O.C. Officials Say Debt Must Be Refinanced : Bankruptcy: In bleakest assessment yet, shortfall is put at $172 million and growing. Top adviser says situation is ‘pretty grim.’
SANTA ANA — Unable to pay bills and maintain many services, Orange County leaders outlined a broad proposal for recovery Wednesday that includes refinancing some of its debt, paring operations, persuading creditors to share in its loss and considering a legal blitz against those they believe are responsible for the financial mess.
Offering their bleakest assessment yet, officials confirmed for the first time that the county faces a budget shortfall of at least $172 million over the next six months and faces another $160-million gap in the next fiscal year, which begins in July. Previously, county officials said that $40 million in budget cuts were needed.
“We now know the size of the problem,†said new Board of Supervisors Chairman Gaddi H. Vasquez. “The loss is absolutely real and far deeper than anyone previously anticipated.â€
“It’s pretty grim,†said former state Treasurer Thomas W. Hayes, the county’s chief financial adviser.
In other developments Wednesday:
* One of the county’s largest departments, the General Services Agency, announced that 72 employees would lose their jobs, the biggest layoff since the county declared bankruptcy Dec. 6.
* In Sacramento, the Senate Rules Committee issued subpoenas requiring former Treasurer-Tax Collector Robert L. Citron, his chief assistant Matthew Raabe and Michael Stamenson, the Merrill Lynch broker under scrutiny by federal regulators--to appear at a Jan. 17 hearing.
The three are key figures in the county’s financial collapse. Legislators decided to issue subpoenas after the committee received a letter from Orange County Dist. Atty. Michael R. Capizzi asking that lawmakers avoid granting legal immunity to the men if they refuse to testify on the grounds of self-incrimination.
“Mr. Citron is a potential suspect in this important criminal investigation,†Capizzi said in his Jan. 3 letter. “The grant of immunity by a (state) Senate committee would effectively foreclose any criminal prosecution of Mr. Citron or any other witness who gave immunized testimony.â€
* Irvine Unified School District trustees declared a state of financial emergency and slashed $795,000 from the district’s 1994-1995 budget of $100 million. “This is the lowest moment that we have experienced,†said longtime Trustee Margie Wakeham.
* The county’s administrative and judicial offices have been flooded with calls from people who put up cash for bail money and have been unable to get the money returned once their cases are resolved. The county also continues to hold money the marshal’s office has collected in the form of wage garnishments from people who owe money in legal judgments, according to the county auditor-controller’s office.
“The system has come to a screeching halt,†said Gary Leach, the office’s claims manager. “They’re all going to get their money, we just don’t when.â€
* More than 50 private attorneys and investigators who defend impoverished clients learned that their services likely would not be needed after the public defender’s office creates two new divisions to handle cases previously farmed out to private counsel.
Court-appointed lawyers who took cases before the bankruptcy complained they were not getting paid. Among them: the attorney for computer consultant Richard K. Overton, one of Orange County’s most notorious murder defendants. He said he is owed “tens of thousands†of dollars and is uncertain if he can take the case to trial next month.
* U.S. Bankruptcy Court Judge John E. Ryan approved the county’s request to make $4.2 million in payments to bondholders, a step county lawyers considered critical to reassuring anxious bond markets in hopes of eventually re-establishing the county’s credit.
* The county auctioned $258 million in corporate securities from its investment pool to reduce the average maturity of the portfolio and lower its exposure to movements in interest rates. The sale represented only a portion of the $458 million that was put up for bid, and the auction is to continue today. It could not be determined what the county received for the securities sold Wednesday.
The county’s financial advisers offered a broad four-point plan for digging out from bankruptcy.
Elements of the plan include: refinancing existing debt to stretch out maturities, which would buy the county more time to pay off its existing loans; charting a new course of borrowing--the size and timing of which has not yet been determined--to replace more than $2 billion lost this year in the investment pool; restructuring county government to reduce expenses and taking aggressive legal action to recover the county’s losses.
Bruce Bennett, the county’s bankruptcy attorney, said Orange County itself has taken at least a $700-million hit on its principal investment of $2.4 billion in the now-frozen pool. In all, 187 municipalities had deposited $7.4 billion in the pool before its collapse, according to revised figures released Wednesday. The losses total 27% of the investors’ principal.
The financial advisers stressed Wednesday that all the fund’s investors should share the losses equitably, although they conceded that some agencies may get a greater share of the remaining money. The disbursement still needs to be negotiated, Bennett said.
“The saddest part about it is it’s a pure zero sum game,†Bennett said. “This is potentially a free-for-all, but we’re going to do everything in our power to resolve this.â€
Bennett said the county could not absorb the entire $2.02-billion loss on the portfolio and give the other agencies that invested 100% of their money even if it wanted to. The county has $2.4 billion in the fund, but state and federal laws restrict what the county can do with much of that money, he said.
“It’s too much to ask that there will be consensus†among the 187 pool investors, Bennett acknowledged, but he said he is seeking fiscal options that will win support from a majority of the investors.
New borrowing will be necessary for the county to work its way out of its fiscal nightmare, officials said. But the ability to take out future loans will depend on whether the county can balance its budget and generate enough cash to regain the confidence of the financial markets, officials said.
“The county is not going to be able to borrow its way out of its problems,†Hayes said. “You can’t borrow money you can’t pay back.â€
Another possible, but unlikely, solution is raising taxes. Bennett said he could not rule out the option. But Hayes said there is neither political nor public support for such an action.
“Any meaningful increase in revenues will take a two-thirds vote of the people and that is not going to happen in Orange County,†Hayes said.
The county also faces significant legal hurdles in structuring a debt offering, especially one that would be paid off over 10 to 20 years, he said. State law prohibits counties and other governmental entities from selling certain types of bonds if they don’t have balanced budgets, Hayes said.
Because of their cash flow crisis, county officials said they do not have enough money on hand to make debt payments on existing bonds over the next six months.
Specifically, advisers said, the county will not have the cash to set aside monthly payments due on annual note borrowings the county must repay in June. The county already failed to put aside December and January payments, and officials said Wednesday it can’t afford to make the rest of its payments.
And that borrowing is just the tip of the iceberg. Just weeks into the next fiscal year in July, the county must come up with $600 million to pay off a taxable note issue sold just to reap investments returns in the county pool. Other bonds that will come due include a $100-million taxable flood control bond and $320 million in pension bond payments, according to the county.
But that does not mean that the county does not plan to make good on its debt to bondholders, Bennett said.
“We will be talking with bondholders about extending the maturities on some of the bonds†and possible refinancing of bonds, Bennett said. The decision on whether to make interest and principal payments will be made on a monthly basis, he said.
Any kind of bond refinancings or extension of maturities will be greeted with caution and concern by bondholders, specialists said.
“This sounds to me like this is what they are going to tell the judge they need, and then bondholders are going to be stuck,†said Richard Lehman, president of the Bond Investors Assn. in Miami, a nonprofit bondholders group. “They are acting real nice, like, ‘This is what we are going to tell the bondholders,’ but what they are really doing is saying to bondholders, ‘This is what we are going to cram down your throat.’ â€
Lehman predicted that prices of Orange County notes could fall, because the county is signaling it will not have the cash reserves for debt service payments.
He said if bondholders do accept a restructuring or extension of maturities, they will want to be compensated with higher rates of returns on the bonds.
When New York City said it could not make good on its annual notes in the mid-1970s, it asked its buyers to accept new, restructured notes, but some bondholders did not and went to court. The bondholders who went to court got more on their investments than others, said Lehman, who said he was concerned that something similar could happen in Orange County.
After the Board of Supervisors was briefed on the magnitude of the budget gap, frustrated supervisors peppered county staff and advisers with questions on how to make up the shortfall. Nobody, however, was able to offer a very detailed solution.
County Administrative Officer Ernie Schneider said more budget cuts are likely, adding that he was working on a comprehensive plan to be released within a couple of weeks.
“I think we need it before the next several weeks,†said Supervisor Roger R. Stanton, clearly annoyed with Schneider.
The supervisors also squabbled over whether to disband the operations management team that proposed the initial $40 million in county budget cuts. Stanton said the team--comprised of Capizzi, Sheriff Brad Gates and Health Care Agency Director Tom Uram--is crucial, while Supervisor William G. Steiner said the committee should be dissolved so Schneider could develop a recovery plan and prepare next year’s budget.
A local taxpayers group that had called on supervisors to reduce county government and trim their own salaries said Wednesday that just one supervisor--Stanton--agreed to a list of demands the group presented the board last month.
Two other supervisors--Steiner and Marian Bergeson--responded to the pledge but did not sign it, said Carole Walters, a member of the group, called the Committees of Correspondence.
Steiner told Walters that he had reduced his staff expenses by 13% before the crisis and planned to reduce it by an additional 14% soon, she said. Steiner and Stanton also said they agreed with the group’s demand that board meetings be held at night so that working people could attend, Walters said.
Bennett said it was inevitable that the county will file more lawsuits to recover its money. The county already has sued Nomura Securities, one of the investment houses that cashed in collateral it held on loans to the county, triggering the bankruptcy.
Adding to the day’s gloom over finances was the news that 72 workers were being laid off and six other workers accepted an early-retirement offer in the county’s General Services Agency, which purchases real estate, maintains county buildings and oversees the library system. Another 39 positions will go unfilled. Some of the workers are employed by Martin Marietta Corp. and work under contract at the county data center.
“At this point, we have exhausted our options and have no alternative but to lay off county and Martin Marietta employees,†said a statement released by General Service Agency director Bert Scott. “We will be working with human resources (staff) to place these people in other operations that have a need for competent experienced personnel.â€
Talk of new layoffs brought an angry reaction from the Orange County Employee Assn., which represents 11,000 of the county’s 18,000 workers.
“Bert Scott has taken an inhumane, meat-ax approach that defies common sense and totally violates our labor agreements,†said John H. Sawyer, general manager of the union.
Scott did not return calls for comment.
Sawyer said several of the GSA workers fired Wednesday had worked for the county for 25 years or more. Attorneys for the association will be checking to determine whether any of the laid-off employees may have been fired because of their age, sex, race or union activities, he said.
The union’s anger was exacerbated, Sawyer said, by its discovery that the county has hired 84 people in a variety of departments and positions since the financial crisis erupted last month.
“They’ll give you all kinds of explanations (for the hirings), including special skills and all that, but a lot of it is going to be hogwash,†he said.
Times staff writers Michael A. Hiltzik in Los Angeles, Eric Bailey in Sacramento and Tracy Weber, Susan Marquez Owen, Rebecca Trounson, Chris Woodyard and correspondents Shelby Grad and Russ Loar in Orange County contributed to this report.
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Headed for the Red
The $1.64-billion general fund is where the county is hit hard. Most of the fund, 72%, comes from federal and state governments and is money the county administers for local programs and receives for services. The county has discretion over the remaining 28%. The problem: the county cannot get at $160 million it expected to earn in interest income from the now frozen investment fund.
General fund budgeted revenue Total budgeted general fund: $1.64 billion Intergovernmental, other revenue: $1.18 billion County revenue: $463 million General fund revenue sources, fiscal 1994-95 (In millions of dollars) Budgeted Projected Taxes DMV fees Available balance Interest Sales Other ***
Negative cash flow
The general fund will have sufficient cash receipts to cover operating expenses for three of the next six months. But if the county makes required debt payments, it will come up short. Without debt payments, there would be a $10-million cash balance in June. With debt payments, the shortage is projected to equal $172 million:
General fund cash flow (In millions of dollars) Operating expenditures Debt service Cash receipts General fund projected cash balances (In millions of dollars) Before debt service After debt service Source: Arthur Andersen & Co.
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