Public Affairs Special ; 711; OC Bankruptcy: Truth and Consequences ; Tape Number 46

Do you see e public affairs specials are made possible by Disneyland park by the Peter and Mary Muth foundation. And by viewer support. Six months ago the people of this county were hit with a cataclysmic financial earthquake. It was a stunning announcement that the county was plunged into the largest municipal bankruptcy in the history of the United States. Amid emotions of disbelief and anger residents were informed that the county's investment pool for tax money had lost 1.7 billion dollars due to the highly risky investments by former treasurer and tax collector Bob Cetron. The shock waves of this loss are placed at risk the financial stability of county government as well as 200 other taxing bodies including schools special districts and cities in and outside of Orange County. But the bankruptcy isn't just about money loss. It's about people lost literally hundreds of county workers who did nothing wrong have lost their jobs. On the positive side the extraordinary accomplishments have been made in six months to pull the county out of this mess. How well are we doing on recovery. I'm Jim Cooper and I'll talk about that with my special guest

today. To examine the bankruptcy problem you must view what's already been accomplished and the formidable recovery effort that lies ahead. First the county has cut its general fund budget by 41 percent from a total before bankruptcy of 462 million to a current total of 275 million. A savings of one hundred eighty eight million dollars for the current year. Second the county has eliminated two thousand and forty one job positions from its before bankruptcy total of seventeen thousand three hundred workers to the new total of fifteen thousand two hundred fifty nine budgeted job positions for all these county workers. The job terminations was devastating. The county investment pool was like an investment bank for the county tax dollars as well as those of 200 other agencies. The original tax money pool was seven point four billion.

And then other agencies then borrowed another fourteen point four billion dollars leveraging the total to almost 22 billion with hopes of earning more interest money. After the collapse the original pool was reduced to five point seven million billion rather for a loss of one point seven billion dollars on May 2nd the largest municipal bankruptcy settlement in U.S. history was accomplished. The county and two hundred agencies accepted a bankruptcy court settlement of the remaining five point seven billion in the investment pool. On May 19th the checks were handed out to pool members. The county received 1.7 billion in cash and the other 200 agencies shared four billion dollars in cash. This settlement staves off a threatened series of secondary bankruptcies on many pool members. Schools receive 77 cents in cash for every tax dollar invested. They were also given recovery notes for another 13 cents per dollar which are being paid off this month. Repayment claims like IOUs may be made for the final 10 cents. All of the remaining members of the investment will receive 77

cents on the dollar in cash plus 3 7 3 cents in recovery notes due this month. They also may seek the remainder as IOUs in the future. The pool bankruptcy is now on the road to a solution but the county still faces its own heavy bankruptcy debts. Overall the county is about two billion dollars in debt. About 1 billion of this is in notes and bonds which are due this summer. A big victory took place on May 11th when the state legislature in Sacramento approved five bills to make it easier for the county to pull out of its bankruptcy. It'll be easier for the county to sell property to import trash for landfills to borrow on delinquent property taxes and Twitter CEP vehicle license fees to finance new loans. But more solutions are being pursued. Heading the list is a proposed half cent sales tax that would generate about 130 million a year for 10 years and raise county sales taxes to eight point twenty five percent. Another is pursuing litigation against Wall Street investment firms to recapture money.

Sales of county assets such as John Wayne Airport are being studied for financial relief. There are studies to increase fees like Tony trash dumping fees to raise more money. Privatization of certain county functions is also on the table. There's even a congressional bill to turn El Toro Marine Corps air station over to the county for a possible sale. Some of the costs of the bankruptcy are not measurable in dollars. Pain has been felt by hundreds of county workers who lost jobs schools services for the county's children are at risk. The crisis is far from over. Now let's meet our guests and talk about it. William Popejoy is a chief executive officer of Orange County he was appointed by the Board of Supervisors shortly after the bankruptcy action and he's serving without pay. He was the first president the Federal Home Loan Mortgage Corporation and is owner of Western financial printing company Marion Bergen is the newly elected Orange County supervisor for the fifth district she was formerly both served both as an assembly member and as a state senator. She's a

former teachers school board member and a former president of the California School Board Association. John Morelock is Orange County new treasurer and tax collector replacing Bob Citron Morelock was the first public figure to challenge Citron investing practices a certified public accountant he is vice president of a local accounting firm. Wayne wood Dean is chairman of the board of the newly formed Orange County Business Council which now combines the Orange County Chamber of Commerce and the Orange County industrially. He was formerly city manager for Bray and he's the president of his own consulting firm unable to be with us say as Bruce Bennett is now serving as the Orange County bankruptcy attorney. Ruth has to be in court during this taping. I'd like to start with each of you to give your capsule assessment of where we are with this recovery. Let's start with you Mr. Polk. Well we've made real progress thanks in a major large measure to the Board of Supervisors. There's been criticism heaped on their backs. In my

experience being the chief executive officer of the county they've made some courageous decisions and the counties move rather rather quickly. They've made a huge cut in the county's budget no one's real happy with that 41 percent reduction of the discretionary portion of the county's budget where we had any real control that that would be large for any corporation private or public. The legislative package that basically was under the overall guidance of former Senator Byrd's and now supervisor Burgess and was was considered when we first went to Sacramento in Marion I recall sort of dead on arrival and all five major pieces of that package were passed and emergency session. And since then we're moving forward with a plan to try to get the county out of bankruptcy. We think that the 10 day price that this county will pay if if we're not able to get the

bankruptcy soon off our backs will be very very great and will be something we experience for a long long time. Do you do you hit gridlock sometimes when you're trying to deal with supervisors. You had some arguments and bad yes but they are the bosses I report the Board of Supervisors sometimes I don't think they fully realize that I I realize that but I do and I respect the the the supervisors as an organization but I don't think that the supervisor Oriole set up where you really have under normal circumstances before this bankruptcy five chief executive officers were because I think it's it's something that is obsolete. And I think that something should be changed. And I hope to be part of the change. Your assessment supervisor. Well of course I came. After one month after the DFL bankruptcy had been declared. I'm quick to remind everyone that the

initiation had already began I think that the successes have relied very very much on the capability of those who have been brought in to help understand that we are really charting new waters there has literally going through minefields of which there's never been any any charges laid before him were really writing a book for this type of bankruptcy. The legislation package itself is unique in California legislative history that 5. Absolutely. And I'm cool settlement with getting 200 disparate into these to agree to anything is an Herculean but and I think this as a Congress dressed to the six months that we have been responding to this absolutely incredible crisis has has been dealt with very effectively and to a large part of those that have that capability. Had we not had the attorneys who could deal with actively with the. All of the investors and all those agencies and of course Bill has been immensely successful in his

efforts and we're very very happy that he would volunteer. You know it isn't often that you get those kind of services for any amount of money much less free of charge so he's he has been incredibly helpful as far as getting us through this you had to sit through many stormy sessions and taken the extraordinary abuse. How do you deal with that. Well it's not a very friendly atmosphere I can understand people are outraged in their med and they they want us to know that they're mad and I think they want to blame somebody. And you know I guess the Board of Supervisors is probably a good place to start. But I think that anger has got to move into a healing process now and we've got to get on with the game. Look what happened in Washington the whoops disaster there with a major default and some 900 million dollars in settlement and there's 400 million dollars in attorney's fees 12 years ago. So when you look at what we've been able to accomplish in six months and to really move us into a very desirable place

as far as the timing as well as the resolution to all of our investors the difficulty of course long term is how we provide a revenue stream so we can make good on our debt obligations. I would talk about that. Mr. Markey were you certainly deserve credit for having the vision to criticize the risky investments in the first place. How does it feel to go into that job that's been vacated by Bob Citron. I would certainly have been a very fast three minds since coming on board Jim. But we've been working diligently but it is a process as Bill knows you things don't happen like they do in the business world where you could get something done quite quickly. But we've been working diligently with an oversight committee meeting. They were supposed to meet quarterly I've almost had a meeting almost every week or every other week to review our investment policy statement which I knew would take some time to develop and we're close now to wrapping that you've had some defections from your committee have you are you going to replace those people if those those individuals are selected by the

Board of Supervisors each board member will select. And we've got four outstanding individuals on there right now we're working together quite well and enjoy their expertise and their involvement. I think people would like to know about some of the people who are angry that you talk but people want to know what's different what's going to be different now that John Morelock is running that office instead of Bob Citron what changes have you made. What assurances could you pass on to the people who might be watching this television program. Well we've taken a posture that our investment policy is almost diametrically opposed to what Mr. said trying to add in place our investment policy prohibits reverse repurchase agreements so we can i borrow against our portfolio. It prohibits derivative so we won't be involved in floaters in inverse floaters like Mr Citron had done before so we are functioning as a as a very safe very secure very diligent portfolio that right now is very short term very almost risk free. If I could even dare to say that term.

So it's night and day. What would happen even though the company going to get less revenue out of your procedures. It's a hell of a lot safer if you want to use that language. If you want to use that language the issue has always been safety of principle first. These are tax dollars we can't afford obviously to lose those we need to be liquid to be able to provide the cash it needs as they come due. And then we focus on yield and if the market is good i.e. Greenspan wants to raise the rates then we benefit a little bit. If the market isn't there than that then we just have to live with that rate or return it to stretch out to go beyond to reach beyond what's what's proper is only setting yourself up for another disaster and that will not occur while John Murrell ex Treasurer the can. Well that's good to hear this gonna get at that part of your statement is certainly reassuring. Private sector. 2000 corporations and businesses and you knew Orange County Business Council

that represents the old industrial league and the Chamber of Commerce. Two thousand of these and private enterprise people are in your group and your group are saying vote yes on merger are why is that. Jim the Business Council represents businesses in this county. And keep in mind that those are large corporations their little ones their mom and pops and there are a whole lot of employees that live here. These are folks that that work here in this county. They have children they go to school here and they use the recreational opportunities that are here. The Business Council is concerned and interested and challenged to maintain the quality of life issues that we are all facing and quite frankly we have a preeminent issue with maintaining the economic viability of the county that we call home. So the reason that the Business Council has approached probably one of the most tough the toughest decisions that they could ever make and that is to say the long term future of this county is more important. Then making a philosophical political statement. We've got to maintain

quality of life here at the same time that came out of the throat pretty hard it didn't come easy. But at the same time we're also seeing to Marion and to Bill and their colleagues that we must restructure not just County government but all the local government so that we're contemporary the same thing that businesses have had to do the same things that nonprofits are doing. We're going to have to do that and I'm confident that we will. The name of the program is truth and consequences. Let's try and get to some of the truth of what is on what's at what's at stake here. What do you see is at stake. Well if you and what are the consequences the future of Orange County is largely at stake if we don't have the revenue and that's a measure our provides to have a recovery plan. We will in all probability default on our debt going forward and we will be thought of I'm afraid as the deadbeat co. we don't deserve that. We can do better. The consequence will be that home sales probably will go down.

They're going down now and we will pay a larger price. What we've tried to do and really this is an educational effort this isn't trying to market a campaign this is trying to get the people informed to make whatever decisions they feel is appropriate let them know what the consequence we believe will be. What about just education larger class sizes. Well you know I I'm I'm less can I education was a problem before. I mean education in California is a problem and it will get worse. I think that the class sizes in some schools will go up but I'm not so sure that I'm convinced that we're going to have a melt down of our educational system because if measure are fail what about health services What about social services all that is provided by the county will be cut further if the board goes along with the cuts and they've been cut dramatically now.

I pick up on that Jim because I think there are two problems we face and no one knows for certain what happens with the revenue stream that major ar would produce. One is that if we face a default the Bill mentioned then we're going to be in deep trouble the state also is concerned about that because they have an interest in how this is going to affect credit rating through all municipalities as well as the state in their ability to be able to invest into it to reach the market. The other thing is our general fund revenues. And if the courts were to say and frankly there will be court intervention at that point if the courts were to say that we're going to attach the revenue stream to make the repayment that reduces our ability to provide services that are required both previous state and federal government we will then be put under a court order to provide programs in some way. And so there will be an injection into the county process for taking over the administration of the county to make certain programs that are mandated will be provided. At what expense is going to have to be made up by whatever possibility for a

revenue stream to accomplish that. So we will could be faced with other kinds of impacts say on property taxes or other revenues that would be far more disastrous to an individual as far as how much it was going to cost them. Now all of this is pretty much unknown but. From best guess and knowing what's happened with other kinds of defaults or bankruptcy I think that's probably the course of action that we can pretty much still hand out. So much of what we're all going through I say all of us to live in Orange County is in uncharted waters isn't it. I mean the president making events. This is a never happened yes you for an history of this county and probably I don't think it's an overstatement to indicate there's never been anything more important for this county to consider and that's why programs like yours are so valuable to help the people of the county understand to do their homework so to speak and make whatever decision they think is appropriate I think more people will vote for a measure are but they may not. It's an insurance policy measure

ours as a way to avoid what appears to be disaster. And hopefully we can get Measure R or that asset sales tax relief quickly. John you've taken in a contrarian point of view you've been very supportive of the efforts with the exception that you don't think measure are the right way to go when we give you a chance to explain why you feel about that. Jim we're in an environment where we've seen our federal taxes increase our state taxes increase. Orange County residents are taxed at a higher level than most other counties and they're still very angry. They believe that more cuts can still be made at the government level. They believe more can be sold that there are still some viable alternatives to to resolve this issue. And I believe that's true as well. What about the things let's talk a little bit about that privatization. Certainly you should

support the idea of privatization as revenues. Jim the Business Council feels the time is our enemy. If we had all the time in the world to deal with the problem you may not have heard us talking about a tax increase. My guess is you may not have heard either of their supervisors or the chief executive officer either. But we don't have that time. So Wall Street's a very unforgiving place if we can get rollover of debt. If we can extend terms and conditions that's one thing if we can't. Same thing happens that if I don't make my home payments if my wife and I miss a payment. Bad things happen to us. And this county will end up paying more. And we just saw this week the county went into the bond market. They borrowed money a lot of it and they paid a premium. A big one. Twenty five million bucks more than they might have had to pay and they hadn't defaulted anything. Think what that environment would have been if they had been laboring under the circumstances that Marion talked about where the bill's concerned about and I appreciate John's concern. But we're seeing we're not willing to take the

risk with the quality of life of this county and there's much more that has to be done. You know the problem that I see that as a part of the reality all of us have to deal with when the man goes in to vote when the when the voter goes in. There are 65 words. That's all he's going to read. Many people thousands and thousands of people who vote will soon find 65 words. And upon that basis of 65 words make a choice of whether they're going to vote yes or vote no on Measure R. What way is there a better way to get a message across outside a program like this to say what is really at stake if you've already asked what's really at stake what are you voting for if you voted no. Well there's almost. I don't think any issue that's important to our country or our state or our county can be defined in 65 words. So one of the reasons we have a problem we do Jim and people like don't like to hear this I'm not a politician is that there are responsible people this community responsible they set back and abdicated their

responsibilities to have an oversight to challenge Mr. setter on the Challenger Board of Supervisors. And now they're met. But in the final analysis they should be mad at themselves if Measure R fails. The supervisors aren't going to suffer a mistress it runs long gone. They're going to suffer the people that county are going to suffer so they're going to be virtually shooting themselves right in the head. Something else Jim I want to mention I respect John but I come from the private sector My business has been to cut budgets when I had to and I've done so to sell assets and I've sold billions of assets. And I'm telling John now and I've told him before there's no more that can be done and that the we can't cut our way out of this we can't sell our way out of it. There are things that we can do but we need time. And time is our enemy. What we need now is a chance a pause measure our will give us that. I don't want to be known as a person to help put a tax in place I think will negotiate a settlement with Merrill Lynch and others

because they have a real problem and will get this thing off our backs. But in the meantime I'm not interested in rolling the dice with the future of this county where I've lived for a long time and I'ma live the rest of my life unless they run me off because to take it put at risk the quality of life we have in this county. I'm telling you this county already is becoming the laughing stock of the nation as someone a rich county that's what we are hiding behind a bankruptcy to pay legitimate debts. I don't think it's old fashioned to pay money you owe. I think that's where you start. And even coming from the cynical world of business there's nothing wrong with honoring your obligations. These these debts this money we took in the schools the cities are our our obligations to repay privatization. Trash for cash. All these other things are on the table. A lot of people sincere people are saying why can't those other things work why can't they

take care of it without measure are we going to answer that you know we've tried repeatedly to get legislation in Sacramento they're going to allow for contracting out to give us greater access to the private sector. Frankly we're prohibited from doing so. And politically as well as legally we simply can't do a lot of what we would like to do. But there is a lot of contracting out going on within the county that actually doesn't it doesn't surface surveys only for information for the public to understand. But we can now import fresh is not right but the legislation that took place in May. Yes we have allowed that to happen. We're looking now to those contracts and we can hopefully be able to get up to 50 60 million dollars which will help our budgets considerably better that isn't in the bank yet you have to understand the rollover. What about the rollover who want to sue him gets a lot of people feel if you could just roll over these summer debts for a year everything's going to be hunky dory. I would just answer that a lot of people in this county own orange county boards a lot of retired

folks own these this paper. They invested in it because they thought it was safe. Now you're now you're going to go down and you're going to say to your mother or your mother's friend or somebody by the way you can pay it. Why don't you just say that in a room and it's not very very pleasant. Remember that the major areas half of the amount of money that's needed. The rest has to come from restructuring government. And when we do that and I think we have to put all our energies behind it then my neighbor and your neighbor are going to feel some kind of recovery of confidence because we're suffering a real lack of confidence in government today. And I'm I'm right in the middle of the rollover negotiations and I'm telling you that we want a breathing room. We want a years breathing room for the county but the bondholders the people we're negotiating with they're asking Well it measure our fails. How are you going to pay us back in the next year. Where does the money come from. And the answer is we don't know. Have faith Well they may not want to have faith and if they force us into a

default which isn't always in their benefit but certainly is something we want to avoid. Then we're in a situation that is going to be a morass for years to come a price that can be fierce for this county to pay John. Truth and Consequences. Would you say the default is a viable option for those people who are saying vote no is default a viable option. I've never advocated defaulting. We were in a bankruptcy process that says we need to fill all the caps at the same time. If we took a global look and said let's deal with certain issues at certain times with the landfill bond issue or the revenues that we've increased it Marion said up to 65 million a year that generates an income stream we can borrow against which could generate 340 million. Some call it's as high as 500 million. We are looking at a teacher bond issue that we're working feverishly on which generates another 60 million that provides enough funds to be able to pay up the gap on the bondholders we could resolve that issue if we could resolve that issue once and for all and take care of the bondholders then we deal with how do we make

school districts whole and all the cities whole and deal with these issues one at a time so we can prevent default if we take a more global posture would it bother you for example to just walk away from 100 million dollars in debt to the vendors what about the county vendors hundred million dollars owed to them. When you're a vendor in the business world and you have a client that can't pay you you work out an arrangement. Do we have to make everyone whole. Is there an obligation make everyone whole in the business world. If all my receivables were paid all I'd never get taken this job. You want to answer that one. All right Mary well I mean everybody hold on. I think I had a chat with with the settlement I think the settlement was made through legal entities were obligated we're actually obligated to provide for that if we're not able to satisfy that then the county is going to be in serious trouble. There's no question I would like to say though that the board will be the first once there's a revenue stream established Be it a favorable settlement or resolve with any

other source of income that tax will go away and I think the board will jump all over each other to make the most talk about that if measure our passes. A lot of people say 10 years is way too long to get rid of it and there have misgivings about whether that 10 years are going to stay on. What would you how would you answer that. I have the idea is to get you get world it is stronger coming to you can up front that whenever and however revenue comes in the door the minute you put it in you can do it you do it with. How would you answer that. You're going to get rid of it if it passes. What assurance. Very quickly what do you surance as the Oversight Committee and the attention of the Board of Supervisors. The There's no guarantee this is the part I get a little upset with and when we talk about they want to guarantee there's no guarantee I guarantee this that people this community stop watching what the government's doing and they're going to be unhappy. All right let's give John a chance. If Measure R does pass what concerns would you have about whether it's going to be eliminated. Mr Popejoy said there is no such thing as a guarantee but what

about that. Well we will be diligent to watch every financial statement that comes out and I think you'd have the Orange County Register looking diligently as well I think every one of us every one of us agrees that that we don't want to put another burden on on our citizens this is a very awkward occurrence it's in it and that the sooner we can get out of it the better. I think it's incumbent upon it everyone to vote on June 27. After all everybody in Orange County is in this. Our time's about up now for this first half hour of the program I want to thank our guests for this discussion of the most serious financial crisis ever encountered by Orange County people. Please stay tuned for a debate in the next half hour on Measure R the half cent sales tax election that is scheduled for June 27 and be a voter.