Supervisors OK Contentious Refinancing Plan

SANTA ANA —  A controversial plan to refinance some of Orange County’s outstanding debt was narrowly approved by the Board of Supervisors on Tuesday over the objections of two members who said the county could ill-afford to take on $200 million in added interest costs.

The refinancing, which will be set in motion with the sale today of a new set of pension obligation bonds, will extend the repayment period for some of the county’s bonded indebtedness from eight to 24 years and allow the county to reduce its annual debt service payments by roughly $20 million a year.

Although the refinancing increases the county’s total payout from $155 million to about $380 million, county officials insisted that the refinancing--when adjusted for inflation--would actually save the county money.

The decision comes six months after the county emerged from bankruptcy by issuing $800 million in bonds and using the proceeds to pay off creditors.

County Chief Executive Officer Jan Mittermeier pushed hard for the refinancing approved Tuesday, saying it was the only way to avoid a financial squeeze early in the next decade.

The board majority agreed, arguing that the proposal would also help repair Orange County’s tarnished reputation on Wall Street and help the county win a better bond rating that would make it cheaper to borrow money in the future.

“Wall Street depends a lot on trust . . . and we have to develop a good relationship with Wall Street,” Supervisor Charles V. Smith said. “It wouldn’t make sense not to do this.”

Supervisors Jim Silva and Thomas W. Wilson also supported the proposal, which calls for Mittermeier to develop a comprehensive debt management strategy. Supervisors Todd Spitzer and Chairman William G. Steiner opposed it.

“I’m troubled with extending this debt for 24 years,” Spitzer said. “This county already has so much debt that I’m very concerned about issuing any more at this time. . . . It should only be done as a last resort.”

The deal has been the subject of intense scrutiny over the last few months. Mittermeier presented the refinancing plan to the board last month, but supervisors delayed action until Tuesday.

Two series of pension obligation bonds were issued in the months before the county’s December 1994 bankruptcy to cover a projected shortfall in the county’s employee retirement fund. One series went into default at the time of the bankruptcy because the county lacked the cash needed to redeem bonds being tendered by bondholders.

Under the original repayment schedule, the county was required to make progressively greater annual payments through 2005, when the debt was to be fully repaid. This year, for example, the county was due to pay $25.8 million in principal and interest. By 2005, the annual payment was to have risen above $39 million.

Without the refinancing, the county would have had to spend $125 million from its general fund between 2000 and 2005 to service the debt, probably forcing cuts in government services.

Gedale Horowitz, a Salomon Bros. investment banker advising the county, told the board Tuesday that the hefty payment schedule prompted the bond rating agencies to question the county’s ability to balance its budget in those years.

The refinancing will spread the debt out, sharply reducing the payments. Under the plan, the county would pay just $6.2 million a year from 1998 to 2003. After that, the payment would gradually rise to a high of $27 million in 2116.

County officials said the long-term refinancing would allow them to use more state and federal funds to pay off the debt. When adjusted for inflation, the deal will actually save the county about $2.2 million compared to settling the debt by 2005, they insist.

Critics, however, dispute that contention, saying the refinancing will cost more than paying off the debt in eight years.

“The real cost of doing this is $205 million,” said Orange attorney Lisa Hughes, a member of the county’s public finance committee. “How many programs are we not going to be able to do in the future?”

Hughes urged the supervisors Tuesday to “bite the bullet” and repay the bonds by 2005. “The easy solution is to take out debt,” she added. “None of you will be on the Board of Supervisors when we see the full impact of this.”

Silva said he agonized over the vote but finally decided it was in the county’s best interest to refinance the debt and hopefully improve its image on Wall Street.

“It’s very difficult for me to extend the debt,” Silva said. “I think the question we have to ask is whether the county is good for its word. Some people on Wall Street believe our word is not good.”