O.C. Advised to Raise Taxes; Supervisors Say ‘No Way’ : Crisis: Two investment banks say new revenue key to re-entering bond market. Meanwhile, county union gains.

SANTA ANA —  While Orange County’s elected officials insist new taxes are out of the question, the two investment banks hired to help rescue the county from its fiscal crisis say tax hikes could be a critical component of any recovery plan, according to documents released Tuesday.

A.G. Edwards & Sons and Goldman Sachs both say that new sources of revenue could be key to the county’s ability to return to the municipal bond market either to restructure its debt or to resume the kind of borrowing all governments undertake to maintain operations.

Also Tuesday, a citizens group joined local business leaders in saying no options--including higher taxes or a state or federal bailout--should be ruled out as the county tries to bounce back from the stunning $1.69-billion plunge suffered last year by the investment pool it managed for 186 local agencies.

“Orange County is one of the wealthiest counties in the country. This is not Appalachia,” county League of Women Voters President Constance Haddad told the Board of Supervisors. ‘It is, in our view, unconscionable to declare a tax increase off-limits while demanding ever-increasing cuts in those programs and services upon which the poorest and most vulnerable of our residents depend.”

But board members--who will ultimately establish the county’s recovery plan--appeared Tuesday to remain firm: No new taxes.

“That’s the easy way out,” said Supervisor Jim Silva. “I think there are other things that should be looked at. I don’t think we should even be looking at taxes.”

In other developments Tuesday:

* Labor leaders said county officials have agreed to respect the seniority provisions in employee contracts when reviewing layoffs. The two sides will meet today to reconsider 186 pink slips already sent employees, and hundreds of other layoffs in the works, so the employees most recently hired would be the first to lose their jobs.

“They said they’d go back and follow the bargaining agreements and that’s what we’ve been trying to get them to do ever since Dec. 22,” said John H. Sawyer, general manager of the Orange County Employee Assn., which represents 11,000 of the county’s 18,000 workers. “They finally said they’re going to do it.”

In another victory for labor, U.S. Trustee Marcy J.K. Tiffany created an official subcommittee of labor organizations as part of the bankruptcy restructuring process.

* Supervisors balked at a proposal to set aside $12 million to pay for attorneys, accountants and other financial advisers hired since the county filed for bankruptcy Dec. 6. Instead, board members said they wanted to see a list of individual expenses.

Silva expressed particular concern about payments to Sitrick and Co., a Los Angeles public-relations firm, which submitted $238,000 in invoices for three weeks in December.

“I’m not going to issue a carte blanche here,” board Chairman Gaddi H. Vasquez said.

* Dressed casually in khaki pants and a black knit shirt, former County Administrative Officer Ernie Schneider collected papers and pictures from his third-floor office at the Hall of Administration. Schneider declined to comment on his demotion Monday from the county’s top job, or reveal his plans for his impending two-week vacation.

Meanwhile Tom Uram, the health care agency chief who was appointed Monday to fill Schneider’s chair temporarily, met with supervisors and department heads.

“I know I’m not the savior, but I’m not just a caretaker either,” Uram said, adding that he is prepared to face difficult decisions during his brief tenure.

* County Finance Director Eileen T. Walsh was placed indefinitely on paid administrative leave. Walsh, a top official in Schneider’s office, said she was given no explanation when told at 5 p.m. that Tuesday was her last day and declined to speculate. “It just is what it is,” she said.

* Ruth Darling and Jeffrey Herrera filed a class-action lawsuit on behalf of the county’s taxpayers seeking to prevent “future waste, mismanagement and improper oversight by Orange County’s governmental officers.”

The suit--which includes allegations of waste, illegal expenditures and “gross mismanagement”--names the supervisors seated when the county declared bankruptcy Dec. 6; former Treasurer-Tax Collector Robert L. Citron; Assistant Treasurer Matthew Raabe; Auditor-Controller Steve E. Lewis; Schneider; financial adviser Jeff Leifer and Merrill Lynch & Co.

* County Counsel Terry C. Andrus said for the first time he believes school districts were not required by state law to keep all their money in the county’s investment pool.

School officials have insisted since the early days of the county’s fiscal fiasco that they should be given top priority for repayment because of a state mandate that schools funnel virtually all of their money through the county treasury. Andrus declined to release the details of his legal argument but said his interpretation of the state law would allow schools to invest their money elsewhere.

Hearing about Andrus’ opinion, Capistrano Unified Supt. James A. Fleming said: “That’s hogwash.”

* Supervisor Marian Bergeson said she will meet in Orange County on Friday with Gov. Pete Wilson’s finance director, Russell Gould, and deputy chief of staff, Kevin Sloat, to discuss various legislative proposals connected to the financial crisis. Bergeson has asked the governor to call a special legislative session in February.

* Sources said an attorney for Raabe--who was placed on paid leave Saturday in the wake of revelations that some $85 million in interest due local agencies was diverted to county-controlled accounts--met over the weekend with officials from the Orange County district attorney’s office.

The district attorney is furthest along among three agencies investigating the county’s fiscal fiasco, sources familiar with the probes said.

Local investigators have conducted dozens of interviews, including a 5 1/2-hour taped session with former budget director Ronald S. Rubino, and a 90-minute talk with Schneider, sources said.

Rubino and Schneider helped set up the controversial “Economic Uncertainty Fund” into which outside accountants say the treasurer’s office apparently funneled millions due local agencies that invested in the county’s pool.

The U.S. Securities and Exchange Commission, which has issued subpoenas for personal records of county supervisors and other officials, is trying to determine whether the county issued false and misleading statements to pool participants, and is examining the relationship between the county and securities brokers. The SEC has interviewed Citron and Raabe.

The U.S. attorney’s office has issued subpoenas related to “the issuance, marketing or sale of Orange County securities” in the county administrative office, the treasurer-tax collector’s office and the auditor-controller’s office. The subpoenas were issued this week by a federal grand jury in Los Angeles.

After soliciting proposals from 17 investment banking firms, the supervisors selected A.G. Edwards and Goldman Sachs last week to develop plans for restructuring the county’s existing debt and making new borrowing possible in order to right Orange County’s fiscal ship.

County officials are meeting weekly with consultants from Salomon Bros. and representatives of the two new investment banking advisers to develop a financial restructuring program that eventually will be submitted for approval by the supervisors.

A.G. Edwards’ proposal, released Tuesday, says the county could increase sales taxes and consumption taxes, levy fees on services and restructure some fees and taxes to crawl out of its budgetary hole.

Goldman Sachs suggests selling off county assets, privatizing services and raising “non-traditional” taxes and fees, though some of those steps would need approval by voters or the state Legislature.

The New York firm’s Jan. 12 proposal says Goldman would be willing to commit its own capital to an Orange County fiscal revamp, but does not state how much. The firm advises the county that its first priority must be making good on upcoming bond payments and suggests that new bonds can be secured by a special pledge of existing revenues.

A Goldman Sachs spokesman said the firm would not comment on its proposal.

A.G. Edwards, based in St. Louis, also noted that a key part of any recovery program will be the county’s success in tapping the bond market for new financing. To access Wall Street markets, the county must make good on its outstanding bond issues, restore investor confidence and find new revenue sources, the Edwards proposal states.

The bankers suggest that the county creatively invest the money it sets aside for debt service, boosting the return on the money through complicated “derivative” transactions. Edwards’ proposal also advises the county to seek backing from the state to secure new bond sales, although that--like many of the firms’ suggestions--could be politically difficult to achieve.

Edwards also suggests hiking taxes on tourists, sales and consumption, as well as fees for services.

“This proposal is saying the county is going to have to raise a substantial amount of money and it’s going to have to refinance its debt. That’s what I see here,” said Christopher Taylor, executive director of the Municipal Securities Rule Making Board, the primary regulator of the municipal bond market. “The county is going to have to come up with some money, that’s clear.”

The idea of upping the hotel “bed tax” irked some in the tourism business.

“One of Orange County’s biggest industries is the visitor industry--it’s the goose laying the golden egg,” said Charles Ahlers of the county’s convention and visitors bureau.

Though supervisors have consistently said they will not raise taxes, county officials have researched the options.

Raising the sales tax half a cent, from 7.75%, would net the county about $140 million a year and would require a majority vote of the voters. Implementing a sales tax before March, 1996, would require a special election.

Hiking consumption taxes on alcohol or tobacco requires state legislation, but adding 20 cents per drink sold would bring in about $100 million a year, and a 35-cent tobacco tax would raise $30 million annually, officials said.

Supervisors have authority to raise some taxes, but they are unlikely to bring much cash to the coffers. A new $10 tax on business licenses would bring about $1 million and a 5% utility users tax would raise $5.5 million.

Thomas E. Daxon, the county’s interim treasurer, said taxes are a poor solution because of their negative impact on a local economy.

He conceded that county officials are looking at possible fee increases, but added: “I would do everything possible to stop from getting to that point.”

The supervisors too remain reluctant.

“I’ve consistently felt that increasing taxes would be wrong,” said Supervisor William G. Steiner. Added Bergeson: “I don’t see it as a feasible solution.”

Public opinion on the issue has grown more complex in recent days. The Orange County Business Council, a coalition representing 2,100 local companies, said Friday that nothing should be ruled out as the county attempts to recover. Lawyers for the bankruptcy creditors committee and school districts have both suggested a half-cent sales tax.

But the Committees of Correspondence, an activist group with ties to Ross Perot, has repeatedly told the supervisors that any new taxes will make them prime targets for recall actions. “They got us into this mess, and they should get us out of this mess without raising our taxes,” said Bill Mello, a member of the group. “I don’t see any belt-tightening, except laying off some of the poor people who don’t make much money. I don’t think they’re doing enough to solve this.”

At Tuesday’s supervisors’ meeting, Santa Ana parent Edmundo Cardenas urged the board to “reimburse the school districts 100% of the funds that our children are entitled to.” But Fullerton accountant William Snow Hume contended that schools should be treated the same as other agencies that placed money into the investment fund.

Hume, a member of the Committees of Correspondence, said the public has been misled into thinking schools were legally required to invest by “an educational administrative cartel that wants to cover up their own mistakes.”

“The school districts are responsible for their own losses,” Hume said. “This isn’t about helpless school kids. This is about reckless school officials clinging to power. As a supervisor, your duty is to the county of Orange, not to other municipalities and local agencies of which you are not board members.”

The state’s education code says that districts must place into the county treasury “all moneys received or collected . . . from any source and all moneys apportioned . . . from taxes.” But other laws say local agencies can choose where to invest excess funds. Andrus’ legal opinion indicates that schools are required to deposit their money in the county but could later withdraw it and invest it elsewhere.

“We understand there is a debate, but we think the code is very clear,” said Newport-Mesa Unified Supt. Mac Bernd. “We certainly disagree with that approach” of the county counsel.

Fleming said the education code requiring schools to place funds with the county is “crystal clear.”

“Those of us in schools feel like the woman who was raped and feels violated and then goes to the police and feels violated again,” Fleming said. “It’s bad enough that the agency that held our money in trust . . . speculated with that money so wildly . . . but then to turn around and violate us again by alleging that we didn’t have to have our money there--it’s despicable.”

Supervisors said Tuesday that despite Andrus’ opinion, they planned to refund 100% of school districts’ money, even if they have to incur deeper debt to do it.

The county has “moral and ethical obligation to consider the needs of schoolchildren over a technicality in law,” Steiner said.