Legislature Passes O.C. Recovery Plan After the 11th Hour : Bankruptcy: After snag on link to L.A. County bailout, major bills go to governor’s desk. Measures cannot become law until work on other legislation is completed.

Ending months of political wrangling, the Legislature neared approval of a slate of bills Friday that would give Orange County the tools to emerge from the worst municipal bankruptcy in U.S. history, but would allow for a state takeover next year if local officials stumble.

The package of bills would permit Orange County, which declared bankruptcy last December after suffering $1.7 billion in losses in a high-wire investment strategy, to fuel a recovery with transit funds and other revenue that previously had been off-limits.

But the bills could not become law until work on two additional measures--one of them part of the financial bailout package for Los Angeles County--was completed. Lawmakers were still debating that legislation early Saturday.

“It’s a tremendous day for Orange County,” said Board of Supervisors Chairman Gaddi H. Vasquez. “It sends a clear messge that we are capable and able of putting together a home-grown recovery plan. This is a huge step in getting this crisis behind us.”

Even as Orange County officials prepared to celebrate a legislative victory nine months in the making, the ultimate fate of the recovery measures remained in doubt late Friday as lawmakers worked into the night on the final day of this year’s legislative session.

Against the wishes of county lawmakers, the entire Orange County recovery package was shackled to a series of bailout bills for fiscally strapped Los Angeles County. Under legislative rules, if one of the Los Angeles County bills fails to win approval or is vetoed, the entire fleet of recovery measures for both counties would have crashed.

But county officials expressed confidence Friday that all obstacles would be cleared and the Orange County recovery legislation would be signed by Gov. Pete Wilson.

“This, thankfully, gives us a clear road ahead to recovery,” said Supervisor Marian Bergeson. “Finally, we’re on our way.”

Some state lawmakers, including several from Orange County who helped push through the recovery package, remained concerned about a potential collapse.

“I worry that the plan may not hold together,” said state Sen. John R. Lewis (R-Orange). “It’s delicately balanced.”

If the bills become law, county officials say, they expect to have a final plan approved by all parties in the next few weeks and submit it to federal Bankruptcy Court by December. The county then could emerge from bankruptcy by the middle of next year.

Wall Street, angry over bonds in default and threatening to blackball one of the nation’s wealthiest counties, would get paid. So would hundreds of people and companies that sold services and equipment to the county.

Since the county declared bankruptcy, the debate over how to climb out of the financial hole has created deep rifts in a conservative political culture accustomed to preaching to others on fiscal prudence. Most divisive was a proposal to raise sales taxes, which was overwhelmingly rejected in June by voters.

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Several government officials’ careers have been torpedoed, including that of former Treasurer-Tax Collector Robert L. Citron, the architect of the county’s risky investment strategy, who has since pleaded guilty to six felonies and now faces a possible sentence of 14 years in state prison. County services and staff have suffered painful cuts.

The recovery plan also marks the conclusion of frustrating and torturous negotiations with cities, schools and other agencies that lost huge sums in Orange County’s high-risk investment fund.

The legislation gives the county the power to siphon $38 million annually in sales tax money that goes to transit and use it for bankruptcy recovery. In exchange, the legislation allows the county to shift to the transit agency $23 million a year in gas tax money now used for road construction. Another $12 million each year is grabbed from restricted funds that normally would go to the county’s redevelopment agency, harbors, beaches, parks and Flood Control District.

While the Legislature had been wrestling for months with how to tame the Orange County bankruptcy, the solution did not near a finale until late Friday.

In a series of mostly lopsided votes, the Senate and Assembly approved a trio of bills that had been cobbled together earlier in the week by a special two-house conference committee. A fourth bill designed to clean up technical glitches in the first three bills also was being considered.

The outcome had been in doubt until the final day, with some Orange County lawmakers giving it only a 50-50 shot as late as Thursday. A variety of problems, most of them political, cropped up in the last weeks, among them a push by Assemblywoman Doris Allen (R-Cypress) to inject herself as a player in the recovery plan.

Allen, who faces a Nov. 28 recall sponsored by GOP colleagues angered after a bloc of Democrats elected her to the Assembly speakership in June, grabbed a piece of the action during the conference committee by insisting she author one of the bills.

Orange County lawmakers, who are pushing the recall, balked for a time, saying Allen was a newcomer to the issue and undeserving of any recognition. But they ultimately relented, in part because Allen stepped down from the Assembly’s top post Thursday.

But in the final hours, the county’s recovery bills were being threatened by a common legislative tactic that allows lawmakers to link the fate of different bills together.

Los Angeles County lawmakers persuaded Allen and other members of the conference committee that wrote the final bills to include a provision tying the Orange County package to a slate of bills designed to bail out fiscally strapped Los Angeles County. That link, known as “double joining” in Capitol parlance, meant that if any of the Los Angeles County bills were defeated, all the Orange County legislation would also be scuttled.

The Orange County recovery package, which would become law Jan. 1 once signed by Wilson, is a combination of carrot and stick.

By tapping into new sources of revenue, Orange County is now expected to borrow heavily to pay off its creditors. Yet the county faces a future of even more severe limits. New borrowing will involve essentially mortgaging nearly all of the county government’s landmark buildings, depriving it of flexibility in the event of future fiscal crises. County services, including bus service for the poor and elderly, face the prospect of further cuts.

But another aspect of the plan requires the governor to appoint a trustee who would take over Orange County’s financial affairs if the county doesn’t have a full recovery plan filed in Bankruptcy Court by next May. In addition to taking on all the duties normally reserved for the Board of Supervisors, the trustee would be able to step in to finalize the plan in Bankruptcy Court.

County officials contend that the mere possibility of the trustee is enough to ensure that all parties in the bankruptcy reach a quick resolution.

“I’m pleased with the plan,” added Supervisor Roger R. Stanton. “It provides Orange County with the opportunity to extricate itself from the bankruptcy in a timely fashion, face all the legal obligations we are obliged to pay and move on with life.”

Several potential problems remain, among them the need to get all parties in the bankruptcy--including the cities, schools and special districts that invested in the toppled county investment fund--to sign off on a plan that will go to the Bankruptcy Court.

In addition, the county’s fiscal advisers remain concerned about the potential that interest rate hikes could endanger the county’s financial situation or court challenges to the plan to tap redevelopment funds could threaten some of the revenue they’re counting on.

Others suggested the county’s plan to shift most of its road maintenance and construction revenue will cause problems and send county officials rushing back to Sacramento pleading for more highway funding.

“There will be a crunch on the money available for the county’s highway projects,” said state Sen. Quentin L. Kopp (I-San Francisco), chairman of the Senate Transportation Committee. “Mark my words.”

The plan also continues to cause concern at the Orange County Transportation Authority. Stan Oftelie, the agency’s executive director, worried Friday over the impact the shift of $38 million in transit funds each year will have on the county’s bus operations.

Oftelie said language in the bills dictating which of his agency’s funds would be used might cause major problems. But he said he and his staff needed time to research the impact and search for alternatives.

“It could cause major problems, but we don’t want it to,” Oftelie said. “We want to see this plan succeed.”

The other potential stumbling block could come in the form of a legal order from the Orange County courts. Presiding Superior Court Judge James L. Smith said they need roughly $41 million to make up a funding shortfall and have no alternative but to seek it from the county.

The county says it cannot afford to provide that money because its discretionary spending budget has been slashed to $275 million. If the courts’ demands were met, the county would face a new round of fiscal woes, county officials say.

Meanwhile, former County Chief Executive Officer William J. Popejoy said he also had “major reservations” about the county’s plan to sell $500 million in certificates of participation to pay off its existing creditors. He likened the plan to a family in bankruptcy that can’t pay its bills taking out an equity loan it has no ability to repay.

“The politicians are just postponing the problem,” Popejoy said. “It’s the same thing that got Los Angeles [County] into trouble. I just hope wise minds prevail.”

Given all the potential pitfalls, some were suggesting that the legislative work Friday was only a start on the road back.

“This is the beginning of a recovery process, not the end,” said Orange County Business Council Chairman Wayne Wedin, who helped broker the agreements at the heart of the recovery plan.

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Supervisor William G. Steiner said he too would be keeping the champagne on ice. “I’ll save my celebration until we actually emerge from bankruptcy and begin to significantly restore the sense of trust that’s been lost in this bankruptcy,” Steiner said.

Wedin said it is important to begin working on restructuring government and reassuring the financial markets--whose help the county will need as it tries to recover financially--that county leaders have resolved the oversight problems that led to the debacle.

“We need to prove to them that not only are we paying all of our bills in full, but we have learned a lesson from our mistakes and are taking the kind of corrective action, the checks and balances needed to make sure this doesn’t happen again.”

Wall Street, meanwhile, seemed bullish on the Legislature’s action. With the recovery plan at hand, the county’s flagging credit worthiness will be evaluated again by rating agencies.

“As far as bondholders and other creditors go, this is positive,” said Barbara Flickinger, an assistant director with Moody’s Investors Service Inc. in New York. “They are one step closer to getting out of bankruptcy. But they still have to go through the Bankruptcy Court for approval and then get access to Wall Street.”

Some bond specialists cautioned the county still must persuade Wall Street to buy Orange County bonds.

“When all is said and done, they are still going to have to sell at least $500 million of new [bonds] to pay their creditors,” said Zane Mann, publisher of a California municipal bond newsletter. “Who is going to buy it? And will the county pay it back?”

The county’s bondholders hailed the recovery plan as a sign they may finally get paid by the bankrupt municipality, but questioned why it took so long.

“The tragedy of this whole thing is that it’s taken nine months to get here,” said Stephen B. Ward, chief investment officer with Charles Schwab Corp. “But at least now we have the prospect that we will be paid off.”

Ward said bondholders were especially pleased that the state would appoint a trustee if the county’s recovery efforts go off course in upcoming months. “This plan has gotten off track many times before, so a trustee is good,” he said.

Times staff writer Debora Vrana contributed to this report.