O.C. Touts Books Just 1 Year After Bankruptcy Exit

SANTA ANA — A year after Orange County exited the nation’s biggest municipal bankruptcy, county officials are on the road with a good-news show, hoping to ease lingering doubts about the government’s soundness.

The three-day parade opened Wednesday on Wall Street and was headed for Boston, Chicago, San Francisco and Los Angeles. It’s being put on for big municipal bond buyers like mutual funds, pension funds and insurers and for firms that rate and insure bonds.

Board of Supervisors Chairman William G. Steiner, County Chief Executive Officer Jan Mittermeier and others contend that a revamped government and the booming economy have so improved affairs that the county’s debt should escape junk-bond ratings. That would make borrowing money cheaper.

“The fiscal reality is we’re an investment grade county,” said Christopher Varelas, a county financial advisor from the Salomon Bros. investment bank.

Following its $1.6-billion investment loss and December 1994 bankruptcy, Orange County won investment-grade ratings for its bonds only by insuring payment on them--at three times the going rate--and arranging a state program to divert tax revenue to pay investors if the county threatened to default.

At first glance, the county outlook does look favorable, although things had been so bad that there’s little room for movement except upward, said David Brodsly, vice president of Moody’s Investor Service, a bond-rating firm.

He was to meet with the county officials today, exactly one year after the county emerged from bankruptcy proceedings.

“But it’s sort of like a major cancer operation,” Brodsly said. “It may look successful, but there are always some questions, and you need time to see if the operation took.”

Mittermeier said county finances are solid enough that it’s time to think about paying for new jails, juvenile halls and courts. The most pressing need, a 400-bed addition to the Theo Lacy Branch Jail, can be funded with sales tax revenue, she said.

But for other projects, the county will eventually need help from the state or to return to the bond market to raise money for capital improvements, officials said.

Orange County also soon hopes to refinance one chunk of its $1.5 billion in public debt, $155 million in so-called Teeter bonds backed by collections from deadbeat taxpayers. The bonds were issued soon after the bankruptcy on unfavorable terms. Brodsly said it’s too early for him to assess what ratings such a debt should get.

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Indeed, the huge load of long-term debt that the county took on to settle its bankruptcy obligations calls any new bonds into question, said Stephanie Petersen, a member of the state’s advisory commission on local government debt.

During another period, paying debt and maintaining crucial safety and welfare services “might be putting quite a burden on the county” given the deep spending cuts already made, said Petersen, vice president of municipal research for Schwab Corp. mutual funds.

“They, like the rest of California, are benefiting from the vibrant economic climate,” Petersen said. “In the long term, though, they have to ask what if things slow down?”

She said that for Schwab to buy any new county debt, it would have to overcome concerns about the county in the minds of investors in its funds. She also said that even with insurance, Orange County bonds will need to carry a higher interest rate than many insured bonds.

“There’s just too much insured paper in the market, so a lot of people are looking at the underlying security of the issuer.”

Among the good news being touted to the professional investment world:

* On top of a 41% post-bankruptcy cut in the county’s general fund spending, the restructuring will have trimmed another 220 positions and $10.4 million in annual spending in the fiscal year ending June 30.

* The county will have saved $50 million to repay its debts early by the end of this month. It intends to set aside $140 million for early debt retirement by 2002.

* The general fund balance, which was $68.7 million on June 30, 1996, will be about $77 million at the end of this month.

* General fund expenditures on public protection are up 8.9%, enabling safety agencies to add 272 positions, while welfare caseloads are down more than 5%.

* Employee and vendor bankruptcy claims will probably be resolved for about $20 million less than previously estimated.

* Financial oversight and controls have improved markedly, with the new position of chief financial officer, filled by Gary Burton, reporting directly to CEO Mittermeier.

The real question is whether the “reinvented” county government proves workable over time, said Moody’s analyst Brodsly.

“It’s sort of like recovering substance abusers,” he said. “They can be the cleanest of the clean--if they truly get religion and are going and sinning no more.”