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CALIFORNIA ELECTIONS / GOVERNOR : Former Opponent Criticizes Brown’s Handling of Funds

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TIMES STAFF WRITER

Former State Treasurer Tom Hayes attacked his successor, gubernatorial candidate Kathleen Brown, for her conduct as treasurer Thursday--blaming her for a potentially serious technical mistake in the sale of $4 billion in state warrants.

At a news conference arranged by Gov. Pete Wilson’s campaign committee, Hayes contended that the error in last week’s sale could have cost the state millions of dollars had it not been promptly corrected.

And Republican Hayes did not stop there as he heaped abuse on Democrat Brown, who defeated him in the 1990 treasurer’s race.

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Brown’s staff contended that Hayes’ charges were a predictable part of election-year gamesmanship.

“This is absolutely hypocritical for the governor’s campaign to put forth Tom Hayes to cover for (the Wilson Administration’s) failed budget and fiscal mismanagement,” said Brown campaign spokesman John Whitehurst.

Clearly seeking to belittle Brown’s claim to be “America’s best treasurer,” Hayes also accused Brown of hurting California’s standing on Wall Street and adding to the cost of state borrowing by berating Wilson’s handling of the state budget deficit.

“The treasurer is bad-mouthing California’s financial status at the same time she is arranging to borrow billions of dollars on behalf of California’s citizens, undermining California’s credibility in the financial marketplace,” Hayes said. And he contended that she ought to stand up and take responsibility for a $2.8-billion internal accounting error uncovered in a 1991 audit of the treasurer’s office--a problem that Brown has blamed on Hayes’ administration.

The Brown campaign and treasurer’s office contended that Hayes was wrong on all counts and that his charges were politically motivated.

Specifically, the issuance of $4 billion in warrants--part of $7 billion that California has had to borrow this month to tide government through a continuing financial crisis--was handled by state Controller Gray Davis. Brown’s role was to market the notes on behalf of the controller. Before the warrants were sold, representatives of Wilson’s Department of Finance, the state attorney general’s office and the respected bond firm of Orrick, Herrington & Sutcliffe all reviewed and approved the sale.

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Davis has dismissed the problem as technical in nature. Both he and Brown have noted that the error was caught quickly and fixed before any damage was done.

Davis is the Democratic candidate for lieutenant governor.

Davis’ opponent in the fall, state Sen. Cathie Wright (R-Simi Valley), on Thursday sent letters to Davis and Brown, requesting all documents on the $4-billion warrant deal.

Normally, interest income from state bonds and notes is tax free, which keeps interest rates low and saves California taxpayers considerable money. But shortly after the $4 billion in revenue anticipation warrants, or RAWs, were sold as tax-free notes last week, investors began to realize that under certain circumstances some future purchasers of the bonds might have to pay taxes on part of their return on investment.

The discovery, based on a review of IRS rules, created a whirlwind in the bond market. But Davis was able to correct the potential problem for investors by paying interest in two installments rather than as originally planned--in one lump sum at the end.

In a written statement Thursday, Davis said Hayes should be praising the state’s top financial officers “for a job well-done--not embarking on a political witch hunt.”

Chief Deputy Controller D. Robert Shuman said the decision to pay interest in two installments will save the state $600,000.

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Even though the warrants were issued by the controller and marketed by the treasurer, Hayes contended that the error was Brown’s responsibility.

Had the problem not been caught, it would have cost investors millions of dollars and would have meant a rash of lawsuits, Hayes said. “And it would have jeopardized California note sales for years to come,” he said.

Hayes also said Brown ought to take full responsibility for a $2.8-billion internal accounting error uncovered by state auditors in 1991. The error was discovered in March of that year, less than three months after Brown succeeded Hayes. Hayes conceded Thursday that the accounting problem cost taxpayers nothing and that it was eventually corrected. But he resented a statement that Brown made to The Times last week, blaming the problem on his administration of the office.

The 1991 audit noted a variety of problems with the way the treasurer’s office balanced the state’s checkbook. In a written response at the time, Brown said her staff discovered and corrected the problem, which was caused by a “software design flaw.”

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