One of America's richest counties formally closes the book this week on the largest municipal bankruptcy in the nation's history.
But it may have opened the door to future problems for Orange County as a result of reduced funds for social and other services, from health care to trash pickup to jails. In addition, lawsuits just filed by disgruntled investors could take years to resolve.
For now, though, a regenerated California economy has helped to resolve the bankruptcy problem, taking the heat off the county to fulfill its promise of large-scale economic reform.
"From a county bond investor's point of view, everything for Orange County has turned out in pretty good shape," says Zane Mann, publisher of California Bond Advisor, which has monitored the county's financial crisis since it began 18 months ago. "But from a taxpayer's point of view, tens of millions of dollars will be lost every year that could've been spent on something else. Whether they can live with that remains to be seen."
Dog days of December
It was Dec. 6, 1994, when officials in California's affluent Orange County shocked the nation by announcing a whopping $1.9 billion loss in their public investment pool. This week, the sale of $880 million in bonds, completed in a staged ceremony yesterday, has formally ended the resulting bankruptcy proceedings.
Money from the new bond sales is being used to pay off the purchasers of county bonds once threatened with default. But investors in the troubled investment pool, which used complex strategies including heavy borrowing to buy securities known as derivatives, will be getting back only 80 to 90 cents per dollar invested.
The remaining shortfall, about $1.06 billion, is the subject of several damage suits filed Tuesday against broker Merrill Lynch & Co. and the county's former outside auditor, KPMG Peat Marwick LLP.
The lawsuits are numerous and complicated, and few analysts here will speculate on chances of success or failure. In the meantime, they are examining how Orange County will fare as a result of its current financial strategy, assuming no additional monetary damages are awarded investors from pending litigation.
The consensus: far better than anyone hoped. "Orange County has come out of this in extraordinarily good shape," says Rick Reiff, editor of the Orange County Business Journal. Noting that the 2-million-strong population of mostly affluent communities has an extremely diverse economy with an $80 billion annual gross product, he says: "We've managed to get out without getting stung up front ... and maybe not in the future either."
By putting up county buildings as collateral and raiding vast monetary reserves the county held in such areas as parks, beaches, and transportation, the financial recovery plan was able to raise enough money to pay back previous bondholders plus interest.
"This county was awash in cash, and it took this crisis for officials to own up to it and use it," says William Dannemeyer, an antitax activist who formerly represented Orange County in Congress for 14 years.
Although the aggregate loss to pool investors remains high at this point - $1.06 billion, pending litigation - the loss is being spread over more than 200 entities including schools, cities, water, sewer, transportation, and other agencies. Many will soften the blow by spreading losses over the coming decades. "We think the negative effect of this will be a blip on the radar screen," says Esmail Adibi, head of the Center for Economic Research at Chapman University in Orange, Calif.
In a just-released Chapman study, Mr. Adibi estimates direct and indirect job losses to total only 2,880 in the year since the bankruptcy. He measures that against a gain of 23,000 jobs over the same period, due to California's recent emergence from recession.
What will suffer for years to come, to an extent that is unclear, are social services ranging from parks to trash collection.
"The losers are the fringe members of this community - gang members, who will no longer have remedial programs, drug users, wife abusers," Mr. Reiff says. "But these are not the typical Orange County taxpayers."
Because of greater prosperity in the United States and particularly in California, many analysts say the lessons that Orange County might have been forced to learn will not materialize. Public activism to restructure county government has petered out in recent months as business indicators have risen.
"They had a huge chance to reform the practices that caused this, but they blew it," says Fred Silva, a member of the California Constitution Revision Commission.
The general image of county government has been forever altered, however, most analysts feel, as the once-forbidden idea of reneging on public debt veered close to reality. And the particular economic profile of Orange County has suffered, with the loss of top bond ratings and the prospect of further litigation.
But Larry Naake, president of the National Association of Counties, adds that the episode caused unprecedented self-examination by local governments across the US.
"It shook people deeply and made them look at what they were doing to see if it was by the book," says Mr. Naake. "It was a wake-up call about the dangers of derivatives and leveraging."