Orange County Recovery Tab $29 Million and Rising : Bankruptcy: Critics say top-notch lawyers, accountants cost too much. Others say fast, effective action is worth it.

Orange County taxpayers lost $1.69 billion and their government, one year ago today, sank into bankruptcy. Now, they are spending millions more to get out of it.

Accountants pore over fiscal ledgers at $325 an hour. Lawyers toil into the night--at $385 an hour. Financial advisors from one of the nation’s most prominent investment houses labor for the taxpayers at $150,000 a month. Photocopying bills sometimes exceed $3,000.

Total so far: $29 million. And it’s nowhere near over.

The multi-pronged effort to lift Orange County out of the nation’s worst municipal bankruptcy has become a money-eating machine, gobbling up taxpayer money at a rate of $2.4 million a month. That’s $115,000 per business day.

County administrators are not alarmed.

They say Orange County’s bankruptcy was an epic disaster that will require equally dramatic expenditures of taxpayer cash to help the government survive. While they have refused to pay several thousand dollars worth of claimed expenses--for lavish dinners, big hotel bills--they have rarely questioned the sky-high hourly fees. They predict that the total could climb much higher.

Indeed, participants in the county’s investment pool have agreed to create a separate $50-million fund to pay the costs of doing legal battle with Wall Street.

“Unfortunately, bankruptcy is expensive,” county Chief Executive Officer Jan Mittermeier said. “The fastest and best way to reduce these costs is to get out of bankruptcy, and that is what we are trying to do.”

The financial disaster spawned an array of battles that the county government must fight--and that taxpayers must pay for. Lawyers are drafting an immense plan to straighten out the government’s finances. They are readying a titanic legal assault on the Wall Street giant Merrill Lynch, demanding $2 billion. They are defending the county against a big lawsuit brought by local agencies demanding millions.

To handle all that, the county has hired some of the country’s priciest and most prestigious legal and financial professionals. Among them are Salomon Brothers, a New York investment banking firm, Arthur Andersen & Co., a nationally known accounting firm, and dozens of lawyers from 16 different law firms.

Talent costs money: Salomon and Andersen have billed taxpayers a combined $12.5 million so far. No fewer than 28 people retained by the county--mostly lawyers--charge more than $300 an hour. Herman Glatt, a Los Angeles bankruptcy attorney, gets $435 an hour.

“Law firms with the experience and the reputation tend to charge more,” said Lee Bogdanoff, a lawyer in Glatt’s firm, Stutman Treister & Glatt. His rate: $335 an hour.

The $29 million spent so far on the bankruptcy could pay about 600 county workers--more than a third of the 1,600 the government shed from its work force--for a year.

And the clock is always running. Lawyers bill when they are in court, when they read, when they talk--and when they talk to each other. When bankruptcy lawyers J. Michael Hennigan, Bruce Bennett and James Mercer get together and talk, they each send the county a bill.

Some lawyers charge even when they are in the air. When New York lawyer Leslie Mazza flew to Orange County last December, she read bankruptcy documents on the plane. Cost to taxpayers: $2,000. And that was a bargain. Mazza billed the county $400 an hour, not her usual rate of $450.

Lawyers with the firm of Squire Sanders & Dempsey routinely billed the county for flying to and from their offices in Phoenix and Cleveland, whether they read anything or not.

Some Orange County residents are alarmed at the amount of money the county is spending. They say the bankruptcy has presented lawyers and accountants with such a grand opportunity to make money--to sell securities, argue in court, draft documents--that they won’t stop on their own.

“We don’t want to turn Orange County into a trough,” said William J. Popejoy, the former banking executive who was the county’s chief executive for a time last year.

Lawyers and financial advisors helping Orange County say that even though the numbers are high, taxpayers have no choice but to pay up.

A shoddy bankruptcy recovery plan, they say, could ultimately cost taxpayers much more through higher borrowing costs and a limp economy. The plan they are assembling, they say, will allow the county to recover from a potentially crippling blow with relative ease.

If all goes according to plan, Orange County will rise from insolvency in June--a mere 19 months after it plunged into it. For a business of comparable size, that would be a very rapid recovery, and would save money, bankruptcy lawyers say.

“The true economy of this case is that it will be over in a short amount of time,” Bennett said.

Then there is the county’s ambitious lawsuit against Merrill Lynch & Co. The county is suing for $2 billion, claiming that the firm led the county astray with bad investments. Merrill Lynch denies any wrongdoing.

The lawsuit is a multimillion-dollar gamble. The county has no assurance it will recoup even a dime from Merrill Lynch. But it will cost millions to find out. So far, taxpayers have been billed $5 million in the effort against Merrill. And the suit has many months to go.

Supervisors say the expense is worth the risk.

“There is so much in potential benefits for the county that we really don’t have a choice,” Supervisor William Steiner said.

The lawyers handling the Merrill suit say taxpayers are getting a bargain. Lawyers at Hennigan Mercer & Bennett have employed a sophisticated computer to scan more than 1 million documents--which they can then recall at a mere keystroke. Such high-tech prowess, the lawyers say, enables them to keep their costs down.

By comparison, they point to Merrill Lynch, which they estimate has spent as much as $40 million preparing for the court battle.

“The taxpayers are getting an astonishingly good deal,” lawyer Hennigan said.

Not everyone thinks so. Several people wonder aloud why the county government has not sought deeper discounts from its professionals. The government is, after all, bankrupt. And it is, after all, spending public money.

“Given the amount of work and the certainty of payment, it would not have been unreasonable to ask for a discount,” said William R. Mitchell, a lawyer and chairman of Orange County Common Cause.

Popejoy, the former county chief executive officer, echoed Mitchell’s complaint. Southern California is full of lawyers who could do the work.

“We’re not talking about brain surgery here,” Popejoy said.

The lawyers handling the case vehemently disagree. Bennett, for one, says bargain rates are a “false economy”--that lawyers will always work harder on the cases that pay them the most.

“All of the people here can get more than enough work at their regular rates,” Bennett said. “And that is the work they will do. That’s the reality.”

In fact, several of the firms working the bankruptcy have offered the county slightly lower rates. Arthur Andersen lops 10% off its bill. Willkie Farr & Gallagher, whose lawyers helped prepare bond issues, lowered their rates from $450 an hour to $400.

Chris Varelas, a Salomon Brothers vice president, said his firm took many small steps that saved taxpayers millions.

“We do not want to be perceived as trying to take advantage of the situation,” Varelas said.

To date, Salomon has collected $6.6 million--more than any other firm. And its biggest single fee is yet to come. Salomon will act as the financial advisor on a bond issue the county will undertake next year as part of the bankruptcy recovery. The expected fee: At least $2 million.

For all the money county administrators have agreed to pay, they have balked at several bills. Dennis Bunker, Orange County claims manager, scans every charge that comes in.

Sometimes the minutes on the billing sheets don’t add up.

Three lawyers hired by the county--Bennett, Hennigan and Mercer--got together for a meeting May 25. Bennett billed for 1.1 hours. Hennigan billed for 1.5 hours. Mercer billed for 0.3 hours.

So how long did the meeting last?

Bennett said he doesn’t recall exactly, but he said he sometimes “lumps” charges together, and didn’t bill for other time spent on the county’s case.

“We shouldn’t do that, but sometimes we do,” he said.

Bunker, the county risk management director, said it’s problems like that that give him headaches.

“I don’t like to pay out any of it,” he said.