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Pool's Investors Attack O.C. Recovery Plan


COSTA MESA — With the ink barely dry on a settlement proposal designed to help Orange County chart a course toward financial recovery, participants in the county's collapsed investment pool attacked the plan Wednesday, saying it would leave their agencies with massive revenue shortages.

In meetings throughout the day, worried investors--including school systems, cities and special districts with financial stakes in the loss-ridden pool--criticized the day-old pay-back plan because it fails to guarantee a 100% return of their investments.

In Sacramento, meanwhile, Orange County's attempt to pursue changes in state law to help it recover from bankruptcy also was greeted with resistance Wednesday by a Legislature long dominated by Democrats hostile to the Republican enclave.

A package of about two dozen bills that county lawmakers will introduce next week when a special session on the bankruptcy is convened includes several ideas that have previously been floated--and rejected--in the state Capitol.

Orange County lawmakers have tried to tone down such retreads by applying them only to the bankrupt county and limiting them to periods of two to five years. But that has not placated many Democrats. A proposal to allow Orange County to contract out more public-sector jobs has once again drawn fire, as has a plan to allow the county to cut general assistance welfare benefits.

For their part, school districts were especially disappointed with the county pay-back plan because they argued that they should get all their money back because they were required to deposit all their funds with the county treasurer's office.

Without the return of their entire investments, several school officials warned, they will be forced to make budget cuts so deep that they would imperil the quality of education.

Accepting only 90% of their investments, as the settlement plan offers, "is something the schools will just not agree to," said Andrew V. Czorny, a member of the executive committee representing the pool investors that met for five hours Wednesday. "It's something that concerns us too."

"We need a guarantee," added John Dean, superintendent of the Orange County Department of Education. "We need to know how much money is coming down the pike. If it is going to take forever, we are going to have to make major reductions."

Standard & Poor's, the New York bond rating agency, said the proposed distribution plan represents forward movement, but said it is too early to judge whether the proposal could boost the credit-worthiness of Orange County and other agencies that invested in the pool.

"At this time, S & P believes that because of the preliminary nature of this proposal, no rating actions are warranted," the agency said, noting that the proposal requires the approval of both the bulk of pool investors and the U.S. Bankruptcy Court.

Brokered by Orange County business leaders and endorsed by the Board of Supervisors, the settlement proposal was unveiled Tuesday as an imperfect solution that would at least allow the bankrupt county to take the first step toward financial recovery.

Almost immediately, however, many investors expressed disappointment. Under the proposal, pool participants would immediately get 77 cents on every dollar that they had invested when the fund collapsed in early December--and a promise that they would eventually recoup the rest.

But the proposal, offered by the Orange County Business Council, also was greeted with skepticism by another key group--municipal bond investors who would be expected to purchase any new debt.

A central feature of the plan would be the sale of $255 million in so-called recovery bonds, to be paid off over 15 years by a first claim on the county's assets, the proposal states.

The marketable 15-year notes would be used to give schools an additional 13% return on their investment dollars beyond the 77% they would receive immediately. The districts could lodge claims in Bankruptcy Court for the remaining 10%.

However, according to Cathy Bando, a municipal bond buyer with Sutro & Co. in Los Angeles, the county is unlikely to find ready buyers for the recovery bonds because it has so far failed to come up with a plan to pay off its current bondholders.

Two months after the county's Dec. 6 bankruptcy filing, bondholders are increasingly nervous because Orange County still has no long-term plan for debt repayment, and has been waiting until the last minute each month to pay its bond bills.

"Right now, I don't think there are any buyers who would run up and buy these recovery notes," said Bando, who is advising the creditors committee.

Robert Moore, an attorney for the creditors committee established by the Bankruptcy Court, said his clients were troubled that the plan gives highest status for repayment to the recovery bonds, at the expense of current bondholders.

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