Orange County Offers Recovery Plan to State

SACRAMENTO —  Orange County officials on Thursday gave state legislators the most detailed bankruptcy recovery plan they have yet unveiled--a plan that even its creators described as risky and filled with legal pitfalls.

The proposal calls for raising trash dumping fees more than 50%, a cost that will be passed on to consumers countywide; increasing the county sales tax by half a cent and borrowing $1.25 billion with new bond issues.

And although it seeks no handout from the state, the plan does ask the Legislature to guarantee county loans and revise state laws, thereby allowing the county more freedom to borrow against future revenues.

Orange County Chief Executive Officer William Popejoy said that if the insolvent county can follow the recovery blueprint, “we believe (we) can get this terrible situation behind us.”

But state officials expressed concern that the plan for digging out of $1.7 billion in investment losses was fraught with legal and political uncertainties.

“It’s a fragile plan,” said Sen. William Craven (R-Oceanside), co-chairman of the Senate panel.

Even Popejoy said the proposal may be difficult to enact.

“In some legal areas we’re stretching the envelope,” he conceded after presenting the plan to a special Senate committee probing the county’s Dec. 6 bankruptcy filing, the largest by any government entity in U.S. history.

“We never said this was going to be easy,” added Bruce Bennett, the county’s bankruptcy attorney. “We understand that there is risk in many of the options. But we think the county has a fair shot of getting through all the problems.”

Among the obstacles are environmental hurdles that could hinder the waste disposal plans, political difficulties in winning approval of the half-cent sales tax increase and the nagging reluctance of state lawmakers to embrace loan guarantees.

If the proposal went smoothly, Craven said, it would be akin to “a triple play that’s better than Tinker to Evers to Chance.”

Sen. Tom Hayden (D-Santa Monica) added: “It’s still asking the state to bail out Orange County.”

Not all the Senate panel members were as pessimistic.

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“It’s certainly at least better thought-out than anything we’ve seen so far,” said Sen. Lucy Killea (I-San Diego), the committee’s co-chairwoman. “Yeah, I think it’s optimistic. But there’s a greater sense of realism in the sense that they’ve lined everything up. It was very much piecemeal before.”

The plan presented Thursday was the county’s most detailed account yet on how it intends to move out of insolvency, though it offered few new proposals.

“The plan does do what they said it would do: It makes everyone whole,” said Karen Krop, assistant vice president with Moody’s Investors Service, a bond rating agency. “But the odds of getting it done are very difficult.”

County officials identified four new revenue streams to help finance the recovery effort. Most the money would come from the half-cent sales tax increase and a plan to increase dumping fees at county landfills; the plan also counts on earning extra revenue by allowing neighboring counties to export 6,000 tons of trash a day to Orange County.

The county’s precious surplus of landfill capacity would be very attractive to other Southern California counties--most notably San Diego County to the south--that are running short of landfill space. But the additional trash would reduce the life span of Orange County’s facilities from 55 years to 47.

Under the plan, dumping fees at the landfills would increase from $22.75 per ton to $35, a prospect that worried some city officials.

“It would hurt Newport Beach badly,” said Councilman John Hedges, who estimated that the increased dumping fees would cost the city $800,000 annually. “All of our refuse pickup is paid for directly out of the general fund. It’s a terrible idea.”

Seal Beach Mayor George Brown said the dumping fee increase was “just like passing a tax.”

Seal Beach Councilwoman Gwen Forsythe also criticized the county’s proposal, complaining that higher landfill fees would hurt cities that have embarked on recycling programs. One of the key advantages of those programs was that they cut city landfill costs. “Now, they go ahead and raise the fees,” she said. “That’s not the right way to handle this.”

Under the county’s plan, new bond proceeds and sales tax revenue would be used to come up with the $430 million that the county needs to redeem $1.1 billion of bonds that mature this summer. (The rest of that debt would be paid from the county’s roughly $600-million share of what remains in the bankrupt investment pool.) The plan would also raise an amount equivalent to the $345 million that the county lost through its investment in the pool.

Still, because the county is racing against the clock and the solutions are complex and time-consuming, it seems unlikely that Orange County will come up with the cash it needs to pay off the debt coming due this summer.

As a result, some type of plan to roll over that debt will have to be implemented, county officials said. Bondholders have been critical of the county’s initial proposal to, in effect, delay repayment of the principal on the debt for a year without raising the interest rate paid by the county.

Throughout a daylong hearing, county officials told state legislators that they were willing to make the tough decisions needed in order to dig out of the crisis. All the county needs, they said, was a little legislative support.

In particular, they appealed for state guarantees for $236 million in “recovery notes”--the new debt the county wants to sell to help make good the losses of the nearly 200 cities, schools and other agencies that, together with the county, lost $1.7 billion when the investment pool collapsed in December.

Officials sought to assure the senators that they would find the financial means to pay off the recovery notes and that a state guarantee was needed only for six months. Indeed, Bennett said the county was seeking ways to avoid needing a state guarantee at all, including requests for letters of credit, private financing or insurance.

In addition, the county is hoping to win changes in state laws that would allow it to intercept motor vehicle fees paid by county residents. That revenue could be used to back bonds that would yield about $660 million.

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The county also hopes to obtain the power to sell bonds that would be paid back by property tax fines and interest it expects to collect over the next 20 years. It is seeking state approval to form a “joint powers authority” that would manage the funds. By isolating the money from other county funds, the officials hope to make those bonds marketable on Wall Street.

Finally, the county wants to establish a similar joint powers authority that would handle waste management operations.

“Wall Street will be enthusiastic if this deal is structured right,” said Jon Schotz, an investment banker with Saybrook Capital, a financial adviser to the investment pool participants. “We . . . are very supportive of this plan. It’s a good idea.”

The riskiest part of the proposal is the sales tax increase, which would be left up to the voters if the Board of Supervisors follows through next week on its preliminary approval of a special election. County officials estimate the half-cent tax increase would raise more than $1.3 billion over its 10-year life.

If voters failed to pass the tax increase, however, officials have warned that the whole plan could topple and the county would default on its loans.