Repayment Deal: Some Relieved, Others Unsure

Leaders of Orange County school districts, faced with critical cash shortages in the wake of the county financial crisis, expressed relief Sunday over a deal to distribute the $5.7 billion remaining in Orange County’s collapsed investment pool. But the settlement brought mixed reactions from city officials, with some renewing their complaint that the pact fails to immediately return all their money.

Educators said the settlement reached Saturday night--which offers them up to 90% of their money in cash and “recovery notes” that the county has promised to redeem by June 5--allows them to make long-term financial plans without fear of running short of funds.

“This should ensure that no school districts go bankrupt this year,” said John Nelson, assistant superintendent of the Orange County Department of Education. “This is the first step to make sure everyone remains solvent.”

But Huntington Beach Mayor Victor Leipzig criticized the settlement process for not leading to the return of the city’s entire investment.

“The city has not struck a deal” on the plan, which offers municipalities as much as 80% in cash and recovery notes, Leipzig said. The Huntington Beach City Council will take up the issue today.

“It seems like a flaky deal,” added Claremont Mayor Algird Leiga. “The county never stepped up to the plate to give (investors) their money. Instead, they give you these phony notes that purport to give you money, but really don’t.”

Anaheim Mayor Tom Daly, however, said the plan appears in concept to be a “reasonable settlement” for his city, which had $169 million invested in the county pool.

“It may not be ideal for all parties or it may be less than perfect, but we have to find an agreeable solution and move forward,” he said. “There’s just too much at stake for this to continue, for the uncertainty to continue.”

Wayne D. Wedin, a member of the Orange County Business Council, which originally proposed a similar settlement plan, called the deal “pretty near acceptable.”

“I do appreciate the fact that not everybody is happy,” he said Sunday. “You have to deal with what you were dealt, and we were dealt a very big loss.”

Some county supervisors last week made reaching a settlement agreement a condition for placing a proposed half-cent sales tax increase on a special June 27 ballot.

Supervisor Marian Bergeson said Sunday she will “very likely” vote this week to place the tax measure before voters now that the settlement has been reached. The board took the first step last week toward placing the measure on the ballot.

“It would appear to me the sales tax proposal is the best way to go at this point,” Bergeson said, adding that time is critical in assuring state legislators the county is doing everything it can to deal with the crisis.

Bergeson said she would also vote to approve the settlement deal, reached between the county and a seven-member committee representing nearly 200 investors.

Supervisor Jim Silva said Sunday he had talked to representatives of about five cities in his supervisorial district and the consensus seemed to be that they would not support a sales tax increase.

“I think that this would be a vehicle to pay the cities back, but if they think it’s not a viable vehicle then obviously we can’t go that direction,” Silva said.

Silva will continue to meet today and Tuesday with representatives of cities and school districts to see how they feel about the tax increase.

As of Sunday, though, “the feeling I am getting is that the cities are not in favor of the sales tax,” he said. “If that’s the case, I won’t be in favor of supporting it.”

The settlement becomes official if it is approved by the elected officials of 80% of the agencies holding 90% of the money in the pool. The Board of Supervisors and U.S. Bankruptcy Judge John E. Ryan also must sign off on the deal.

The agreement calls for a return of 76 cents on the dollar to those investors in a high-risk commingled pool of funds. Those in a lower-risk bond pool will receive nearly 84 cents. Because no entity had all its money in the bond pool, however, the highest average amount any one agency would receive is about 81 cents.

Most of the investors--including the school districts, cities, water districts and even the county itself--had their money tied up in the commingled pool, where it had been highly leveraged to make large gains over the years.

Under the agreement, schools will be given an additional amount in recovery notes that will allow them to recoup 90% of their investments. All other agencies will receive recovery notes that will bring their total return to 80% of their original investments.

The county has promised to make the $237 million in recovery notes “good as gold,” guaranteeing that they can be cashed by June 5. If that prospect does not materialize, the agencies will have the right to sue to recover their money.

The county also will put forth its “best efforts” to repay schools the final 10% and everyone else the final 20% of their investments, but offered no guarantee.

School and city leaders were set to discuss the settlement at meetings beginning this week. Under the plan, each investor will choose between two repayment options.

In the first, Option A, schools would receive the full 90% in cash and notes and cities would receive 80%. But any agency accepting the full amount would forfeit its right to file lawsuits in the hope of recouping the rest. All agencies would receive promises from the county that the remainder would eventually be paid.

Under Option B, investors would take the 76% to 81% of their investment in cash and reserve the right to sue for the rest.

Without the settlement and access to the money they had invested in the pool, school district officials said, massive cutbacks and even bankruptcy were possible. The money has been tied up since Orange County filed the biggest municipal bankruptcy in U.S. history Dec. 6, after the county’s investment pool plunged $1.7 billion in value.

“We are feeling that unless there are major modifications, we should be in pretty good shape for next year,” said Edward H. Decker, a trustee with the Newport-Mesa Unified School District, one of the county’s hardest-hit school systems.

Anticipating that it would not get all its money returned immediately, Newport-Mesa has already made more than $2 million in cuts, including layoffs and reductions in material purchases. Decker said that if the district receives 90% of its money by June, additional cuts are unlikely.

Hank Adler, a trustee at the Irvine Unified School District, said he does not expect his district to make new cuts either. The district last month slashed about $3 million from its budget.

The settlement plan is also expected to take pressure off five school systems--Irvine, Newport Mesa, Placentia-Yorba Linda, the Orange County Department of Education and North Orange County Community College--that borrowed a total of more than $200 million to invest in the pool.

All five districts face summer or fall deadlines to repay those loans. Officials have said the settlement would likely provide them with the money needed to make the payments on time.

Placentia-Yorba Linda Unified officials said they would discuss possible cutbacks this week.

The settlement “begins to bring (the district’s financial picture) fully into focus,” said Trustee Karin M. Freeman. “I think we can get through this thing. I’m not saying it’s going to be pretty.”

But Leiga, the Claremont mayor, said he will likely recommend that the City Council select option B--which would give the city 76% of its investment--and reserve the right to sue the county or brokerage houses for the rest.

Leiga and other city leaders expressed skepticism at the county’s promise to make good on IOUs that cover the remaining 20% of the cities investments.

“They are saying ‘trust me’ for the rest, but they are not the kind of people we want to trust,” Leiga said of county officials.

“I’m skeptical about it to tell you truth,” added Fullerton Councilman Chris Norby. “That promise isn’t worth very much. . . . But at the same time, I would be willing to take 76 cents as long as it doesn’t jeopardize my ability to go after the rest.”