MOORLACH UPDATE — Thankful — November 29, 2013

I hope you had a wonderful Thanksgiving Day. I will admit that it was not the same for me with my granddaughter 2,000 miles away. But, we had a great family gathering and our home was filled with special guests, conversation, and laughter. We have much to be thankful for.

I am thankful that the CEO of the Orange County Transportation Authority (OCTA) will be recommending a deferral of imposing toll lanes on the San Diego 405 Freeway at Monday’s OCTA Regional Planning and Highways Committee meeting. I’m thankful that OCTA is moving forward on its Measure M commitment to build one new lane in each direction. I’m just mystified that OCTA leadership was willing to add two lanes to the existing five lanes (one carpool and four general purpose) for toll (managed) lanes, but is unwilling to recommend two lanes sans the toll lane alternative. If some fourteen bridges are widened to accommodate four new lanes, but only two are paved, it strikes me as poor stewardship. It is also extremely inconsiderate to those who live alongside or nearby the freeway, as construction activities are a disruption. So why consider adding the other two lanes later and create another inconvenience to these constituents? I would recommend that OCTA get the four lanes (modified for the Seal Beach North sound wall) built at the same time. Especially if you believe construction costs are rising. The OC Register covered the story as the lead topic of their Thanksgiving edition’s second front-page headline and is the first piece below.

I’m also thankful that Orange County received a little recognition for a strategy it pursued eighteen years ago. If you’ve enjoyed my LOOK BACKS these past five years for the bankruptcy era history, you’ll love The Bond Buyer Wednesday (Thanksgiving weekend issue) piece below. The reporter addresses the topic of DIP, debtor-in-possession, financings. It’s a little esoteric, but if you’re a finance person, you’ll love the comparisons and the history. Detroit’s bankruptcy may just set a new tone for entering a Chapter 9 proceeding in the years ahead in dealing with defined benefit unfunded actuarial accrued liabilities. The piece was the front page, top-of-the-fold story!

OCTA proposal would defer talk of tolls on I-405

Agency prefers to develop a countywide policy, looking at tolls after any new lanes open in 2020 or later.

By DOUG IRVING

Orange County’s transportation agency is considering a plan that would shelve its much-criticized proposal to charge tolls on I-405, but would keep alive the possibility of future tolls there and throughout the county.

A committee of board members at the Orange County Transportation Authority is scheduled to review the new plan on Monday. The full board could then vote on it as early as Dec. 9.

The OCTA is spending around $1.3 billion to add one free lane in each direction along 14 congested miles of I-405, between Costa Mesa and Seal Beach. It has been looking seriously at replacing the carpool lanes with tolled “express” lanes as part of that project, under pressure from Caltrans.

But the recommendation now headed to the board would postpone any decision on expanding the project until after the free lanes are finished in 2020. At the same time, it would commit the OCTA to develop toll policies as part of its long-range plan that would apply countywide, not just to I-405.

That would keep the construction wheels moving on building the free lanes. OCTA officials calculated that any delay in hammering out pros and cons of toll lanes could add millions of dollars to the project cost. And, as a staff report notes, “a consensus has not been reached” on the tolling question.

Instead, the idea of tolls has packed public meetings with frustrated residents and united the cities along the freeway in opposition.

“Constructing toll lanes is a breach of trust with Orange County residents,” the mayors of those six cities wrote in a letter to the OCTA last week.

Representatives of those cities greeted the OCTA’s latest proposal with skepticism.

“It looks to me like they’re just postponing tolls,” said Diana Carey, a Westminster councilwoman. “If you’re talking about a tolling policy countywide, then that needs to go to the voters. Period.”

It was not clear Wednesday whether Caltrans would sign off on the OCTA’s plan; a spokeswoman declined to comment. Caltrans owns I-405 and has the final say on what happens there. It faces a federal mandate to ease traffic in California’s most-congested carpool lanes, including those on I-405, and has made clear that tolling is one option to accomplish that.

Orange County transportation officials have pushed the state to develop a bigger-picture policy on tolls before it narrows its focus to I-405. The OCTA’s new plan would keep that policy discussion open but would shift focus from I-405, spokesman Joel Zlotnik said.

“Continuing to have that discussion, and doing it in a more comprehensive and regional way, is really a positive step, the right way to go,” he said.

The tolling idea has been a big part of the debate over the future of I-405 in recent months, but it’s not the entire debate. Politicians and residents, especially from the cities closest to the freeway, also have pushed the OCTA to build two new lanes in each direction, not just one.

The added cost for those two lanes, around $100 million, is a fraction of the nearly $1.3 billion the OCTA already is spending to get one lane, they point out. But the proposal now heading to the OCTA board would shelve the two-lane idea as well. A staff report given to board members argues that it has neither the money nor the support of Caltrans that it needs.

But county Supervisor John Moorlach, who has led a minority push on the OCTA board to get those two lanes in each direction, said he’s not giving up.

“If we’re moving forward, let’s just be good stewards,” he said. “The trucks will be there, the cement will be there … let’s do it all the first time.”

Monday’s meeting to review the plan for I-405 is scheduled to begin at 10:30 a.m. at OCTA headquarters, 600 S. Main St., in Orange.

Contact the writer: 714-704-3777 or dirving

Detroit DIP Loan Has Precedent in Orange County Bankruptcy

by Caitlin Devitt

CHICAGO — Detroit’s proposed $350 million debtor-in-possession financing, while rare in Chapter 9, is not the first such deal.

The honor goes to Orange County, Calif., which 18 years ago completed a pair of DIP financings that were key to lifting the county of its bankruptcy.

“Most people have forgotten Orange County,” said Roger Davis, public finance chair at Orrick, Herrington & Sutcliffe, which acted as underwriter’s counsel on the OC deals. “Detroit is certainly bringing them up to date. When people look at whatever the next municipal bankruptcy is, they’re going to look at Detroit and Orange County.”

The two governments suffered very different problems that drove them to file for Chapter 9.

But their DIP loans share many of the same features and will, if Detroit is able to close its $350 million loan with Barclays, mark the largest such financings in Chapter 9.

“This [DIP loan] seems to be critical for Detroit,” Davis said. “More likely, they’ll do some more financings as part of their emergence from bankruptcy.”

Orange County filed for Chapter 9 after suffering $1.7 billion of losses in the Orange County Investment Pools. The losses were aggravated by the county’s budget shortfall due largely to the loss of interest income from the failed investments.

“Our bankruptcy was a little different from Detroit’s,” said John Moorlach, OC’s treasurer during the bankruptcy who played a key role in the county’s financial recovery. “Detroit’s is the issue of spending a little more than you make every year, while Orange County was like a hedge fund implosion.

“Our big focus was trying to address those losses, and deal with all the schools and cities [who lost money] in the investment pool and get the rest of it from litigation,” said Moorlach, who is now a county supervisor. “That was our approach to our plan of adjustment, and it was key to getting the deals done.”

Orange County completed two DIP financings in 1995. A $279 million recovery bond sale featured a super-priority lien that allowed the county to pay off the school districts that had suffered investment losses. Proceeds from the deal financed a settlement between the county and the districts that was reached in bankruptcy court.

Like Detroit’s deal, the county’s $279 million of recovery bonds relied on an intercept feature, which allows the bond trustee to collect the revenue backing the bonds directly for debt service before passing the remainder on to the government.

Both governments sought bankruptcy court approval for the deals, a key to DIP financings.

Both also featured super-priority liens, making the repayment of the debt superior to all other creditors and administrative costs.

“Orange County provided two very useful models for how you might do DIP financings, and at least one of them is being replicated in Detroit,” Davis said. “One is a settlement with some of the creditors, which is essentially what Detroit is doing,” said Davis, referring to the city’s proposed settlement with its interest-rate swap counterparties, who would be paid with part of the proceeds of its $350 million deal. “The other is getting some assets out of the bankruptcy estate that would enable them to borrow.”

The second model is the one the county used in issuing $150 million of so-called Teeter Plan revenue bonds backed by delinquent property taxes in 1995. The county set up a separate authority that was outside the bankruptcy to take over the delinquent tax assets.

OC’s recovery bonds were backed by all available funds of the county and additionally secured with motor vehicle license fees. The recovery bonds were also insured by MBIA Insurance Corp. The county paid interest rates of between 5% and 6.10% on the debt, which was sold in the public debt markets — unlike Detroit’s plan.

“Orange County was an essentially wealthy community that had the ability to pay [the recovery bonds] back, and in that case they’re significantly different from Detroit,” Richard Ciccarone, chief research director at McDonnell Investment Management LLC, said. The MBIA insurance also smoothed the way for that deal, said Ciccarone.

Willkie Farr & Gallagher was bond counsel on OC’s deal in 1995. Goldman, Sachs & Co. and A.G. Edwards & Sons, Inc. were the underwriters. Orrick, Herrington & Sutcliffe was the underwriters’ counsel. Salomon Brothers was financial advisor on the deal.

The county also issued certificates of participation backed by the county’s real estate in 1996 as it emerged from Chapter 9. All the financings were considered key to the county’s long-term recovery plan.

Orange County’s 1995 recovery loans were sold with a final 2015 maturity. They were refunded in 2005.

Detroit’s loan is for 2.5 years, or when the city emerges from bankruptcy.

Detroit is hoping to close on its $350 million DIP loan with Barclays by the end of the year. Detroit’s DIP features pledges of the city’s casino and income tax revenues. The agreement calls for the city to pay Barclays roughly $4.3 million in commitment fees and a floating interest rate based on the London Interbank Offered Rate plus 3.5%.

Several of the city’s creditors, including bond insurers and unions, are fighting the deal, saying it would take too much of the city’s revenue off the table. A hearing is set for Dec. 10.

Whether DIP loans are a good idea in Chapter 9 depends on the circumstances of the bankrupt government, according to bankruptcy attorney James Spiotto.

“If it has the money to keep operations going, or to do an improvement that’s necessary as part of their recovery plan, then it makes sense,” said Spiotto. “Obviously [Detroit officials] believe they need the money and it’s their determination that they need it to be able to continue to operate.”

While Orange County entered bankruptcy for different reasons than Detroit, the Motor City’s problems are now a kind of bellwether for cities across the county, especially in California, said Moorlach, a Republican.

“What’s really fascinating about Detroit is their issues are endemic of all municipalities today,” he said. “With Detroit, as with our two cities, Stockton and San Bernardino, it’s this slow process of running out of cash as you’re seeing your fixed costs increase while revenues are stable or decreasing.”

Moorlach said he’s a “big fan of Chapter 9” for the way it helped the county work out its problems and was key to its restructuring plan.

“You go into bankruptcy court to get some debt relief, but the tumor for everyone now is the pension plans,” said Moorlach. “OC didn’t have a problem with its pensions — in 1994 it was just a hedge fund implosion — but everyone has that problem now. It’ll all grind to a halt when investors say, ‘You’re not paying us enough to take on the risk.’”

FIVE-YEAR LOOK BACKS

November 28

2008

Joseph Serna of the Daily Pilot provided an update on a contentious subject with “Eyeing budget cuts, county officials are evaluating whether cities should pay for harbor patrols.” Two years later, the Office of the Performance Audit Director would publish a thorough report on the topic (see http://ocgov.com/civicax/filebank/blobdload.aspx?BlobID=10726). Taking into account the property values of the homes in both harbors, it was hard to swallow the claim that the two harbor cities in my District were not more than adequately paying for the Sheriff’s services. The Performance Audit report would help put this debate to bed.

More than $30 million in budget cuts by county leaders this week has led officials to reevaluate whether the county should make the cities pay for the sheriff’s harbor patrolling.

With declining tax revenue in a slumping economy, Orange County supervisors said they are dusting off the books and reevaluating everywhere the county could save money, including long-standing expenditures like harbor patrol for beach cities.

Fourth District county Supervisor Chris Norby argues that Newport Beach and Huntington Beach should pay the annual $6.6 million it costs for the sheriff to patrol their waters. Unlike Dana Point’s harbor, these two harbors are not county land, he said. He spoke specifically about Newport Harbor on Wednesday.

“The harbor is completely within the city limits of Newport Beach. Anything that is completely within the city limits, is that city’s responsibility,” he said. “If the city wants to pay for the service, and contract the service, then we’d be happy to do it.”

He said since the economy began to tank, he’s found support from previously resistant colleagues. Supervisor John Moorlach, who represents Newport Beach and Huntington Beach, said he would first like to talk to sheriff’s officials and city leaders. He did point out the realities of the county’s finances, though.

“Deputy sheriffs are very expensive people. They’ve priced themselves so high with their salaries and benefits, and the costs are only going up. It seems we can probably find a cheaper solution somewhere else,” he said. “I was told yesterday that I have 500 people, need 500 people for the jails. Overall, if I can give the harbor patrol to the cities and maybe an outside service and move deputies to the jails,” that may be worth exploring.

Newport Beach Assistant City Manager Dave Kiff said any decision would have to be approved by the City Council, but any notion of the county just billing the city was the wrong approach.

“I think it’s a non-starter to say we’d ever just cut a check and pay for the service. That’s not how we do it…if the strings are, the county sends us a bill and we pay for it, that’s not going to work,” Kiff said. “We’d probably send the bill back.”

There is room for negotiation, though, county and city officials said, including that if sheriffs continue to patrol Newport Beach waters, maybe the level of service could be reduced. Harbor patrol officials did not return calls for comment. Moorlach said in the past, when questions of who should patrol the harbor were raised, what he calls “opening Pandora’s Box,” sheriffs unions have always fought to maintain “their turf.”

“We’ve been down this road a little bit and things pop out of nowhere,” Moorlach said. “The tentacles of union power and all the facets of the discussion all come out when you begin this discussion.”

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