ORANGE COUNTY IN BANKRUPTCY : Creditors Propose Borrowing Agency to Pay Debt

COSTA MESA —  Orange County’s creditors unveiled an ambitious plan Tuesday to establish a countywide borrowing authority that would use future growth in property taxes to pay off a proposed $1.5 billion in new county debt.

The plan also includes a quarter-cent sales-tax hike, whose proceeds would go to county schools.

The proposal, written by the Orange County Creditors Committee, the hundreds of people and firms owed money by the county, is scheduled to be presented to William J. Popejoy, the county’s new chief executive officer today. Local business leaders, including Irvine Co. Executive Vice President Gary Hunt, reviewed it Tuesday as part of the group’s efforts to enlist support for the plan.

The plan is modeled after a state law governing redevelopment agencies, which sell bonds whose proceeds are reinvested in specific communities. The plan would create a new authority that would divert a portion of the county’s future property-tax revenues, using the money to secure bond issues.

Revenue from the new debt would be used to pay off the county’s existing debt and to repay the losses of participants in the county’s collapsed investment pool. Once the bonds were sold, the county could defer principal and interest payments for three years.

“Property taxes will not go up as a result of this,” said Cathy Bando, an investment banker with Sutro & Co., adviser to the creditors committee. “What this means is that local government in the region will have to tighten their belts to the tune of 2% a year.”

County officials have not yet scrutinized the plan, but supporters are hoping that the proposal will find favor with anti-tax voters, because it would spare homeowners higher property taxes. The plan would not divert funds from existing redevelopment districts.

However the state, special districts and schools may oppose it because property tax growth they depend on would instead be earmarked to pay off county debt, Bando said. The unique countywide authority would require state legislation.

“That’s going to be a hard sell,” said Dean Misczynski, director of the Senate Office of Research in Sacramento, who is helping to draft a variety of special bills the county needs to recover from the bankruptcy.

Popejoy could not be reached for comment Tuesday, but some business leaders and county advisers were also skeptical of the plan.

“I think it’s mission impossible,” said Walter Hahn, a partner with Kenneth Leventhal & Co. a major accounting firm in Newport Beach. “There are too many people who get a piece of these taxes. Nobody is going to approve of it.”

Bill Carlson, executive director of the California Redevelopment Assn. in Sacramento, which represents California’s 350 redevelopment agencies, said a new borrowing authority could hamper local governments’ ability to raise money by precluding creation of other redevelopment zones.

But some officials said the experiment might work.

“This is a unique proposal, but Orange County is a unique situation,” said Joe Coomes, a Sacramento lawyer who specializes in redevelopment law. “It would be like a countywide redevelopment project. I don’t think anyone has ever tried to create such a thing.”

Businesses that are owed money by the county hailed the plan as a way to bring Orange County out of bankruptcy without significantly raising new sales or property taxes.

“The vendors are very supportive because it’s not an increase in taxes,” said Mary Ann Schulte, head of the vendors subcommittee. “To shoot this county in the foot one more time with another tax is not in the best interests of Orange County’s economy at this time.”

“God willing, the growth is going to be there anyway, and we want our governments to stop growing, as the business community has had to do,” she said.

According to the plan, 2% of future property tax growth would be targeted to repay new bond debt over six years. If the value of properties does not increase annually, existing property tax revenue could be tapped, Bando said.

According to proponents, the average annual growth of Orange County’s assessed valuation during the past 10 years has been 7.4%.

The quarter-cent sales-tax increase would offset an estimated $20 million in property tax increases scheduled to go to Orange County school districts in the first year of the six-year timetable. That could increase to as much as $120 million in the sixth year.