NEWS ANALYSIS : ORANGE COUNTY IN BANKRUPTCY : County’s Road to Recovery Will Be a Route Never Traveled : The four-part plan requires cooperation and assistance from many directions, and even then the only certainty is that it will be a long and rough ride.

The four-pronged plan for the county’s recovery offered Wednesday will likely require special state legislation, cooperation from Wall Street, the patience of bondholders and some willingness to compromise among the 187 agencies that have invested billions of dollars in the county’s now-failed portfolio, municipal finance experts said.

The road back will be hard, and the route still isn’t clearly marked on anyone’s map.

“(This is the) biggest part, the hardest part, and I don’t know how long it will take,” said Bruce Bennett, the county’s bankruptcy attorney, as he outlined the possibilities for recovery from the largest municipal bankruptcy in American history.

“There are times in finance when people make mistakes,” said Chicago attorney James E. Spiotto, a bankruptcy expert. “That is the time when we recognize that everyone in this whole process is human, say, ‘What can we do to solve it?’ and move on from there. The important thing is to find the least controversial, most effective way of getting that money to the people who need it.”

As they revealed the true size of the county’s gaping budgetary hole, Orange County’s special team of legal and financial consultants also gave the first glimpse at a strategy for overall recovery from the financial debacle.

The county will almost certainly pay investors in the fund less than they would like. It may refinance its debt to spread it over a longer period, and will probably borrow even more. It will sue, and be sued, over and over again.

The key, most experts agreed Wednesday, will be for the county to find a quick resolution to repay the local agencies and keep the overall litigation connected with the bankruptcy to a minimum.

“Lawsuits don’t bring quick or happy solutions to anyone except the lawyers who try them,” Spiotto said, joking that the Rose Bowl would be the only place large enough to accommodate all the potential litigants in the Orange County case.

Of the four options county officials hinted at Wednesday, the two that seem most straightforward may actually be the most difficult to accomplish. Those are asking all agencies with money in the pool to suffer equally the nearly 30% loss in the value of the investments, or having the county issue $2 billion in longer-term debt to recover losses in the pool and repay the investing agencies in full.

But leaders of the bankruptcy court’s creditors committee have said with increasing determination in recent days that they plan to press for 100% repayment for most of the investing agencies.

Outside experts said Wednesday that any plan spreading the burden equally would likely spawn a flood of lawsuits from people with money in the pool, most focusing on the state law that describes the county treasury as a “trust fund.”

“If everyone takes the hit, I think there would be lawsuits forever,” said Peer Swan, chair of the Irvine Ranch Water District.

“The harsh solution of just telling everybody, ‘You’ll suffer your loss and that’s it’ is not the right approach because it’s just going to beget litigation,” agreed Spiotto. “You will just create more controversy, you won’t end it.”

At the other end of the spectrum is an idea in which the county would repay everybody in the pool 100% of the principal of their investments by issuing longer-term municipal bonds and using the cash to cover the $2 billion in losses the pool incurred.

While this plan would appease investors, it would have to pass several legal hurdles and could trigger a different set of lawsuits.

Thomas W. Hayes, former state treasurer and the county’s chief financial adviser, said Wednesday that state law prevents municipalities from issuing some bonds without a balanced budget, which the county now lacks. The state Constitution also prohibits the county from borrowing a sum so large that the debt payments over one year are more than its expected revenue.

But new borrowing has helped several other municipalities--including New York City--out of financial debacles, and many believe it should be at least part of the solution.

If the county stretched the new debt over 20 or 30 years, it could also spread out the burden of repayment, possibly raising the needed money for debt service mostly through savings in restructured government.

“There will be enormous pressure on the county to go the $2-billion note route. From the outsider’s view, that would be the best way to go,” said Zane B. Mann, publisher of the California Municipal Bond Advisor.

Mann and other finance experts said they are confident that such bonds could be underwritten and sold despite the county’s now battered credit rating.

“In the business we have a saying: ‘Everything has its price,’ ” Mann said. “The market can always use high-yielding short-term paper, so I’m sure it can be sold--at a price.”

Long-term debt, Spiotto said, would ease the impact on local agencies and give the county some breathing room. “Our children always end up paying for our mistakes, and every parent knows that,” he added with a sigh. “That has been the tradition.”

Others, though, worried that the county would pay sky-high interest rates on such a large new borrowing because of its bleak financial state. If the county takes on the entire burden of the pool’s more than $2-billion loss so it can repay creditors in full, local taxpayers will form a long line at the courthouse, they said.

“That’s a political quick fix but it leaves the taxpayers of Orange County with a huge burden,” noted one municipal finance expert who spoke on the condition of anonymity. “The people that are required to pay back that ($2-billion) bond are going to sue. They’re not going to stand for that.”

The two other recovery plans Bennett mentioned Wednesday are practically inevitable, but would not be enough to solve the entire problem.

Since the day the county filed bankruptcy, officials have promised to file lawsuits of their own against the investment banks that underwrote their complex, high-risk financial deals. So far, only Nomura Securities has been sued.

The investment banks are obvious targets because they have the deepest pockets, but outsiders said Wednesday that lawsuits against them will take too long and yield too little to cover the gap.

“It’s a given they’re going to sue all those firms, but so what? That’ll take years to settle, so that’s not going to help them with cash flow,” said the finance expert.

The county itself currently has more than $1 billion in short-term debt that comes due this spring and summer. On Wednesday, consultants said the county has no cash to pay the debt service on those bonds, and that it would likely try to roll over the notes when they come due.

To turn one-year notes into longer-term securities would require a special act of the Legislature, but experts said that has been done before and should not be a problem.

“Special legislation is not cash,” pointed out one securities attorney. “It’s easy to ask the state of California to pass a statute that lets you do your own workout. It is difficult to talk the state of California into giving some cash.”

More difficult would be persuading bondholders to buy the new notes, which would yield lower interest because they would be longer-term and have a lower credit rating.

“This sounds to me like this is what they are going to tell the judge they need, and then bondholders are going to be stuck,” said Richard Lehman, president of the Miami-based Bond Investors Assn. “They are acting real nice . . . but what they are really doing is saying to bondholders, ‘This is what we are going to cram down your throat.”’

Indeed, refinancing the current bonds would likely be an easier sell on Wall Street than issuing $2 billion in new notes because the current bondholders’ only other choice would be to suffer the pool’s losses themselves.

“Your new bondholders are in a superior position to the county because they haven’t played yet,” the securities attorney pointed out.

“If you go to the people who are already involved and say, ‘Here are your choices: either you take (73) cents on the dollar or you take a five-year pay-back,’ they’re captive. They’re already involved.”