Turning an Orange into a Lemon


Municipal bondholders across the nation got a lesson last week in the New Economics from the conservative "I'm mad at government and won't take it any more" crowd: One of the nation's most affluent jurisdictions, Orange County, Calif., which owes $1.7 billion and is now in bankruptcy, essentially told Wall Street it won't live up to its legal and moral obligations. It is welshing on its lenders.

Until now, the basic underpinning of the government bond market has been the understanding that cities, counties and states would meet their financial responsibilities. Bonds are usually backed by the taxing power of the government to ensure that if something goes wrong, the bondholders will be paid off. No longer.

Voters in Orange County, rich and very conservative, decisively rejected a plan to raise the local sales tax by half a percent to erase the county's $1.7 billion IOU over 10 years. Residents are furious at local officials for making these incredibly risky -- and bad -- investments. They are mad at the treasurer who committed the deed (he has pleaded guilty in court) and the current supervisors, too. An interim chief executive officer has chopped local spending 41 percent and fired 2,000 workers. But that has not satisfied constituents.

In Orange County, government is a dirty word. A majority of voters feels that simply by hacking further at the local bureaucracy the county's debt can be washed away. "Off with their heads!" shouted one celebrant after the voters defeated the sales tax proposal. Signs at a victory rally read, "County Government is Corrupt" and "Taxpayers Revolt!"

This rebellious mood leaves local leaders little choice but to give voters what they want. Government services may have to disappear. Just last week, the only veterans office in Orange County was denied any funds, for instance. That is child's play compared with the steps that lie ahead.

All governments across the country might suffer as a result of the Orange County vote. Floating municipal bonds in general will become more expensive. The price of obtaining insurance on a bond issue is likely to soar. And governments with shaky credit ratings may not be able to find any takers for their bonds.

The notion that someone else did this to them, that it is not their fault runs rampant in Orange County. A majority of voters said: "We're not responsible." But they are responsible. It is their elected representatives who created this mess, officials that the citizens of Orange County put and kept in office. As county programs dwindle, as schools lay off teachers and as health services vanish, citizens will have to decide for themselves if it was worth it to stiff bondholders. Living in a deadbeat county, no matter how affluent, may not have much lasting appeal.

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