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Orange County no longer No. 1 when it comes to municipal bankruptcy

November 10, 2011 | 11:55 am

Cirton

This post has been corrected. See the note at the bottom for details.

Orange County is losing one of its lesser distinctions: ground zero to the largest municipal bankruptcy in  U.S. history.

After an inglorious 17-year run, Orange County’s $1.6-billion bankruptcy is being eclipsed -- dwarfed, even --by Jefferson County, Ala., which has filed for Chapter 11 to help deal with $4 billion in debt.

Jefferson County’s financial undoing is being caused in large measure by the refinancing of a sewer system upgrade that relied on exotic interest-rate swaps, according to Nation Now.

Orange County was done under by the risky investments of then-county Treasurer, Robert L. Citron, who borrowed money to bet on speculative high-yield securities that depended on interest rates remaining low.

When rates shot up, $1.64 billion in public money vaporized.

Some county leaders at the time conceded that they didn’t not understand Citron’s strategy all that well and blindly put trust in him because his investments had historically done well.

As in Jefferson County, politicians in Orange County initially predicted financial Armageddon, a deeply troubling thought in a county that was known for its conservative, tight-fisted ways.

One national business writer described a "mushroom-shaped cloud that hangs over Orange County." Others predicted that government would lurch to a standstill, schools would be shuttered, parks sold off.

But it didn’t happen that way.

Real people did lose real jobs and county services were slowed, even frayed. But, while Orange County probably won’t pay off its bankruptcy debts in 2026, the wheels of government did not grind to a halt.

"I wouldn't ever say bankruptcy was good for the county. But, ironically, Orange County is a very well-run county now," said Matthew Newman, the director of the California Institute for County Government .

"Bankruptcy has had a lot to do with that," he said. "It got people to focus on what's important and run as tight of a ship as they could."

For the record, 2:29 p.m. Nov. 10: A previous version of this post referred to $1.64 million in public money vaporizing in Orange County when interest rates shot up. The correct amount is $1.64 billion.

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-- Steve Marble

Photo: Former Orange County treasurer Robert L. Citron is sentenced to one year in county jail for his involvement in the county's bankruptcy. Credit: Al Schaben / Los Angeles Times

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