ORANGE COUNTY IN BANKRUPTCY : Empty Pockets : Finance: Bonds have been a major funding source in Orange County. Agencies that used them for projects will have to seek other methods now.

Like a junkie suddenly without a fix, Orange County government agencies long dependent on borrowed funds--in the form of regular bond issues--are being forced to quit cold turkey as the county’s plunging credit ratings have made it all but impossible to issue new paper.

The county’s bankruptcy filing, and the subsequent downgrading of bond ratings, threaten the very core of municipal finance in Orange County--the financing method of choice for public projects from new communications equipment to schools and roads.

Bond issues have soared since 1978, when the landmark Proposition 13 tax initiative severely curtailed government’s ability to raise property taxes. County municipalities and public agencies have gone to the public 544 times since 1980, issuing $21.3 billion worth of bonds.

Last year was the busiest, with 121 issues totaling $4.9 billion, according to Securities Data Co.

The current uncertainty has forced officials to reconsider how to finance a proposed $94-million upgrade of the county’s antiquated emergency telecommunications system, said Bert Scott, director of Orange County’s General Service Agency.

“Bonds were an option, but they’re clearly not an option anymore,” he said. “The most likely option now is for the vendor, Motorola, to finance it themselves.”

Officials at the Orange County Transportation Corridor Agencies, meanwhile, were trying to determine what will happen to a planned $1.4-billion bond issue next spring. The borrowing is needed to finance a 23-mile toll road through the county.

“Our bond ratings are separate from the county’s rating,” agency spokeswoman Lisa Telles said. “So we don’t know how it’s going to affect our bond sale at this time. We’re working on assessing that.”

So far, neither the federal nor the state government has shown an inclination to guarantee Orange County bonds, a step that could restore county agencies’ ability to turn to the bond market for financing. The federal government guaranteed New York City’s bonds in the 1970s, but only after congressional action. Gov. Pete Wilson said Thursday he does not expect the state to provide any money to help the county get back on its feet.

On Wednesday, Standard & Poor’s downgraded the rating on $1.58 billion in county bonds, dropping some from a solid AA- to CCC, a level below investment grade and an indication of high risk and uncertainty. Most investors won’t touch CCC bonds.

Also Wednesday, Moody’s Investors Service rated $26 million of commercial paper issued by some Orange County sanitation districts as “not prime,” indicating that notes that matured on that day were not paid, said Nicole Johnson, an assistant vice president. (The districts did not default, however, because Lehman Bros. agreed to pick up the loan.)

For a new issue, dropping the credit rating just from AA to BBB can significantly increase the cost of borrowing (expressed in the interest paid on a bond), boosting it as much as one or two percentage points a year. On a bond issue of $100 million, that amounts to $1 million to $2 million extra in annual interest payments.

And that’s not counting insurance or other costs that agencies may have to pony up if their credit ratings fall below the level typically accepted by investors.

If an agency is rated below BBB, it typically will not proceed with an issue, bond market analysts said.

Without the ability to borrow, Orange County government has few alternatives for raising revenue.

Most operating funds come from property and sales taxes, but because of state laws--including Proposition 13--the county cannot raise either.

Orange County could increase business license and hotel occupancy taxes in unincorporated areas. But even those types of taxes may require voter approval, said Steve Mayer, a San Francisco lawyer who specializes in advising local governments.

Cities, schools and special districts also depend on a share of property and sales taxes for their operations, but these entities have a little more leeway in raising taxes and fees.

The city of Fullerton, for example, last year imposed a 2% utility tax to cover a $3-million shortfall in its budget.

Many believe cities in the county will also look at imposing fees--for everything from getting copies of records to using city parks. But those generally require a public hearing.

And there’s a political cost.

Buck Catlin lost his job as Fullerton’s mayor largely because of the new utility tax. “When we put a 25-cent charge for copying . . . one guy came at me with a vengeance,” he said.

Similarly, officials of special districts figure they would have difficulty justifying rate increases for water, sanitation and other services, when service would not be improved.

For now, several Orange County municipalities say, lower bond ratings will have little effect on their plans. Indeed, many agencies said they had no plans to float new bonds in the near future.

“In a typical year we wouldn’t borrow,” said Yorba Linda Assistant City Manager David Gruchow. The city “only issues debt when (there are) favorable market conditions or (there is a) real need to do a large project that we don’t have cash for.”

Similarly, Fountain Valley, which last issued redevelopment bonds in 1985, has no intention of floating a new issue. “There is ample money left from bonds sold years ago to take care of whatever projects are needed or anticipated, and we don’t anticipate doing any additional borrowing,” said Fountain Valley City Manager Raymond H. Kromer.

Seal Beach Mayor George Brown sounded a hopeful note. “Frankly, I don’t think that (low) rating will stay very long,” he said. “I think it will recover rather rapidly. Muni bonds are a good investment.”

But it will take time for Orange County credit ratings to rise back to their previous high levels. “We don’t like to flip-flop on our ratings, so it’s not done lightly,” said Moody’s Johnson.

Which is not to say it never happens.

When the Washington Public Power Supply System defaulted on $2.25 billion in bonds in 1983--the biggest municipal bond failure at the time--credit ratings plunged. But subsequent bond issues earned much better credit ratings. By 1990, the agency was selling as many bonds as ever.

Last January, the system’s bonds were rated AA by Moody’s.

Times staff writer Don Lee and Orange County correspondents Bert Eljera, Russ Loar, Danielle A. Fouquette, Debra Cano and Mimi Ko contributed to this story.