O.C. FINANCIAL CRISIS : Not Everyone Bought Into County Strategy; Others Rue Inaction : Investors: Only San Juan Capistrano and Garden Grove weren’t in pool. A few cities had grown wary and began making withdrawals.

When David F. Dixon first came to the city of Orange last spring to take over as city manager, he became concerned about the amount of money the city had in the county’s investment fund. Too risky, he thought, so the city reduced its investment by about $7 million.

Now, as the county’s fund faces a cash-flow problem, he wishes he had taken out more of the city’s money. But, he said Friday, county officials pressured him not to.

“In 20-20 hindsight, I should have done more, but the pool looked good” because it was yielding higher-than-average returns, Dixon said. “I was the new guy in the county and was told not to rock the boat.”

But Dixon wasn’t alone in questioning the county’s management of municipal investments. Two cities--Garden Grove and San Juan Capistrano--had rejected the allure of the high-yielding county fund and decided against investing in the pool.

Earlier this year, Westminster withdrew $3 million, and so did Tustin. Out of prudence, not panic, La Palma also began making small withdrawals in June.

And in recent weeks, before the news broke that the county’s fund has suffered serious losses, Mission Viejo was considering moving at least some of its $18.7 million to a less risky state investments fund.

Why did most cities stick with the county portfolio? Because its higher risks had meant higher returns, and the cities had reaped the benefits of the county’s bullish strategy.

Now, as county finance officers were urging them not to panic, municipal treasurers and city managers nonetheless perused their own portfolios for reassurance. Luckily, most had diversified their investments so that only a part of their money was riding on the county’s fortunes.

Unlike cities, the school districts do not have the discretion to drop out of the county’s fund, since they are required by state law to deposit their money in the county’s pool.

The general consensus Friday among city and school officials was to ride out the storm and hope that major investors--such as the Orange County Transportation Authority, with $1 billion in the fund--don’t pull out.

Having gained by what was once a highly praised investments portfolio, many city officials minimized the financial downturn and reaffirmed their faith in county Treasurer-Tax Collector Robert L. Citron’s management of their long-term investments.

“The way I read it so far, all agencies are staying put,” said Glenn Steinbrink, Fullerton’s accounting manager. “There won’t be any losses as long as everyone stays put.”

La Palma Mayor Wally D. Linn, a bank vice president, said his city started withdrawing funds when he began noticing an increase in the interest rates.

But even now, Linn said he believes “there is no need for alarm here.”

In Huntington Beach, Treasurer Donald L. Watson said he has been swamped by calls from brokers--perhaps trying to cash in on Orange County’s misfortunes.

“They’re sort of like sharks swimming in the water,” Watson said. “They’re each telling us about this great deal they’ve got to sell us. . . . We’re not looking at taking any of them though. We’re keeping our money in the (county) fund.”

Pulling out from the fund at this point “would be sheer folly,” Watson added.

Still, others who had begun rethinking their own city investment strategies began to question whether their faith in the county had been misplaced.

Dixon said he first got an inkling that something was seriously wrong with the county fund on Wednesday, when he received a letter from the county urging that the city send a representative to a special meeting the following day.

“Hello, hello, hello, surprise, surprise,” Dixon said of the news. “I was not panicky, because I knew we were one of the small fish. But I am concerned.”

And in those cities that pulled out of the fund earlier this year, there was a sense of relief.

“I am sure there are probably many agencies that have benefited substantially by virtue of those investments,” Tustin Mayor Thomas R. Saltarelli said. “I am not going to sit here and second-guess (the county treasurer). . . . It’s just a risk that, as a public official in the city of Tustin, I am not willing to take.”

Of all 31 Orange County cities, Garden Grove and San Juan Capistrano seemed to be the most prudent investors: They were the only ones to say “thanks, but no thanks” to the seemingly attractive county plan that had yielded high returns.

“I don’t think it’s any city being any smarter,” said Cynthia L. Pendleton, San Juan Capistrano’s treasurer. “I think it was just a decision on how risky an investment you want to make. Borrowing money to invest (as the county did) is not what we like to do.”

Tony Andrade, Garden Grove’s controller, said he had been hearing for months that the county’s pool might be in trouble. His city had opted for a more conservative strategy that had a return within 1% of the county’s plan.

“The risk has gotten out of control,” he said, adding that cities that invested may encounter their own cash-flow problems as a result of their involvement with the county.

“The county treasurer has locked them up,” Andrade added.

That is a predicament the school district officials cannot worry about.

“We’ve looked to them to make the right decisions, and we, as a school district, have benefited greatly over the years,” said Michael Fine, the fiscal services director for the Newport-Mesa Unified School District, which has $80 million in the county fund. “I’m confident that they will restructure the pool correctly. They have some very skilled people there.”

At Saddleback Valley Unified School District, Assistant Supt. Bob Cornelius said any loss in the district’s $44-million investment could affect the operating budget, which includes money for salaries, equipment and supplies.

“We need to be cautious and ride this out,” Cornelius said. “We don’t have any choice.”