LOS ANGELES - A number of local governments with investments in Orange County's ill-fated investment portfolio said yesterday that they welcomed the news of the county's bankruptcy filing.
"Our initial response to Chapter 9 is that it's a positive move," said Michael H. Fine, director of fiscal services for the Newport-Mesa unified school district, which has about $75 million in the fund. "We see that as offering some initial stability."
"I think it was a good decision," said Jeffrey Niven, treasurer-finance director for Irvine, Calif., which has $209 million in the county fund.
As the largest city investor, Irvine has had difficulty getting answers out of the county, Niven said but "as I understand it, declaring bankruptcy froze all financial transactions of the county pool."
That's good for the city, he said, because the most pressing transactions were the satisfaction of its short-term debt obligations with Wall Street.
Had the county not declared bankruptcy, the county's creditors could have redeemed some of the collateral that they have held as it relates to the county's debt, and sold it.
Niven said that Irvine has enough money in the rest of its $309 million portfolio to cover any cash flow problems for now.
But, he added, "the negative side is that [the bankruptcy] leaves a large question as to the distribution of property taxes to the city," Niven said.
Dec. 10 is the delinquency date for making property tax payments in Orange County, Niven said, and that is typically when most of the revenue comes in.
"So I'm very concerned as to the timeliness with which those disbursements will be made," Niven said. "I've got 14 bond issues outstanding and 10 of those relate to debt service on property tax-related levies."
Niven said he has assured all of his bondholders that the city has enough liquid cash - more than $80 million - to satisfy all debt service payments for at least two years, even if the county makes no tax disbursements.
"But, there's still a lot of uncertainly out there," Niven said.
Fallout from the county's financial and political crisis prompted Standard & Poor's Corp. to lower the county's debt rating to CCC junk-bond status yesterday, and forced the postponement of scheduled pricings of at least two debt transactions in California [see related stories!.
Orange County supervisors announced their decision to file for protection at 5:30 p.m. Pacific standard time tuesday, capping a day of rumors that such an action was imminent
the filing occured less than a week after the county disclosed that it had sustained paper losses of $1.5 billion on its $20 billion portfolio this year, and a day after the county announced the resignation of county treasurer-tax collector Robert L. Citron.
Citron, a 24-year county veteran, blamed the investment drop on higher interest rates, but analysts believe losses were accelerated by his purchases of highly speculative derivative securities.
Chapter 9 "is clearly the right thing to do," said David Kiff, executive assistant to Thomas F. Riley, chairman of the Orange County Board of Supervisors.
Kiff said supervisors were not expected to be available to the media yesterday.
However, Orange County supervisor-elect Marian Bergeson, who takes office Jan. 2, said she supports the bankruptcy filing.
"We are all pretty surprised and shocked at what is happening, but I think it's probably the best thing for the county right now," Bergeson said.
Bergeson said the county's top priority is to reassure creditors and the investment community that the county is going to regain its stature. The county, with a population of 2.6 million, is one of the nation's wealthiest and fastest growing.
In retrospect, Bergeson said, many of the county's decisions seems to have been driven by investment bankers, rather than the public interest.
She plans to insist on the hiring of an independent investment adviser when she takes office. But she stressed she is not blaming Wall Street for Orange County's woes.
"It's hard to blame anyone now, because everybody was reveling in all the successes and the fact that we were reaping huge profits on our investments," said Bergeson, a former state senator who resigned from her position yesterday to take the county supervisor job.
"The main thing is, we don't want it to ever happen again," she said.
Bergeson said that she had second thoughts about jumping into county government at a time of such crisis, but those worries have faded.
"I wondered if I could rescind my resignation yesterday," she laughed. "But, no, I still have faith in Orange County and in the leadership provided by the board of supervisors ... Ultimately, the economy will bring us out of this."
To bolster the county's legal efforts, officials have hired Ken Klee of the law firm Stutmant, Treister & Glatt in Los Angeles.
Chriss Street, a Newport Beach investment banker who has been investigating Orange County's investment strategies for more than a year, said he was pleased with the county's choice of legal representation.
Street said Klee is a "brilliant" bankruptcy attorney, and he added that if anyone can get the county out of this mess, it's Klee.
"This is bigger than IBM, General Motors, and U.S. Steel in size and complexity," said Street.
"The question now is whether some of the losses will be realized," Street said. "What's the impact on the financial community? Are brokers going to fail because they owe money? Are these school districts going to be able to make payroll? Will any other governments declare bankruptcy?
"And then, the real frightening issue is how widespread these activities are. How many other county treasurers and city finance officers have been throwing the Hail Mary in the derivatives market?"
John Moorlach, a Costa Mesa accountant who ran unsuccessfully against Citron for the treasurer-tax collector post last spring, said he was surprised by the bankruptcy announcement.
"Hopefully, our county leaders will bring some form of a good rehabilitation plan to the forefront," he said. "What we need to do now is establish priorities, review our resources, see what needs to be rationed or limited or cut.
"Whatever the county does, it's got to be organized, fair, feasible, and equitable," Moorlach said, "and it's got to be ready as soon as possible."
Orange County has hired an outside consulting firm to review its investment portfolio and make recommendations. The report is scheduled to be completed by the next Thursday and a meeting of Orange County investment fund participants is expected to occur the following week.
The catastrophe sparked by the county's troubled investment portfolio has spread to local governments far beyond Orange County, including the cities of Santa Barbara, Milpitas, and Mountain View, Calif.
Mark Paul, finance director for Santa Barbara, predicted the coastal city would be forced to pursue legal action against the Orange County investment fund. Paul said it is likely the city would join with other pool participants in litigation.
Santa Barbara has $37 million, or about 25% of its investment portfolio, in the Orange County pool, Paul said.
Santa Barbara's single-A credit rating will probably be affected, Paul said. "Clearly ... [as actual losses are realized, they'll want to review" the city's rating, he added.
Mountain View has $40 million, or about one-third of its investment pool, invested in the Orange County fund.
"Right now the city of Mountain View is fortunate to have enough short-term investments and cash coming in to cover operations," said Patty J. Kong, the city's assistant finance and administrative services director. The city also has enough cash to cover debt service, she said.
Kong doesn't expect the city's credit rating to be affected.
The Silicon Valley city of Milpitas has $5 million, or about 6% of its $85 million investment portfolio, in the Orange County fund.
"I don't want to minimize the importance of $5 million, but it won't affect the city's day-to-day operations," said Starla Jerome Robinson, Milpitas' financial services director.
Robinson, who doesn't expect a cut in the city's credit rating, said Milpitas was attracted to the Orange County pool because of "the liquidity, yield, and what appeared to be a safe investment."
In Mountain View, finance director Kong said she wrote a memo Tuesday to city manager Kevin C. Duggan, explaining why Mountain View invested in the Orange County investment fund.
"After evaluating other alternatives, the Orange County pool was selected due to its long track record of being able to obtain a strong return with safe investment practices," the memo said.
"While bond investment funds have generally proven to be consistent and relatively safe investment alternatives, both public and private funds have been significantly impacted by the unusually sharp rise in interest rates in recent months," Kong wrote.
"Prior city staff consultations with Orange County investment managers gave the city the impression that reasonable investment strategies were being utilized to manage the portfolio. In addition, the city had an outside investment broker review the [Orange County portfolio in the past year, and they did not identify any areas of concern. The city had no prior knowledge that the [pool] had any investment/liquidity problem."