Credit Agencies Assail O.C. Vote, Issue Warnings

SANTA ANA — The resounding defeat of Orange County’s half-cent sales tax increase had powerbrokers from Wall Street to Sacramento bracing Wednesday for a possible financial meltdown in the bankrupt county.

Wall Street moved swiftly to punish county residents for their 61%-39% rejection of Measure R, throwing into doubt the county’s ability to borrow money in the future and to refinance $800 million in bonds that come due in the next few weeks. In a blistering attack, major credit rating agencies criticized the county for its “outrageous and unprecedented” conduct, with one vowing to downgrade the county’s bonds to default status.

“With this sales tax defeat, Orange County is going to be shut out of the municipal bond market,” said Richard Larkin, a managing director with Standard & Poor’s Corp., a credit rating agency in New York. “It’s not going to be able to pay its notes this year, and there is no visible way for them to pay them in 1996. It’s in default.”

Meanwhile, top officials from Gov. Pete Wilson’s staff flew to Orange County to meet with county leaders and begin searching for ways to salvage their finances--and thereby avert a state takeover of the affluent county that has been transformed into a fiscal basket case.

The Board of Supervisors--which had been split on the tax hike--issued a public plea for both sides in the election battle to join in an emergency meeting today to explore alternatives for recovering from bankruptcy in the wake of Measure R’s defeat.

The supervisors also scheduled a closed session to discuss the fate of Chief Executive Officer William J. Popejoy, who made the failed tax proposal the cornerstone of his recovery plan. Although Popejoy indicated that he wants to continue steering the county out of insolvency, he said political forces may push him out of the job.

Politicians, financial experts and county administrators called the defeat of the tax proposal a defining moment in the county’s history, ranking with the descent into bankruptcy Dec. 6.

“This is a new era,” board Chairman Gaddi H. Vasquez said in an ominous tone. “This is a new day.”

Other leaders said the defeat of Measure R was an opportunity to chart a new direction for the county’s recovery.

“This whole debate is going to go to a different level,” Supervisor William G. Steiner said. “The rhetoric will be replaced by a realism. There will be significant prioritization of what we can and can’t do.”

County officials are considering wholesale budget cuts, as well as repudiating hundreds of millions of dollars in debts to the cities, school districts and county agencies that lost money when risky investments by former Treasurer Robert L. Citron led to $1.7 billion in losses and the biggest municipal bankruptcy in history.

Almost everyone agreed Wednesday that Orange County will be under siege from every corner as it grapples with its woes for months, even years.

“It’s going to be real confrontational,” said David Kiff, an aide to Supervisor Marian Bergeson.

The county’s biggest problem in the wake of Measure R’s defeat appears to be coming from Wall Street investors. Their bonds--essentially loans to the county to finance its operations--were supposed to be redeemed with proceeds from the 10-year sales tax increase, which would have brought in about $130 million each year.

Bond default is inevitable, said Thomas W. Hayes, the former state treasurer who spent two months as the county’s financial adviser in the days immediately after the bankruptcy.

“They can’t print money,” said Hayes, who also questioned whether the county leaders have any viable options left. “On a private sector model, they default on the debt. That hasn’t happened for a general purpose government ever in history. We’re in uncharted waters, unfortunately. It’s a very serious situation.”

Financial analysts said the rejection of the sales tax signaled to the municipal bond markets that Orange County was willing to walk away from its debt.

As the market opened Wednesday, prices of all bonds linked to Orange County fell slightly. Bond insurers and firms that have marketed Orange County bonds since the bankruptcy said it was getting too risky to continue working with the county.

Standard & Poor’s said it would give $600 million of county notes due July 10 a default rating, regardless of the standing of any plan to stretch out repayment of the debt for another year. Other notes due in July and August will also be given a default rating.

Moody’s Investors Service, which already has given county notes its lowest possible rating, was equally scathing in its comments about the rejection of the half-cent sales tax hike.

It is “outrageous and unprecedented that in the six months since the bankruptcy filing, Orange County has utterly failed to take responsibility for its own actions,” Moody’s said. “The county is demonstrating near-total disregard to the damage this will also inflict on the hard-won trust generally awarded to other municipal borrowers.”

Major mutual funds that own millions of dollars of notes due this summer met in New York for three hours Wednesday to discuss whether to reject a plan to extend repayment of the debt for a year. U. S. Bankruptcy Court Judge John E. Ryan had approved the plan Tuesday as voters were going to the polls.

Concerned that the county will not be any more able to repay them next year, noteholders are considering asking the court for the millions of dollars in their funds that have been held in reserve by the county. That would effectively give the bondholders about 77 cents on the dollar.

“If we don’t accept the rollover and there is a default, it might be cleaner,” said Steve Ward, investment manager of Charles Schwab Corp. “There is currently a wide-ranging discussion about this issue.”

Tensions over the county’s financial future were equally high in Sacramento.

“It is imperative that Orange County now move quickly to develop an alternative plan that will meet the financial obligations of the county,” Wilson said.

The governor sent state Finance Director Russ Gould and Kevin Sloat, his deputy chief of staff, to meet with Orange County officials Wednesday to begin developing such a plan. Supervisors said the governors’ representatives offered no financial assistance.

State Treasurer Matt Fong threw his support behind a revived proposal to install an “all-encompassing” state trustee in Orange County--but only if the county defaults on its bond debt payments, fails to keep government operating or invites such a takeover.

Fong said the trustee should have control over all county services--including the transportation agency, water districts and other agencies--so that reserve funds could be tapped to help bail out the county.

Local government officials tried to put the best spin on the voters’ resounding repudiation of the tax measure, which lost by a ratio of more than 3 to 2.

Vasquez and Supervisor Roger R. Stanton said the defeat of the tax leaves the county back where it was seven months ago. Ideas previously rejected or judged unfeasible--such as selling off John Wayne Airport and opening landfill space to out-of-county trash haulers--must once again be considered.

Stanton, a critic of Measure R, said the board will have to make up for time lost in the tax campaign. “Measure R was a last resort, but it was put at the top of the list of things to do,” Stanton said. “Now what happens? We go back and retrace our steps.”

Supervisors said they did not want to rush to embrace a “Plan B” until county officials have time to restudy the situation more thoroughly.

But already, some elements of an alternative recovery plan are taking shape. Among other things, it would include stiffing the cities and school districts for the remaining money they are owed; using property tax growth to secure future county borrowing, and attempting to raid sales tax revenues earmarked for transportation funds.

“Making cities, school districts and special districts whole, while not off the agenda, is not a priority,” Steiner said.

Severe budget cuts are another key component of a new recovery plan, supervisors said. “They will be painful, and there will be no other way,” Vasquez said.

Some county officials have estimated that an additional $70 million will be cut from an already reduced general fund budget of $275 million--which represents a 41% cut in discretionary spending from the previous year.

“It’s like realism and shock at the same time,” Health Agency Director Tom Uram said of life in the county on the day after the sales tax defeat. “There’s disappointment, obviously. We’re trying to do a thoughtful response and redirection.”

Times staff writers Jodi Wilgoren and Mark Platte contributed to this report.

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