O.C. Treasury Turmoil Puts Officials on Alert : Investing: Sanitation district contends it lost money after criticism by executive Robert L. Citron's political foe. The county may delay refinancing of bond money.

TIMES STAFF WRITER

In the wake of recent political attacks questioning the investment practices of Orange County Treasurer Robert L. Citron, county officials are taking temporary precautions in how they bring multimillion-dollar government bond deals to the marketplace.

And one finance official with the Orange County Sanitation District asserted Wednesday that the controversy may have already cost the district thousands of dollars in the search for new investors for securities issued to pay for part of its day-to-day operations.

These are the first indications that nationally publicized criticisms of Citron's investment practices by his political opponent may have cost the county money and affected officials' critical financial decisions.

Peer Swan, the sanitation district's fiscal policy chairman, said Wednesday that the agency lost up to $12,000 last month when it was forced to finance about $30.2 million in short-term securities at a higher rate.

At the time, Swan said, potential investors were not as willing to carry the agency's notes because treasurer candidate John M. W. Moorlach had criticized Citron's aggressive investment strategy in managing Orange County's $7.5-billion investment pool. It is unclear whether that reluctance also could have been influenced by rising interest rates.

Citron invests the money on behalf of the county and more than 180 other municipal and government agencies and says his strategies are sound.

"It was not a huge dollar amount with us," Swan said. "But it could have been worse."

The Sanitation District's securities, known as commercial paper, were being backed by the county investment pool. They were eventually purchased by Leahman Bros. Officials at the investment firm could not be reached for comment.

Moorlach dismissed the district's contentions that that it lost money as "weak political posturing by people who are not paying attention."

"They are looking for a bogyman, and it's not me," Moorlach said.

Meanwhile, county Finance Director Eileen Walsh said this week that in the wake of the Citron flap the county would likely delay by two weeks the refinancing of at least $234 million in bond money designated to pay for construction of local streets, sewer and flood control services in Aliso Viejo.

It was uncertain whether the county would delay refinancing and the search for new bond funds to finance a separate $250 million in improvements for the Foothill Ranch and Rancho Santa Margarita areas. There, the bond money would pay for roads, library services and a Sheriff's Department substation.

Walsh said such delays would hopefully clear the air of criticisms by Moorlach and his supporters of Citron's investment policy, allowing the county to seek favorable refinance rates.

The director said the South County delays also were needed to secure property appraisals, and she did not think the wait would cost the county additional money.

However, Walsh said the Citron controversy has prompted several calls from Wall Street agencies seeking reassurances about the county's financial standing with credit rating agencies.

"The rating agencies are comfortable (with our standing)," Walsh said, "but I've never had to have so many conversations with them. (Citron's) stuff is clean."

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In recent weeks, Moorlach has criticized Citron's investment management, which relies heavily on using the county pool's U.S. Treasury bills and bonds as collateral to borrow short-term at low interest rates and investing the borrowed funds in bonds and securities that pay a higher rate of return.

The strategy can earn large returns while interest rates remain low and stable. But it can fail when interest rates rise, as they have in recent months.

Recently, Citron has received "collateral calls" that forced the investment pool to pay an additional $215 million in collateral because the value of the securities he used to borrow money has declined as interest rates have gone up.

County officials and market analysts familiar with Citron's investments, however, had expressed confidence in his management of the county pool during his 24 years in office.

Criticism of Citron's tactics, most of which have come from his political opponents, have been aired by the local media as well as the Wall Street Journal and in the financial trade publications Derivative Week and the Bond Buyer.

Citron and Assistant Treasurer Matthew R. Raabe acknowledged that the criticisms have continued to foster a climate of uncertainty in Orange County among investors.

"We do know there is general nervousness out there in the market right now," Raabe said. "Unfortunately, the market moves wildly on rumor. The psyche of investors has been damaged."

When the political exchanges reached their height a few weeks ago, Swan said, there was potential for even greater damage to the county's financial standing. With the quieting of the debate, the uncertainty seems to have lessened in recent days, he said.

In the case of the sanitation district, had no investors chosen to carry the district's debt, Swan said officials could have been forced to call on the county pool to bail it out because the $30.2 million in securities were fully backed by the county pool.

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Before the securities were purchased, Swan said, investors asked many questions and expressed concern about criticisms leveled by Citron's opponents.

"The $12,000 was not going to kill the sanitation district," Swan said. "That wasn't the danger. The danger was in possibly creating a run on the pool.

"(Criticisms by the Moorlach campaign) are like a guy who runs into a theater and yells 'Fire!' " he said. "This is real money we're talking about. It would have been real easy to create a stampede."

Moorlach, however, said he had no intention of backing down on his criticism of Citron's practices and scoffed at the idea that debate from one campaign could place Orange County at a disadvantage in the marketplace.

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