Calif. county asks state for millions in bailout

[July 23, 2010]  SACRAMENTO, Calif. (AP) -- Finance officials with the cash-strapped state of California will consider Friday whether to grant a multimillion-dollar loan to a county considering bankruptcy because it illegally funded a new hospital and now has to repay the debt.

Modoc County is asking the state for a bailout, hoping to secure a loan for between $4 million and $12.5 million so it can continue to provide services to county residents.

An audit last year by the state controller's office determined that the county was violating state law by shifting dollars away from their intended purpose, prompting the current financial crisis. The county has hired a bankruptcy attorney in case it needs to declare itself insolvent, said Dan Macsay, chairman of the Modoc County Board of Supervisors.

"What we are trying to negotiate now with the state is to come up with a loan that we will obviously repay, to get us over this crisis that we're at right now," Macsay said on Thursday.

It's unclear whether Modoc County will have enough money to pay expenses for the current fiscal year that began July 1, considering it must repay millions in debt, he said. The county borrowed $12.5 million from special funds to support the hospital for about 15 years but never repaid the money.

Modoc County is in California's far northeastern corner, a sparsely populated region of forests and wind-swept plains that is tucked between the Oregon and Nevada borders. In January, the state listed its population at 9,777.

On Friday, the state treasurer, controller and others will discuss proposals to help the county stay afloat. The county has requested a loan from the state's Pooled Money Investment Board, which oversees a portfolio that was worth $69.4 billion as of June. But California has its own financial troubles and is facing a $19 billion deficit.

"When a local entity files for bankruptcy protection, it has a ripple effect on the reputation of the state," said Tom Dresslar, spokesman for state Treasurer Bill Lockyer. "It creates headlines that do not serve the state well when it, for example, tries to sell bonds."

Municipal bankruptcies are rare in California. The most high-profile one was Orange County's bankruptcy filing in 1994; the San Francisco Bay area city of Vallejo filed for bankruptcy protection in 2008 amid a revenue crisis.

Yet helping Modoc County by providing a loan comes with its own dangers. If one financially strapped municipality gets a loan from the state, it could prompt other local officials to ask for handout, too. Dresslar said if the state does issue a loan, it would want to make clear that it's not setting a precedent.

Dresslar also said a loan would carry strict conditions, such as allowing the state to intercept other tax money destined for the county.

"We don't think any county will be chomping at the bit to place themselves under the scrutiny and conditions that this kind of loan would carry with it," Dresslar said.

One question that must be answered immediately is whether Modoc County can use the money it has to pay its bills or whether it is legally obligated to use that money to repay debts, said state Assemblyman Jim Nielsen, R-Yuba City, who represents the region. It remains unclear whether the county will be able to deliver the next paycheck to its employees until that is resolved, he said.

Meanwhile, Modoc Medical Center has had to stop offering services such as minor surgeries and delivering babies, said Macsay, the county supervisor. Instead, county residents will have to drive more than two hours to hospitals in Redding or across the Oregon border to receive those services.

Darcy Locken, the Modoc County auditor, said the county will have a special election in August for voters to decide whether to impose a new tax to fund the hospital.

[Associated Press; By CATHY BUSSEWITZ]

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