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O.C. Bounces Back, Frayed at the Edges

The 1994 bankruptcy didn't ruin the county, but the effects linger in significant ways. The emergency 'is coming,' road chief says.

December 05, 2004|Mike Anton | Times Staff Writer

When risky investments caused more than $1.6 billion to evaporate and forced Orange County to declare bankruptcy in 1994 -- the nation's largest municipal default -- some predicted Armageddon.

One national business writer described a "mushroom-shaped cloud that hangs over Orange County." Some said county government would come to a standstill, that the 200-plus school districts, cities and public agencies with stakes in its mismanaged investment pool would be crippled for a decade or more. Others warned that bankruptcy would lead to more crime, more drunks on the streets -- even an outbreak of tuberculosis.

"It is now only a matter of time before children start dying," one social worker pleaded to supervisors who were forced to slash the county budget.

But as the 10th anniversary of the default arrives Monday, the bankruptcy appears at first glance to be little more than a pothole in the rearview mirror. Those who lost money have largely been repaid. The county's creditworthiness -- which plunged to junk-bond status -- is higher than ever. And tuberculosis rates are down.

However, the effects linger in many subtle yet significant ways.

The county still owes about $810 million of the more than $1 billion it borrowed to reimburse creditors. That debt, scheduled to last until 2026, costs the county $90 million a year -- money that otherwise could go to parks, healthcare, social services and roads.

Cutbacks mean less landscaping and more brown grass at county parks. Can't afford mental health counseling? Chances are you'll have to wait. Landfills are filling up more quickly because Orange County takes in trash from Los Angeles and San Diego counties to raise debt repayment money.

Streets are rougher because the county defers road repairs to help retire the debt. Before bankruptcy, county roads were resurfaced every five years. Now it's every seven.

Carpets in county buildings are dirtier -- and thus wearing out faster -- because of the debt. Cutbacks made in routine cleaning and maintenance of county facilities remain in place a decade after the bankruptcy.

'Double Duty'

"People have to do double duty on a lot of jobs," said Bob Wilson, director of internal services for the county's resources and development management department. "Overall, the conditions of the county's buildings are less than they were before the bankruptcy because of deferred maintenance, even though we know it costs you more in the long run."

When a toilet valve went out one weekend at the Harbor Justice Center, for example, the ensuing flood caused $300,000 in damage. "If we had regular preventive maintenance, that valve would've been replaced," Wilson said. Cost: $10.

The roots of the bankruptcy reach back to the passage of Proposition 13 in 1978. In its wake, the Legislature froze each county's share of property taxes. Orange County -- at the time less populated, politically conservative and tightfisted -- spent the least per capita on government services covered by property taxes. Because that rate was frozen, the county to this day receives just 6 cents for every $1 of local property tax paid -- the lowest rate in California.

Robert L. Citron, the county's longtime treasurer, devised an aggressive -- and widely admired at the time -- investment strategy to make up the difference: He borrowed to place big bets on speculative high-yield securities that depended on interest rates remaining low.

When rates rose, $1.64 billion in public money vanished.

Citron lost his job and went to jail after pleading guilty to felony fraud charges. And the county, which later recovered hundreds of millions of dollars by suing its Wall Street advisors, had to find ways to not only live with that reimbursement formula and later state budget cuts, but also repay the bankruptcy debt.

Orange County ranks No. 1 among California counties in debt service per capita -- but near the bottom in spending per capita, according to an analysis by the California Institute for County Government, a nonpartisan public policy research group.

"I wouldn't ever say bankruptcy was good for the county. But, ironically, Orange County is a very well-run county now," said institute director Matthew Newman. "Bankruptcy has had a lot to do with that. It got people to focus on what's important and run as tight of a ship as they could."

That tight ship has come at the expense of cuts in services.

The county's $543-million discretionary budget is less than it was before the bankruptcy, when factoring in inflation. Its workforce, with nearly 2,000 jobs cut after the bankruptcy, has bounced back to 17,546 positions, nearly 2% more than in 1994. But during the same period, population increased 16%.

The tentacles of bankruptcy reach into nearly every corner of government.

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