4 School Districts Borrowed Cash to Invest in Fund : Crisis: Orange County treasurer gave a special guarantee against risk for those agencies, but not the other government concerns who invested in the troubled pool.

Lured by the promise of raising badly needed revenue and a special guarantee against risk, four Orange County school districts last year took the extraordinary step of borrowing a total of $200 million for the sole purpose of reaping profit from the county’s controversial investment fund, officials said Saturday.

Provided with written and oral promises in 1993 that the county’s huge investment fund would be used to safeguard every penny of their principal, the four agencies hoped to earn about $1 million a year each from the deal.

But with last week’s stunning announcement of a $1.5-billion decline in the value of the county’s now-$18.5-billion investment fund, the prospects remain uncertain for the venture undertaken by three districts--Newport-Mesa Unified, Irvine Unified and North Orange County Community College District--and the Orange County Department of Education.

If the return from the county’s investments drops too far, the districts could have trouble paying back the interest on their loans, which in some cases are equivalent to half their annual budgets.

And if other investors pull out of the county investment pool, some school officials are worried that Treasurer-Tax Collector Robert L. Citron will not be able to follow through on his guarantee to protect the borrowed $200 million.

“Unless Bob Citron has a personal checking account to buy back (millions) worth of bonds, I don’t think he had authority to provide the guarantee,” said Chriss Street, investment banker who has been following the school districts’ venture since its inception and helped organize an unsuccessful political challenge to Citron this fall. “Did the supervisors grant him some special authority to give those guarantees?”

Citron declined to answer reporters’ questions Saturday. Assistant Treasurer Matthew Raabe could not be reached for comment on the school district investments late Saturday.

But in interviews after the initial deal was made in 1993, both Citron and Raabe said the unprecedented arrangement was a no-lose situation for the school districts.

“It’s impossible for them to lose,” Raabe said then. “It was structured in such a way so they could never lose a dime. All they can do is make money on this deal. . . . I don’t think you could get a more secure financing than this, really.”

Raabe said the same in a letter to each district explaining the particulars of the deal: “There is no risk related to the . . . principal amount.”

Orange County’s 31 school districts have a total of $550 million in borrowed funds invested with Citron’s office, according to John L. Nelson, assistant superintendent of business services at the county Department of Education.

Most of the borrowed money, about $350 million, is revenue districts routinely use every year to cover operating expenses while awaiting tax receipts.

But as state funds for education dwindled, four local education agencies in 1993 took the highly unusual step of borrowing large sums specifically to add to Citron’s investment pool, hoping to reap profits to pay for teachers and equipment. Citron’s office gave officials of all four districts a written guarantee they would not lose any of their initial investment.

Unlike other investors in the county pool, the districts can withdraw their funds only each June.

“This is the most secure (part) of the whole issue,” Nelson said Saturday. “The regular pool, we’re all aware, there’s no guarantee to it.”

“As of now, I still feel comfortable (that the districts’ investment is secure),” he added, “but I don’t have all the answers yet. And I don’t think I will for a few days.”

Shortly after the initial deal was struck in June, 1993, officials in all four school districts said they became involved with the innovative investments in an effort to offset continued cuts in state funding for education.

School officials were aware that their involvement in the securities was risky and unorthodox by their usual standards but many said they felt reassured by Citron’s guarantee. With their principal investment secure, the districts could lose money only if the return on their investments fell below the interest they owed on their loans.

“We’ve cut our budget and cut our budget in this district. We’ve had to do without a lot of things,” Gilbert Moreno, vice chancellor of the North Orange County Community College District, said at the time. “I’m searching for innovative, creative ways to enhance our revenues, and, yes, some of those mean you have to accept an acceptable risk.”

The college district borrowed about $56 million; Irvine Unified about $54.5 million; Newport-Mesa nearly $47 million, and the Orange County Department of Education, $42 million.

“The purpose was, in the beginning, to increase operating funds for educational purposes during a very tight time,” Nelson said Saturday. “In any kind of budget situation, you look for ways to reduce expenditures or increase income.”

The investments were made simply “to increase our operating funds,” Nelson said.

But Tom Burnham, an Irvine Unified trustee who voted against the investment project, said Saturday that betting on interest rates for school budgets is “ridiculous” public policy.

“I didn’t feel like it was worth the risk,” Burnham said. “I was uncomfortable with the risk and benefits analysis. The pay-back seemed a little tight in my view.”

On the other hand, he said, “you can see how seductive it can be when school districts are so strapped for money.”

With an investment strategy of borrowing money to buy securities, then using the securities as collateral for a second round of borrowing and buying, the districts earned about $1 million in interest during the first year of the investment, Nelson said.

Based on news that the overall county fund has lost $1.5 billion in value, Nelson said he expects that this year’s results are “going to be less than last year.” Newport-Mesa Unified Supt. Mac Bernd said he expects his district’s investment to earn about $400,000 less than projected.

“We’re not going to get as great a return, but it’s not a question of us losing money. We don’t have it in line to even be spent,” he said. “There are some doomsayers who have a lot grimmer picture, but I think we’re OK, unless there’s something I don’t know.”

Steve McArthur, a member of the Irvine Unified school board until this month, agreed.

“It was a sound investment. The principal was never at risk,” he said Saturday. “We may not make as much money as we thought we would make. . . . It is probably not something we are going to do any more.”

Asked in 1993 why the treasurer’s office would offer a guarantee of some investors’ money but not others, Raabe said at the time it would be impossible to arrange such a deal for every school district, city and other government agency. The special deal was possible only because the $200 million was a small fraction of the overall pool, he said.

“It’s very hard to tell people you’re making money for somebody else but you can’t do it for them. But that’s what we had to do,” Raabe said then.

Times staff writers Matt Lait and Debora Vrana contributed to this report.