O.C. Supervisors Vote to Go Deeper in Debt : Recovery: $275-million bond issue to repay investors called ‘linchpin’ to solvency. But how will <i> it </i> be repaid?

Even as it considers defaulting on $600 million of its bonds, Orange County took its first tentative step Tuesday toward borrowing even more.

The County Board of Supervisors unanimously approved a new $275-million bond issue designed to pay back more than 200 cities, school districts and other agencies a portion of losses they suffered in the collapse of the county’s investment pool.

“This is the key. This is the linchpin to the county remaining, hopefully, solvent,” the county’s bankruptcy attorney, Bruce Bennett, told supervisors before the vote.

Approval of the bonds, however, came before the county had resolved how it will pay them back. So far, no stream of revenue has been identified to guarantee repayment of the so-called recovery bonds.

The county, desperately short of cash after declaring bankruptcy last December, currently has a number of revenue sources in mind, but none is a sure thing.

The county will put a half-cent increase in the sales tax--from 7.75% to 8.25%--on a special June ballot, but voters so far indicate that they’ll sink the measure. County officials also have proposed increasing county revenue by opening landfills to neighboring counties and boosting the fees charged to waste haulers, but cities and environmentalists have expressed concerns about the impact.

The county has asked the state Legislature to divert vehicle license fees into a special “intercept fund” that could be dedicated to bond repayments, but that has yet to be approved.

“If none of these things happen, there are going have to be very, very, very, very, significant Draconian, additional budget cutting,” Bennett told the board.

The county is already looking at entering the 1995-1996 fiscal year with a budget slashed nearly in half.

The recovery bonds are a critical element of Orange County’s plan for emerging from its financial morass. For months, government agencies that had money in the county’s investment fund quarreled over how to divide up what was left after since-resigned Treasurer-Tax Collector Robert L. Citron lost $1.7 billion in risky investments.

Schools, cities and special districts argued vehemently that the county should pay them back in full.

After weeks of negotiating, however, the county and a committee of the other fund investors settled on a plan that would give the other investors an average of 77% of their pre-bankruptcy fund balances in cash right away, with the balance paid in various types of IOUs.

One type of IOU was to be backed by the recovery bonds, which the county assured other government agencies would be “as good as gold” and convertible into cash by June 6. Various government agencies have been voting over the past several weeks on whether to accept the offer.

On top of the cash reimbursement, the settlement plan provides for schools to receive 13% of their fund balance in the form of “warrants” backed by the recovery bonds, with the IOUs for the remaining 10% to be treated as general claims against the county in bankruptcy court. Cities and other agencies would receive only 3% of their original investment in the form of warrants.

In order to sell the bonds, however, the county must have a source of income to guarantee their repayment.

Orange County’s bid to return to Wall Street comes as it considers a last-ditch strategy if it can’t pay back nearly $1.3 billion in county bonds due this summer, can’t reach an agreement to refinance them for another year, or concludes its financial crisis is unsolvable any other way.

The county, with only half of the money needed to pay off the bonds, is considering whether to default on $600 million of the bonds on grounds that the borrowing was illegal because it exceeded debt limits spelled out in the state Constitution.

Some contend that such a move would spark a firestorm of protest on Wall Street and scare off the investors needed to buy future Orange County bonds.

But Zane Mann, publisher of the California Municipal Bond Advisor, a trade publication, noted that “We have a saying in the bond market: ‘Everything has a price, and if you offer enough interest, somebody will buy them.’ ”

While investing in a bankrupt county might not sound like a good deal, Mann said, county bonds will carry a higher interest rate because of their risk--which means more money for investors. The county’s bonds used to carry one of the safest ratings, which meant lower interest rates.

“I can tell you they won’t be rated prime anymore,” Mann said. “People are obviously going to have a lot of mistrust when it comes to anything that has Orange County written on it.”

To put its plan for recovery bonds into effect, the county needs court approval.

In a Tuesday filing in Orange County Superior Court, the county asked for such judicial approval of the new bonds and warrants. And Bennett said the county is asking U.S. Bankruptcy Judge John E. Ryan to make a ruling on May 2 that would give “super-priority” status to the claims of the investment pool participants.

“It’s an effort to make the recovery (warrants) the safest possible piece of paper,” Bennett said. “What this does is basically implement the commitment that has been already made in the settlement agreement.”

Bennett said that once a settlement is reached, the county will distribute recovery warrants to pool participants.