O.C. Supervisors Not All Sold on Refinancing

SANTA ANA — A multimillion-dollar bond refinancing package that backers say is critical to Orange County’s bankruptcy recovery is proving a tough sell to some county supervisors, who are skittish about extending the county’s already hefty debts.

The proposal, which Board of Supervisors Chairman William G. Steiner likens to “refinancing your house,” will be put to a vote of the full board Tuesday.

In effect, the deal would lower the county’s annual payments to retire one set of pension bonds from $25 million a year or more to roughly $6 million over the next eight years, while extending the final payment date from 2005 to 2020.

The refinancing also would increase the county’s total payout from roughly $155 million to more than $300 million. County officials insist that the refinancing will end up saving the county money when the debt is adjusted to inflation, but critics are still dubious.

“It’s like making [house] payments for 20 years and then being told you owe more money and need to make another 10 years in payments,” Steiner said. “It’s very tough to swallow.”

County Chief Executive Officer Jan Mittermeier and her cadre of outside financial consultants are aggressively pushing the proposal, saying the existing repayment schedule has the county in a tight financial squeeze.

The existing repayment schedule requires the county to sharply increase its annual payments beginning in 2000. Mittermeier said the only way the county could cover the increases is by dipping deeper into the general fund, which would likely force further cuts to public services already slashed during the bankruptcy.

By spreading the debt out over 24 years instead of the present eight, the county’s annual payments would be greatly reduced, especially over the next decade as officials struggle to find money for court operations, new jail beds and other needs.

“It provides us flexibility at a time when we need it,” County Chief Financial Officer Gary Burton said. “It allows us to look at funding for jails and other services instead of taking the money and shelling it out for debt service.”

The refinancing plan comes to a vote six months after Orange County emerged from bankruptcy by issuing $800 million in bonds and using the proceeds to pay off creditors. The county will have to repay its massive bankruptcy debt over the next 30 years, leaving some to question the logic of the pending pension bond deal.

Supervisor Jim Silva said he’s still studying the issue but, like Steiner, is troubled with the prospect of spreading out the debt.

“I think a big part of the problem with government is debt,” Silva said. “You pay a lot of money in interest and have little to show for it.”

The impending decision is being watched closely on Wall Street, where the county needs to improve its tattered reputation. The deal would benefit the holders of the existing pension bonds, which were issued with AA ratings but collapsed to junk bond status after the bankruptcy.

County officials hope that a successful refinancing will help convince rating agencies to boost Orange County’s bond rating, making it cheaper for county government to borrow money in the future.

“Any kind of gesture that shows a willingness to restore the value of the bonds can’t hurt Wall Street’s perception of the county,” said Richard Lehmann, publisher of Income Securities Advisor in Florida. “Wall Street could recognize that the county is not living by the mistakes people made in the past.”

The deal has been the subject of intense scrutiny from both supervisors as well as the members of a public finance commission set up in the wake of the bankruptcy to review bond deals. The lengthy analysis contrasts sharply with the way bond issues were dealt with in the summer of 1994, when supervisors hastily approved the original bond issue with little public review or comment.

The county is using money from the original bond issue to fund employee pensions. The decision to issue the bonds came after a 1994 study concluded that the county’s regular contributions to the employee retirement system would leave a long-term shortfall of $320 million.

Two series of pension bonds were sold to raise the needed money, and one set of the bonds went into default on the eve of the county’s December 1994 bankruptcy, when the county found it did not have enough money to redeem bonds being tendered by bondholders.

The biggest flaw with the existing payback schedule, officials said, is the “payment spike” that requires the county to make progressively greater annual payments through 2005, when the debt will be fully repaid.

This year, for example, the county stands to pay $25.8 million in principal and interest. By 2000, the payments could total $32 million. By 2005, it could exceed $39 million.

“It takes a huge amount of cash to meet those obligations,” said outgoing Supervisor Don Saltarelli, who supports the refinancing. “It will put a lot of pressure on the county budget.” Without the refinancing, the county would have to divert $125 million from general fund budgets, totaling roughly $1 billion, between 2000 and 2005.

“There is no question that we will pay the debt. But it is going to take away our flexibility,” Burton said. “Just about every county department receives some [money] from the general fund, from health care to social services and general government [operations] like the auditor and assessor.”

The proposed refinancing would spread the debt out, sharply reducing the payments over the next eight years. Under the plan, the county would pay $6.2 million a year from 1997 until 2004. That year, the annual payments would gradually rise to a high of $29.2 million in 2015.

Despite the extended debt, the county insists that, when adjusted for inflation, the refinancing would actually save the county about $2.2 million versus paying off the debt in eight years.

The refinancing also would allow the county to use $30 million in state and federal funds to help pay off the debt, saving county taxpayers more money, according to Chris Varelas, a Salomon Bros. financial consultant and an architect of the bankruptcy recovery plan.

The promised benefits have convinced at least one supervisor, Thomas W. Wilson, to enthusiastically support the refinancing plan. “I’m very comfortable with it. In the long run, I think this is the prudent thing to do,” he said. “There are some legitimate risks we face if we don’t pursue this.”

But others remain unconvinced and question some of the rosy predictions made by the county.

Orange attorney Lisa Hughes, a member of the county’s public finance advisory committee, has emerged as the leading critic of both the deal and the way county officials have “rushed” it to the board.

“We are taking a long-term approach to a short-term problem,” she said. “We have a cash-flow problem in six to seven years, but we are taking drastic action now when we might not have a problem.”

She and others strongly dispute the county’s contention that it will save money by refinancing the debt, charging that officials are using wildly high figures in adjusting for the effects of inflation.

Though county officials said they’ve found no alternatives to refinancing, critics said more time should be devoted to seeking out different options or waiting to see if the county receives a windfall from its bankruptcy-related lawsuits.

Hughes, who is also chairwoman of the California Lottery, is working on an alternative plan that she intends to present to the board Tuesday. “My concern is that we are adding unnecessary debt with the attitude of putting this off and making it someone else’s problem,” she said.

Regardless of how the supervisors vote on the refinancing, the county’s spending priorities already are being shifted by its increasing debts.

The $800 million in bankruptcy recovery bonds issued in June will be repaid by diverting money from parks, transportation, housing and flood-control projects. Officials decided to dip into revenue earmarked for those purposes after voters rejected a half-cent sales tax increase designed to help pull the county out of bankruptcy.

Varelas and other financial experts said that Orange County’s debt service burden is not excessive when compared with other California counties.

Burton acknowledged that the county debts are “a little on the high side” but said they will go down as its financial recovery continues. “Our goal is to bring it down,” he said. “It will take time.”

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Deeper in Debt

If the Board of Supervisors decides Tuesday to refinance debt related to employee pensions, the county would have until 2019-20 instead of 2004-05 to pay off the debt. It would result in smaller annual payments, which officials said are necessary to avoid budget cuts. But total debt would nearly double. A comparison of the two approaches, with principal and interest payments in millions:

Current Schedule’s total debt: $155 million

1996-97: $25.8 million

2004-05: $39.5

Proposed Schedule’s total debt: More than $300 million

1996-97: $6.5

2014-15: $29.2

2019-20: $0

Source: County executive’s office; Researched by SHELBY GRAD / Los Angeles Times

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County Comparison

Total local debt per resident is far from the highest in California. How Orange County’s per-capita debt compares with some other California counties:

Alameda: $481

Los Angeles: 494

Orange: 622

Riverside: 417

San Bernardino: 631

San Diego: 789

Ventura: 127

Source: County executive’s office; Researched by SHELBY GRAD / Los Angeles Times