The Lesson of an Embarrassing Stumble : How capable are localities with complex investments?

After calming the Chicken Littles for days, Orange County’s government on Tuesday seemed to acknowledge that the sky was indeed showing evidence of cracks.

Its Chapter 9 bankruptcy filing apparently buys it time to get a troubled financial house in order while holding portfolio investors at bay. But clearly the developments of the last week pose huge risk to Orange County’s reputation as a place of affluence, bedrock values and a sunny outlook.

The entire nation has watched as the county went breathlessly from concern to defensive maneuver. The first appeals for collective calm after the revelation that the county’s investment pool had lost $1.5 billion rapidly were followed by a downward spiral in confidence. By declaring bankruptcy, the county is seeking to ensure that investors don’t withdraw funds all at once and prompt an even bigger financial crisis. Ironically it is seeking to protect itself from the agencies that believed in it most and had the biggest stake in its future.

In recent years, the issue of local financing has grown in importance. Local election after local election in Southern California and around the country has asked voters to pass judgment on the extent of debt that prudently could be carried.

Can local and county governments successfully manage their debts? That inevitably is a central question that must be answered.

The experience of Orange County is a sobering lesson for the inside look it offers at how debt load can mount up. The debt grows not just with a decision to build a road or sports complex but with borrowing aimed at maximizing investment return to help keep the wheels of government turning. And these pressures to maximize return are indeed very real as local government becomes more and more the repository of expectations about what can be done to improve quality of life in a time of tight budgets.

A Chapter 9 declaration may give Orange County a chance to get its financial house in order and provide an equitable approach for those seeking to withdraw their funds from the county’s troubled investment pool. But Orange County, in its effort to get more out of its finances, now finds itself facing the restrictions that are likely to accompany whatever benefits may lie in a bankruptcy declaration.

One does not have to look far to find the places where major projects are on the drawing boards, and where plans may have to be seriously re-evaluated. The crisis potentially could affect the county’s ability to invest in such needed improvements as roads, schools, an emergency telecommunications system and sports and entertainment complexes. Ultimately, Orange County’s bankruptcy declaration is an admission about past management of its future--and it’s a grim lesson for others to heed.