Two Investors Consider Jumping Out of O.C. Pool

As top Orange County administrators convened in secret Saturday to assess the fallout of the county’s multibillion-dollar investment fund, two investors indicated they may pull out of the massive securities pool whose $1.5-billion drop in value caused a financial furor last week.

The private session included the county’s administrative officer and embattled Treasurer-Tax Collector Robert L. Citron, whose high-risk investment strategy has come under nationwide scrutiny.

Orange County’s key financial players are charting a new course for the crippled fund that includes the investments of 185 cities, school districts and other governmental agencies.

But even as a county management team tried to minimize the damage, the elected leaders of two government investors--the city of Newport Beach and the Irvine Ranch Water District--warned Saturday that they might withdraw from the investment pool because they are unhappy with Citron and his handling of the portfolio.

“It’s like they are holding a gun to our head,” said Newport Beach Mayor John W. Hedges, whose city has $15 million invested. “We are being held hostage by the bigger players. They are holding hands and willing to go down with the ship, but we aren’t.”

County financial officers fear that any withdrawal from the pool might ignite a run on the $18.5-billion investment fund. No investor can take any money back now, beyond normal withdrawals, without waiting 30 days and suffering a 20% loss because the portfolio’s market value has fallen by that rate.

Hedges said Saturday he would like the city to pull its money out of the investment fund and is particularly upset that those in the pool will get only 80% of their money if they get out now.

Although the city doesn’t want to lose one-fifth of its investment, he said, “If we could get all our money out, we would take it out now.”

The chairman of the Irvine Ranch Water District said he was so frustrated with his inability to get answers about the fund from Citron in October that he ordered $100 million withdrawn last month.

Peer Swan said his board has served written notice to the county that it will withdraw its remaining $300 million if it cannot be part of a proposed advisory board sought to oversee the county’s future financial dealings.

“For the amount of money he was dealing with and the precarious situation he was in, I wasn’t satisfied he was dealing with this in a serious enough manner,” Swan said of Citron.

County officials were mum about Saturday’s meeting, refusing to disclose any details for fear of public exposure.

Citron, an elected official who has been county treasurer for 24 years, said Saturday he was ordered by the county not to discuss the situation.

But other news developments surfaced Saturday:

* County Administrative Officer Ernie Schneider said he would be willing to create a review committee of the pool’s top 11 investors, who together have more than $2.5 billion in the fund. The top four investors are seeking to form a smaller group that would have oversight of the county’s financial future.

* The county has hired an Irvine public relations firm, Gladstone International, to deal with the crush of media calls that have mounted since county officials disclosed last week that its $20-billion securities portfolio had taken a $1.5-billion hit in the past 11 months.

* Members of the county’s assembled “management team”-- which includes Citron, Schneider, Assistant Treasurer Matthew Raabe, Auditor-Controller Steve E. Lewis, County Counsel Terry C. Andrus and Finance Director Eileen T. Walsh--have been assigned specific roles to help the county through its financial crisis.

Citron still is in control of the investments while Raabe has been designated the team spokesman. Raabe and Lewis are meeting next week with Capital Market Risk Advisors, the county’s newly hired Wall Street financial consultant, and with the two major rating agencies, Standard & Poor’s and Moody’s Investors Service.

“Right now, we’re trying to field media calls and return calls from participants in our investment pool,” Raabe said. “Our plan right now is to meet next week with our financial consultants and rating agencies and review potential strategies.”

The county team is very concerned about the perception over the massive “paper losses” in the county’s portfolio and fears investors might want to withdraw from the fund, Lewis said.

“The issue is cash flow,” Lewis said. “The key to this thing is for people not to panic.”

Raabe said Saturday that the county had $1.3 billion to $1.5 billion in cash reserves as of August, but now is holding about $350 million in liquid assets. Raabe said the reserves dwindled as the county made so-called “collateral calls” because the value of the securities used to borrow money declined as interest rates shot up.

Part of Citron’s investment strategy was the use of derivatives--investment contracts whose values are based on the performance of an underlying security, interest rate or market index.

Citron invested heavily in “structured securities,” highly volatile instruments whose value is pegged to interest rates and makes them susceptible to fluctuations in the market. As interest rates rose this year, their value decreased. Raabe said Citron stopped investing in structured securities this spring.

Swan is pushing for a review committee of the pool’s four top investors--his own district, the Orange County Transportation Authority, the Orange County Sanitation Districts and the Transportation Corridor Agencies--to help oversee the recommendations of the county’s financial adviser. County officials favor a board composed of the 11 largest investors.

“This is a high-stakes game,” Swan said. “The people with the largest amount of money should have the largest amount of the say.”

Mayor Hedges blasted Citron’s risky investment strategy, contending that the pool’s plummeting values were not disclosed to city officials.

“His office misrepresented to us the risk and volatility of the fund,” he said. “It’s like he never read the Wall Street Journal. The financial press was predicting that rates would rise.”

Newport Beach’s city attorney is looking into the legality of the county withholding the funds, Hedges said, adding that county officials told him in May that the city could take out its funds at any time with no penalty. City Atty. Robert Burnham said Saturday he had not fully reviewed the issues related to the withdrawal. The City Council is expected to review the matter this week.

The city of Costa Mesa, which had an estimated $14 million in the county pool in June, has drastically reduced its holdings in recent months as the portfolio’s returns began dropping, said Mary Hornbuckle, a Costa Mesa councilwoman.

Since early November, the city has reduced its county investments from $5 million to about $2.6 million, she said.

“For us it had more to do with getting better rates than concern about the security of the pool,” Hornbuckle said. “Our treasurer always tries to get the best rates, and we use those interest funds to pay for police, fire and city improvements.”

Hornbuckle said the city, which is a voluntary participant in the pool, put some of its money in the state-run investment pool, Local Agency Investment Fund.

“We didn’t have any problem getting it out in November, but we couldn’t get it now,” she said.

The assistant county treasurer said Saturday that the hindsight of the past few days was expected.

“I don’t think anyone who really understands the market and this particular portfolio would have figured in February that interest rates would have risen at unprecedented levels,” Raabe said. “I absolutely do not think we’ve done anything wrong.”

Times staff writer Debora Vrana contributed to this report.