By May 11, 306 more of his department co-workers will be gone. Promotions, pay raises, and cost-of-living adjustments are frozen until further notice. His wife, also a county worker, has already been let go.

''We woke up on Dec. 6, [1994] and found ourselves in bankruptcy,'' he says. ''I still haven't figured out why.''

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