SANTA ANA, Calif. -- The crisis in Orange County is beginning to threaten municipal services, with the water district saying it won't have enough money to pay its bills and school districts faced with closure.
The Orange County Water District filed a lawsuit late Friday demanding that the county release $34 million of the district's funds from the county's bankrupt investment pool.
The district's move was seen as the biggest challenge to the county since it sought protection from its creditors under Chapter 9 of the bankruptcy code on Dec. 6. Shortly before that, the county said its $7.8 billion investment pool had lost at least $1.5 billion by betting the wrong way on interest rates.
In fact, things might be worse than that: Standard & Poor's Corp. said yesterday that it believed the estimated loss by the county might be "significantly underestimated." The Wall Street Journal, citing unnamed people close to the fund, said yesterday that the losses might have widened to $2.5 billion.
Whatever the size of the loss, all assets in the fund are now frozen. That's affecting about 180 California municipalities that invested in the fund. Some of them are starting to need the money to operate.
Officials of the county said yesterday that they haven't reached any agreement with the water district on how it would meet its obligations over the next 90 days. "We are still at an impasse," said Thomas F. Riley, chairman of the county board of supervisors.
While he couldn't guarantee any payments to the water district, Mr. Riley said the county can meet school payrolls for the next few weeks. He declined comment, though, on whether the county would be able to meet a scheduled $105 million disbursement to the 28 school districts in Orange County in January. The uncertainty has some school districts talking about shutting down.
"We're planning for the possibility of a close-down," said James Fleming, superintendent of the Capistrano Unified School District, with more than 33,500 students.
The Orange County Sanitation Districts, meanwhile, are trying to get $26 million from the fund to pay for commercial paper that their remarketing agent is holding as debt.
County officials "haven't formally turned us down," said Steve Kozak, financial manager of the sanitation districts, "but we don't have the money." Their commercial paper program was downgraded Wednesday by Moody's Investors Service Inc. to "not prime." To preserve capital, the districts have imposed a hiring freeze.
Elsewhere, the Orange County Transportation Authority said it would meet $46 million in debt service payments due Feb. 15 on sales-tax revenue bonds it issued. Some planned highway projects won't go ahead, though, because of the bankruptcy filing.
In other developments, Donaldson, Lufkin & Jenrette Inc. sold all $100 million of securities that served as collateral on a loan it made to Orange County's investment pool, said DLJ President and Chief Executive John Chalsty. The firm lost no money in the sale. "We had no exposure going in and we had no exposure going out," Mr. Chalsty said.
Merrill Lynch & Co. is the only major Wall Street firm that hasn't sold the collateral for its loans to Orange County, which filed for bankruptcy court protection after defaulting on loan agreements to securities firms.