LOS ANGELES — When Orange County, Calif. makes the final payments related to its 1994 bankruptcy in fiscal 2016-17, it will finally be free of risky investment decisions made more than two decades ago.
It will also free up funds for economic development and deferred projects in the county, which has an annual budget of $5.8 billion. And officials say it means they can now look to debt financing as an option.
Orange County currently has plans to issue $68 million for a central utility upgrade at the end of May, according to Suzanne Luster, public finance director. The proceeds will be used to upgrade the heating and cooling infrastructure that supports the civic center campus, the Orange County Jail and federal and state buildings. County supervisors will vote May 10 on that bond sale, which would be its first long-term debt issuance in 10 years.
The bankruptcy “has made us more conservative in terms of being very careful to not issue debt where we don’t have to,” said Orange County Executive Frank Kim.
The nation's sixth most-populous county and home of Walt Disney Co.'s Disneyland sought protection from creditors in December 1994 after it lost about $1.64 billion on derivatives.
The county entered bankruptcy after its investment pool reported the losses from highly leveraged positions that unraveled when interest rates rose.
The investment pool consisted of funds from the county as well as approximately 240 other local agencies, including school districts, cities, and special districts.
The county emerged from bankruptcy in June 1996 after 18 months.
The AA-rated county threw off the reputational taint of the bankruptcy long ago.
Investors don’t even bring up the bankruptcy when the county issues bonds, and it does not have an impact on bond pricing. The county’s bonds are oversubscribed when they sell, Luster said, but the county has issued virtually no long-term debt other than that related to the bankruptcy in 22 years.
The rating agencies say the county has strong fiscal management practices and solid fundamentals.
Income and wealth indicators for county residents are substantially higher than state and national averages, and per capita taxable assessed value is also high at approximately $153,000, according to a Dec. 28 Fitch report.
The affluent county’s taxable assessed value grew 3.4% in 2014 and 6.4% in 2015, according to the Fitch report. The median-priced home goes for $712,560, according to California Association of Realtor’s February report.
The unemployment rate fell to 4% in February from 4.7% a year earlier, according to the Bureau of Labor Statistics.
Where the bankruptcy has an impact “is that we are now making the final payments, which frees up money that wasn’t available before for the other needs of the county,” Luster said.
The county has a laundry list of road projects that have been put on hold, said Lisa Bartlett, chair of the Orange County Board of Supervisors.
It also has an animal shelter in Tustin that needs to be reconstructed, a homeless shelter, and it is in the early stages of a master-plan to reconstruct its civic center in Santa Ana, so it can move county offices to a central location, Bartlett said.
“Money diverted from the Orange County Flood Control District, parks, the former redevelopment agency, imported waste revenue that was diverted to make bankruptcy recovery debt service payments, can now go back to its original purpose,” Luster said.
Other than the $1.58 billion in principal and interest, related to its bankruptcy, that is has nearly paid off, the only other long term debt the county has issued since its bankruptcy was $32 million issued for its electricity system that will be retired in 2018.
“I don’t think we were unwilling to issue debt,” Luster said. “It is just that our resources were dedicated to paying off that debt, and a lot of things had to be deferred.”
The county’s most recent long-term debt sale was the 2005 refunding of its bankruptcy recovery bonds. It sold two refundings with a par value of $565.7 million for net present value savings of $102.5 million. The refunding shaved 10 years off the bond maturities.
Next summer will mark the official end of debt issued to cover the county’s investment losses.
The 2005 bankruptcy recovery general obligation bonds were retired on June 1, 2015. The 2005 lease revenue bonds, that were also bankruptcy related, will be retired by June 30, 2017. The final $18.4 million lease revenue bond payment to come from county coffers will be made June 30. The final $5.8 million payment on the lease revenue bonds due June 30, 2017, will be paid from bond reserves.
The county owes another $33.2 million to so-called Plan B participants, who chose not be a part of the court settlement. County officials hope to have a plan to pay off the remainder owed to the Plan B participants – that are mainly internal funds or county affiliates – within the next 30 days, Kim said.
There was a period of time when the county attempted to finance projects and infrastructure with cash, Kim said.
As a result, Kim says, the county probably has the state’s lowest debt profile on a per capita basis.
While the county is looking to tackle deferred projects, it will still continue its fiscally conservative path.
“We want to make sure it is absolutely necessary and we have considered all other options before we finance any capital projects,” Kim said.
The county’s credit ratings were restored in the early 2000s to solid investment grade ratings of Aa2 by Moody’s Investors Service and A-plus by Standard & Poor’s. That was a vast improvement from the Caa and CCC ratings issued by Moody’s and S&P, respectively, after the December 1994 bankruptcy filing. Fitch Ratings did not rate the county prior to the bankruptcy, but assigned underlying AA-minus ratings to the county’s pension obligation bonds and certificates of participation issued under the county’s bankruptcy recovery plan.
Prior to the bankruptcy, the county had carried Aa1 and AA-minus ratings.
Today, the county holds an AA-plus issuer rating from S&P with a stable outlook. The rating agency upgraded the rating from AA on Dec. 28. Moody’s revised its outlook on the county’s long-term ratings to stable from negative on Dec. 17 maintaining its Aa1 issuer rating. Fitch gave the county an implied GO rating of AA-plus with a stable outlook in a Dec. 28 report.
County officials are aiming higher though.
“Our goal is to reach AAA like many of our peers,” Kim said. “We are continuing to improve the county’s fiscal situation by making sure we are structurally-balanced and careful about taking on new debt.”
As the county’s profile has improved, Kim said, it does have the additional capacity to issue debt.
The end of the bankruptcy-related debt payments, like paying off a house, gives the county lots of options, Bartlett said.
“There are always services we can enhance,” Bartlett said. “I would love to expand healthcare and social services.”
She said she’s also waiting to see what the 24 county departments propose, now that the bankruptcy debt is nearly paid off.
