OCTA May Offer Loan to Tide the County Over : Finance: As cash crisis worsens, officials submit plans to cut costs by $40 million. Some creditors urge tax hike.

SANTA ANA —  As department heads submitted plans Monday to immediately slash more than $40 million from Orange County’s government operating budget, creditors and outside experts began fashioning their own proposals to resolve a mounting cash crisis.

The chief executive of the Orange County Transportation Authority said his agency might be willing to make a short-term loan in exchange for a promise that it would get back 100% of the $1.1 billion it poured into the now-failed county investment fund.

A lawyer for a committee of banks and vendors owed money by the county insisted that new taxes are needed to help make up the investment fund’s stunning $2.02-billion loss, even though local politicians so far have ruled out tax hikes.

And the nation’s top municipal securities regulator said the state must provide concrete assistance--much like New York City received during its financial crisis of the 1970s--or the county’s fiscal morass will worsen.

“I am a little surprised they have not stepped forward,” said Christopher A. Taylor, executive director of the Municipal Securities Rule-Making Board. “They are going to have to. The earlier you get involved in these things the better. . . . The longer the state waits, the shorter the time it has to effect something rational.”

But Gov. Pete Wilson and legislative leaders have repeatedly said the state cannot afford to help the county or the 186 local government agencies that had money in the investment pool.

In his annual State of the State speech Monday evening, Wilson took note of the Orange County situation but again offered no hint of a bailout, saying only that he hopes lawmakers tighten the rules on local government investing so that “high-risk gambling” with taxpayer dollars does not happen again.

In other developments Monday in the nation’s biggest municipal bankruptcy filing:

* Orange County Superior Court Judge Theodore E. Millard denied a request by The Times and other newspapers to make public search warrants that the county district attorney’s office served on the treasurer’s and auditor’s offices last month. Newspaper attorneys may appeal the decision. As part of their ongoing criminal inquiry, district attorney’s investigators questioned Supervisor William G. Steiner and are expected to interview other top county officials this week.

* State Treasurer Matt Fong unveiled a task force of public- and private-sector financial experts who will examine local government investment practices in the wake of the Orange County crisis. The task force will have its first meeting Thursday and expects to present Wilson and the Legislature with recommendations by March.

* A special state Senate committee looking into the Orange County crisis said it may issue subpoenas this week to half a dozen bankers, attorneys and financial advisers who played key roles in Orange County investments. Attorney Terry Bird, who represents Assistant Treasurer Matthew Raabe, said his client will join former treasurer Robert L. Citron in testifying next week before the Senate committee. Merrill Lynch officials said broker Michael Stamenson, who handled most of Merrill Lynch’s business with Orange County, also will testify.

* County officials announced that an additional $42.5 million in property taxes collected before the Dec. 6 bankruptcy filing and frozen until now will be distributed to county schools. The schools received about $75 million in similar tax money last week.

* The county’s Personnel Department and Environmental Management Agency each laid off a few people, bring the total number of county employees let go in the wake of the crisis to 107, according to the county’s largest union.

Department heads are scheduled to submit their budget-cutting plans today, but sources said Monday that they may be told to turn around, try again, and slash more because of an announcement by the county’s financial consultants last week that the cash shortfall over the next six months will be at least $172 million.

Paul Sachs, the leader of a team of accountants from Arthur Andersen & Co., said Monday that agencies that tried to meet their budget cutbacks by leaving vacant staff positions unfilled may be told today to make real cuts in the amounts currently being spent.

“I think . . . they’re going to need $40 million in cash savings,” Sachs said of the county. “The (total) shortfall is $172 million, so there’s a combination of many things that will be necessary to address that.”

Health Care Agency Director Tom Uram, who sits on the management council that recommended the $40 million in budget reductions, said unfilled positions could be used to meet the cutback quotas in some cases but not in others.

“They’re in dreamland,” Uram said of department heads trying to meet the cuts solely through attrition. “If people come in with games, they’re going to be sent back to the drawing board.”

County officials have said they plan to refinance their current loans and issue even more debt as part of their bankruptcy recovery plan. But Taylor, the municipal securities regulator, said that investors will not buy new Orange County bonds as long as the county plans to pay less than 100% to current bondholders.

Established by Congress in 1975, Taylor’s MSRB makes rules to govern the issuance and trading of municipal securities, much as the New York Stock Exchange and the National Assn. of Securities Dealers regulate stock trading.

In a telephone interview, Taylor said the only practical solution to Orange County’s problems is for the state to establish a legal authority to segregate the county’s post-bankruptcy revenues and assure investors that the county will pay its obligations.

Taylor cited the Municipal Assistance Corp., which was created by New York state in the aftermath of New York City’s financial crisis in the 1970s, as the type of entity that is needed in Orange County. New York state diverted city sales taxes into a special pool to pay off debt, thereby assuring investors that the city, its employees and its contractors could not tap into the funds.

“The state in the New York City crisis saw very quickly that it had to get involved and it was very beneficial,” Taylor said. In Orange County’s case, he added, “the county has demonstrated it can’t take care of itself.”

Sean Walsh, a Wilson spokesman, called Taylor’s criticisms “unfounded and shortsighted.” He said the state has provided “appropriate assistance” to the county by dispatching teams from the offices of the treasurer and auditor general, by speeding up funding for transportation projects and by helping the county secure the services of Thomas W. Hayes, a former state treasurer who is now the county’s chief financial adviser.

“The bottom line, as far as we’re concerned, is the state has shown leadership and provided a hand to the county when it needed it,” Walsh said. “But the state is not in a position to bail out the county.”

In the search for home-grown solutions, officials Monday reacted most enthusiastically to OCTA Chief Executive Stan Oftelie’s notion of offering short-term loans to help the county pay its operating costs.

Oftelie, who chairs a U.S. Bankruptcy Court committee of participants in the county’s collapsed investment pool, said OCTA does not need its money right away and could loan millions of dollars to the county to help with immediate budget shortfalls.

Short-term loans from OCTA could assist the county in refinancing its own debt and issuing more, Oftelie said. For its part, OCTA would want the loans to be secured by property or other county assets--and would want assurances that it eventually will get back all the money it invested in the pool.

“Our position is that we should receive 100 cents on the dollar, but we’re open to time and terms of such an agreement,” Oftelie said. “Is there a way for short-term assistance? I think so.”

Supervisor Steiner, who has joined his four colleagues in a promise not to raise taxes, praised Oftelie’s concept Monday.

“He’s a team player. I think it represents his understanding that we’re all in this together,” Steiner said, adding that OCTA is probably the only agency that could offer such a loan. “But he certainly expects something in return. . . . It’s smart, because he wants to get all his money back, and this may be a way to do it.”

Moore, the lawyer for the Bankruptcy Court committee of vendors and bankers, acknowledged that any talk of tax hikes was “politically unpopular” in Orange County, but said new revenue could help the county recover from the battering of its reputation.

Moore’s committee Monday hired Chanin & Co., a management consulting firm, and Sutro & Co., an investment bank with expertise in public finance, to review the county’s situation and offer suggestions for recovery.

“What we’re really facing is just an immediate liquidity crisis, and there are various solutions to that,” Moore said. “The county is going to have to deal with not only the fact that it’s lost its share of whatever was invested in the pool, but it’s also lost the income that was going to be generated by the pool. That revenue stream is going to have to be made up from somewhere.”

Others with money tied up in the frozen treasury said nothing should be ruled out as the county searches for answers.

“Unique problems require unique solutions,” said County Schools Supt. John F. Dean. “It’s like hanging by your fingernails on the cliff. We cannot let go. Somewhere there’s a solution out there, and we’re going to find it.”

In its continuing effort to liquidate the troubled investment pool, the county sold $120 million in hard-to-market derivatives back to their original issuer, the Federal Home Loan Bank of Chicago, one of a network of banks set up by the federal government to make mortgage money available to the nation’s lenders. The price was not available late Monday.

The sale followed a similar one Friday in which $100 million in notes were sold back to the Federal Home Loan Bank of New York. The sale was part of a larger transaction in which $317 million in corporate and bank notes were sold for a total of $267.1 million, or an average of 84.26 cents on the dollar.

The corporate notes had been issued by Merrill Lynch & Co., Morgan Stanley & Co., Citicorp and American Express Corp. The selling price, lower than the prices the county has received on earlier securities sales, was evidence that the county now is laboring to sell progressively less attractive securities remaining in the pool.

In Sacramento, a consultant to the state Senate committee reviewing the Orange County situation said it may issue subpoenas for officials from investment and law firms that did business with the county if those individuals do not agree by 5 p.m. today to testify voluntarily. The hearing is scheduled for next Tuesday.

After hearing testimony on the Orange County crisis, lawmakers plan to discuss whether local governments should have the power to void labor contracts in a bankruptcy--as Orange County has done; the long-term credit implications of municipal bankruptcies; and the conditions under which a local agency should be allowed to file Chapter 9.

“Orange County is a giant learning example,” said Dean Misczynski, director of the California Research Bureau and author of several state bond laws. “It makes sense to try to learn what we can from Orange County and prevent the problems and questions coming up in the Orange County proceedings from happening elsewhere.”

Meanwhile, a citizens group said it would call today for the ouster of Orange County Administrative Officer Ernie Schneider.

“A lot of this has been his fault,” said Carole Walters, a leader of the Committees of Correspondence, an activist group that includes members of Ross Perot’s United We Stand organization.

Times staff writers Julie Marquis, Lee Romney, Debora Vrana and Tracy Weber in Orange County, Eric Bailey in Sacramento, Scot J. Paltrow in New York and Michael A. Hiltzik and Stuart Silverstein in Los Angeles contributed to this report. Times correspondent Shelby Grad also contributed.

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