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Schools Await Bankruptcy Settlement in California

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Schools would recoup 90 percent of the $1 billion they have tied up in the bankruptcy of Orange County, Calif., under a settlement that county officials are poised to offer.

The county is expected to seek a bankruptcy judge's approval of a plan that would pay schools 77 cents on the dollar and guarantee repayment of an additional 13 cents, said Ed Dundon, the school liaison for the county's chief executive officer.

Most of the county's 27 elementary and secondary school districts could absorb a 10 percent loss without following the county into bankruptcy, school officials said. Budget planning for next year is under way, and planned layoffs of school employees announced last week were less drastic than expected.

Still, the schools' fate will not be clear until the judge and the county's creditors sign off on the plan. That process could take two months or more and could unravel at any point, observers said.

If that happens, "we are in swamp water up to our armpits," said A. Alan Aldrich, a senior labor-relations representative with the California School Employees Association.

Avoiding the Short Straw

A risky investment strategy that failed last year when interest rates rose prompted Orange County to file for bankruptcy on Dec. 6. (See Education Week, Jan. 11, 1995.)

In the months since, most of the more than 180 county agencies with money deposited in a county investment pool have been jockeying to influence the settlement negotiations. Schools have lobbied vigorously for a full return, arguing that state law had required them to keep their operating revenues in the county treasury.

Last month, however, county officials worked out a plan to return to schools 77 percent of their cash. Schools would receive an additional 13 percent in marketable "recovery notes," or guaranteed repayment promises, and 10 percent in unguaranteed notes.

In response, schools launched a "black ribbon" campaign. Staff members, students, and parents wore black ribbons on their clothing to "mourn" the possible $100 million loss. Some schools posted billboard-size signs on their buildings detailing the dollars--prorated--owed them by the county.

"A 10 percent loss equates to an average of about $200 for every student in Orange County, or at least $6,000 per classroom," Superintendent John F. Dean of the county department of education said in a written statement.

In recent weeks, school officials had become concerned that the county could not guarantee the recovery notes without state help. In testimony March 8 before the state legislature, county officials asked for such backing. But lawmakers--particularly Democrats traditionally at odds with Orange County's largely Republican delegation--did not warm to the idea, observers said.

"It was a nice speech," said Scott B. Johnson, the chief counsel for the special Senate committee investigating the bankruptcy, "but it fell flat." Legislators want the county to find other revenue, perhaps from taxes, before turning to the state for help, he said.

Crunching the Numbers

Although Mr. Dundon of the county executive's office said the recovery notes eventually will be guaranteed, either by the state or the county, school districts are guessing at their actual losses as they crunch the numbers for next year's budgets.

Last week, for example, the school board in the Capistrano district reviewed more than 30 budget cuts--including canceling bus service, shortening the day for high school students, and canceling varsity sports--in expectation of losing roughly $7 million of the $74 million invested with the county.

In Irvine, meanwhile, school officials are planning a budget assuming repayment of 77 cents on the dollar, Susan Long, the deputy superintendent for personnel, said. While the Capistrano district has no immediate plans for staff cuts, officials in the Irvine schools have sent layoff notices to 30 administrators and 102 teachers who have one-year contracts.

The Irvine district has more than $100 million frozen in the bankruptcy--more than any other district in Orange County--and must repay a $54 million debt due in June. Some community leaders are asking for a special election to approve a new property tax whose proceeds would be targeted to maintain instruction.

"We can't depend on the county or the state," said Mark P. Petracca, a political-science professor at the University of California at Irvine who is among those crafting the tax proposal. "We can only depend on ourselves. It's time to wake up from this nightmare."

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