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Uncertainty Over Bankruptcy in Calif. Leaves Schools Dangling

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Drew Lindsay

Orange County, Calif., schools are treading water and clinging to the hope that they can recover nearly $1 billion threatened by the county's financial capsizing.

Last week, the county met its $115 million teacher payroll--the first since it filed for bankruptcy Dec. 6--and classes resumed following the holiday break.

But anxiety clouded the long-range forecast for the county's 35 districts and 410,000 students. Until the bankruptcy court rules on how the county's public agencies will split its losses, questions about the fate of the schools' $993 million investment--and the schools themselves--will go unanswered.

"Depending on the answers to those questions, you could have 30 districts in technical bankruptcy or not," said Maureen DiMarco, the education adviser to Gov. Pete Wilson.

In the meantime, most districts have mandated austerity budgets that freeze spending, suspend hiring, and cancel travel and equipment purchases.

The Saddleback Valley school board, for instance, denied final approval last month of the hiring of 47 support-staff workers, even though many already had started work. And the Irvine district last week reportedly cut about $800,000 from its $100 million budget and is considering selling its administrative headquarters.

Drawing the Short Straw?

Orange County's financial troubles stem from high-risk investments that backfired. (See Education Week, 12/14/94.)

The county most recently estimated that its investment fund has lost $2.02 billion of its original $7.5 billion value. A bankruptcy court eventually will decide how investors will share this loss, but at least a dozen suits have been filed against the county by those seeking full return of their investments.

A legislative research group has warned that under such pressure, the county may shortchange schools on their investment returns. State officials have acknowledged their constitutional obligation to bail out schools if necessary, and "knowing that, the county may be tempted to distribute disproportionate losses to the schools," the California Research Bureau warned last month in a briefing paper for lawmakers. State law requires the schools to deposit operating funds with the county.

Districts expect a fight for their full share, and many have hired legal experts, local superintendents said.

"Collectively, we've said, 'Let's give the county a couple of weeks to get their act together,"' said Superintendent Peter A. Hartman of the 26,000-student Saddleback Valley district. Although no district has filed suit yet, he said "that could change if this doesn't get resolved soon."

Breaking a Public Trust?

Five districts, however, have been singled out for criticism for borrowing to invest in the county fund.

"That's like taking the milk money and playing bingo with it," Governor Wilson said in comments reported by the Los Angeles Times.

Schools should not expect the state to pay off loans used to invest in the fund, said Scott B. Johnson, the chief counsel for the special state Senate committee investigating the bankruptcy.

"To the extent that they would look for a state bailout on that part, they shouldn't hold their breath," he said.

Officials in the districts under fire said they borrowed to add to their ante in the fund because it provided a seemingly safe cash injection to lean budgets. Placentia-Yorba Linda school officials, for example, reaped $1.5 million by investing the proceeds from $50 million in municipal bonds sold in 1993.

When the district again issued bonds last summer, they received the highest ratings possible because the bond money would go to the county treasury.

"Experts across the country were not aware of any problem with the county treasury," Superintendent James O. Fleming wrote to Governor Wilson in response to his comments. "Most people, including the experts, felt that municipal bonds placed in the county treasury were one of the safest investments possible."

"When you're almost desperate to find a way to pay the bills," said Superintendent John F. Dean of the Orange County Department of Education, "and the treasurer had such a great track record, it looked like a great way to solve our problems."

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