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O.C. BANKRUPTCY / Closing the Books with Merrill Lynch

Public Shrugs It Off

Settlement Isn't Expected to Make Much Difference


It won't fill potholes. It won't ease jail overcrowding and it won't translate into more social programs. Like the county's bankruptcy which preceded it by 3 1/2 years, Tuesday's $400-million settlement of the largest municipal bankruptcy in U.S. history was met more with shrugs than applause around the county.

"It's not like the taxpayers are going to see any of it," said Irvine business consultant Ron Baldwin, dining at a restaurant inside the Hyatt Regency Irvine. "When [the bankruptcy] happened, I was really disgusted with all the government officials involved. But life went on, I guess. It's been off my radar screen for a long time."

Local governments and school districts were able to absorb the $1.64-billion hit to the county investment pool by borrowing more money, dipping into reserves set aside for future road and park projects and cutting services such as child abuse prevention and mental health care that didn't touch the average resident.

The windfall from Merrill Lynch is expected to change the government balance sheets more than government services.

Irvine, for example, will place all of its Merrill Lynch proceeds back into reserve funds set aside for future plans to widen roads and improve parks. Other cities report similar plans.

County government--which emerged from bankruptcy in 1996 by borrowing $880 million to pay back creditors--will receive nearly $200 million from the Wall Street giant. But it isn't expected to do much in the way of making life better.

"The focus of the board is clearly to pay back that debt, not to add services," said Supervisor William G. Steiner. "We want to pay that debt off as early as possible and avoid being hit with the interest."

The Merrill Lynch settlement brings to about $600 million the amount the county has recovered from Wall Street firms and attorneys it holds responsible for helping cause the bankruptcy.

"This adds a degree of financial stability to local governments," said Thomas W. Hayes, the former state treasurer who is overseeing the county's litigation effort.

While politicians hailed the settlement as a big victory, residents were more cautious and expressed doubts that they will notice a difference.

"They told us we weren't going to be affected when they lost the money. We certainly aren't going to be affected if we get some of it back," said Susan Delmas, a Costa Mesa computer repair technician.


Indeed, many city and school district officials said Tuesday that the settlement probably won't result in changes in basic day-to-day services.

The bankruptcy caused the Irvine Unified School District to require parents to pay more money to have their children involved in extracurricular activities such as drama, fine arts and sports, said Craig Kennedy, whose wife, Lesley, is involved in the University High School PTSA.

"Parents of kids participating have to pony up more, and in the case of parents who can't afford it, there's definitely been an effect," he said.

At Costa Mesa High School, Principal Andy Hernandez suggests many places he could use his school district's share of the settlement but isn't sure how much--if any--will eventually trickle down to the campus.

In the wake of the bankruptcy, the Newport-Mesa Unified School District has struggled to keep up with basic repairs.

Hernandez said the maintenance on hold includes replacement of classroom carpeting, resealing leaking roofs and repaving cracking blacktop.

With the Merrill Lynch settlement, most school districts and cities have received 90% to 95% of the money they lost when the county investment pool collapsed, causing the bankruptcy.

The county's 27 school districts, for example, are still owed $45 million, said John Nelson, assistant superintendent of the county Department of Education. The schools are in line to get more money with the next round of bankruptcy settlements.

Nelson and others said most districts can operate on a day-to-day basis without immediately recovering the remainder of their investments. But they said the money will eventually be needed to pay for maintenance, new computers and new construction to meet the state's class-size reduction program.


The Orange County Transportation Authority--the largest investor in the county pool--will receive about $100 million from the Merrill Lynch settlement.

OCTA chief Lisa Mills said most of that money will go toward the massive Santa Ana Freeway widening project. Any leftover money from the project will go toward plans to widen the Garden Grove Freeway.

The OCTA plans to use $8 million in Merrill Lynch money to restore bankruptcy-related cuts to a program to widen and resurface streets around the county.

Still, Mills added: "We were able to avoid having the [bankruptcy] affect any day-to-day operations, so people won't see any changes there."

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