California Scandal Hits Iowa Towns : Finances: Millions of dollars were lost by cities and counties after alleged fraud by an Irvine-based investment firm. Governments there are imposing cutbacks and weighing layoffs.

People in the farming community of Marshalltown are stunned: Their city has been devastated almost overnight, and all they have been told is that it is because of some shady financial scheme out in California.

Since December, the city of 25,000 people just northeast of here has had to shelve a year’s worth of road repairs and sewer improvements, and cancel plans to replace much of its outdated equipment.

It may have to lay off 35 employees--nearly 20% of the city work force--including some from the Police and Fire departments. Because it cannot buy a new firetruck to replace a 32-year-old one, the city’s fire insurance premium will probably go up. “There’s not a part of our operation that won’t be affected,” said city administrator Jay Gsell.

“People want to know: ‘How did it get this bad so fast and who do we blame?’ Gsell said. “I think if Steve Wymer were in Iowa, he would have 88 city and county officials lining up to take whacks at him with a machete.”

Steven D. Wymer, 43, is facing criminal charges alleging that his Irvine-based company, Institutional Treasury Management, defrauded clients in Iowa and elsewhere of $113 million they had given him to invest. He has pleaded not guilty.

While officials in other states--particularly California and Colorado--are also scrambling to find lost money, no place has suffered more than Iowa, where 88 government agencies invested more than $70 million with a Wymer client called Iowa Trust.

“I tell people Dec. 12 was like Pearl Harbor Day in Iowa,” one county official said, citing the day the news broke. “This is so shocking because we really are careful with our money. We are conservative and boring, and we’re not out to make a million bucks.”

The Des Moines Register has dubbed “the Iowa Trust Scandal” the biggest financial disaster in state history.

The issue has dominated lawmakers’ attention. On the first day of the legislative session last month, the president of the state Senate resigned his leadership post while an ethics committee investigates his role as a salesman for Iowa Trust.

And Iowa Gov. Terry E. Branstad has moved to restore public confidence, appointing an investigative panel and proposing legislative reforms to keep the debacle from happening again.

Like cities and agencies elsewhere, Iowa’s investors still hope that some or all of their money can be recovered. Federal officials have frozen Institutional Treasury Management assets and are sorting out the dozens of claims filed against the company. They already have seized more than $10 million in assets of Wymer and his wife, including bank accounts, real estate, cars and furniture from a Sun Valley, Ida., vacation home.

But some governments face a cash crunch because the lost money was earmarked for salaries, construction projects or equipment. Iowa officials are considering whether to create a low-interest loan program for cities or agencies that cannot meet their obligations.

The scandal underscores a vulnerable reality for small-town America, they said, whose investments are usually too small for big brokerage firms to handle economically, and whose public officials often are not schooled in high finance.

The Iowa Trust was formed in January, 1989, to pool dozens of small and medium investment accounts to create better investment opportunities. But--unknown to many members who thought that Iowa Trust was a local operation--Wymer was hired as an adviser to invest the money. He was recommended by Marshalltown, which liked what Wymer had done with other investments of city money. A few cities joined, the trust gained credibility, and others followed.

Several local officials said they were comfortable with the trust in part because Iowa has fairly conservative finance laws, including a requirement that cities and local agencies invest only in government securities, which Iowa Trust did.

“If the money is in U.S. Treasury notes, what better way to invest?” said Lynde Lundquist, treasurer of Cherokee County. “We thought we were doing the right thing.”

But authorities allege that Wymer also deceived his clients into believing that their money was safe. The federal indictment alleges that Wymer sent false monthly statements overstating the amount of money in clients’ accounts, and had employees forge brokerage confirmation documents to support the fake monthly performance statements.

A city most severely affected is Dubuque, which invested more than $23 million, much of it from police and fire pension accounts. Officials there have said the city will meet all its immediate obligations, but if the problems are not resolved soon, the city could face a budget crunch.

In almost every corner of the Hawkeye State, officials tell horror stories about the financial disaster that swept through Iowa like a cyclone across the prairie.

* Marion had invested more than $4 million; city leaders wonder how they will pay for the new garbage trucks they hope to buy.

* West Liberty, which had $646,000 in the trust, has cut back on cemetery maintenance.

* In Boone, the $3 million invested with Iowa Trust was committed to library construction that had begun. Because the city was under contract, it could not stop the library project. Instead, it ordered the builder to slow down the schedule.

Marshalltown, with a budget of $18 million, invested nearly $12 million with Iowa Trust. It is scrambling to pay basic operating expenses. Besides the 35 full-time employees facing layoffs, Gsell said, 65 part-timers could be cut unless the money is recovered.

Some officials predict that it will take a political toll. Randy Enright, executive director of the state Republican Party, said: “There are people who are concerned for their hides in this thing.”

When the Legislature reconvened, state Senate President Joe Welsh, a Dubuque Democrat, stepped down from his leadership job while he is being investigated by an ethics committee. For two years, Welsh was a salesman for the trust.

Welsh said he will be cleared by investigators and will return to his post. But a columnist for the Des Moines Register, David Yepsen, said: “The Joe Welsh scandal is like a small thread on your coat. . . . Start pulling on it, and pretty soon the whole sleeve falls off.”