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Study Tallies Extra Costs if O.C. Defaults : Bankruptcy: Chapman report puts figure as high as $766 million in added interest over next decade.


Orange County will pay up to $766 million in additional interest costs over the next decade if it defaults on its bond payments due this summer, according to a study released Wednesday by economists at Chapman University in Orange.

The analysis found that a default would force county taxpayers to pay a "premium" of $472 million to $766 million in higher borrowing costs than they were paying before the county filed for bankruptcy in December.

The added costs would mean that every county resident would have to pay from $182 to $295 more in taxes over the next 10 years.

The study was released as voters prepare to go to the polls Tuesday to decide whether to enact Measure R, a half-cent sales tax increase that backers say is critical to making sure the county does not default on $1 billion in bond payments.

The study supports the argument that passage of the voter initiative is needed, said Chapman President James Doti, who has supported the tax proposal.

The sales tax increase is expected to raise $1.4 billion over 10 years, according to Chapman estimates. Doti contends the increase would be cheaper than allowing default because the county would not be forgiven for its past debt and would still have to find a way to pay all or most of it back.

Moreover, higher borrowing costs caused by default could further reduce county services and halt needed public works projects, Doti said.

"There would be scrimping and putting off what should be done today because of the premium that would have to be paid," he said.

The county owes $1 billion in principal and remaining interest on a series of one-year notes that come due between July 10 and Aug. 10, and it doesn't have enough funds left to pay them. The shortfall results from a $1.7-billion loss through risky strategies in the county investment pool by former county Treasurer Robert L. Citron.

Doti said a default would result in a cascade of further costs--from lawyer's fees to higher interest rates--for years to come. Opponents, calling the Chapman report a "scare tactic," contend that the county would be better off taking its chances.

"I don't believe we're going to default," said Fred Whitaker, treasurer of Citizens Against the Tax Increase. "If worst came to worst and we did default, the premise that we would borrow as much or more as we did in the past is flawed. The problem is no one is treating [the county] like a business."

The county could lower its interest rates under default by buying bond insurance, which guarantees that bondholders will be repaid. But Doti said the cost of the insurance would offset interest rate savings, still leaving the county paying substantially more for bond issues if it defaulted.

Doti said the higher interest costs point out that the county is going to have to pay for the bond pool losses one way or another--either by passing higher taxes or having to pay more to borrow money.

"Someone has to pay for this," Doti said.

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