Orange County Not Alone in Money Woes, Devalued Bonds
Walworth County, a southeastern Wisconsin region of dairy farms, lakes and subdivisions, has as much to do with upscale Orange County as Cheddar cheese has to do with Ferraris.
But the two share one thing: They both have seen the value of their investment funds drop dramatically as a result of risky bets on mortgage-backed derivative securities.
And like Orange County--whose bond ratings have plunged as a result of its financial straits and resultant bankruptcy filing--tiny Walworth County’s own double-A bond rating was placed under review for possible downgrade Friday by Moody’s Investors Service.
It’s a pattern that is disturbing to bond analysts, who see a growing number of municipalities reaping the whirlwind after sowing the seeds of risk by borrowing too heavily, investing in dicey securities, or both.
Reports of investment losses have appeared around the country since Orange County’s debacle became known last week, affecting communities in Texas, Florida, Kentucky, Maine, Maryland, Illinois, Wyoming, West Virginia and elsewhere.
Even where there has been no significant drop in value, nervous Wall Street brokers are keeping a close eye on some funds. Salomon Bros.--Orange County’s new financial adviser--on Friday issued a $300,000 call for additional collateral from San Bernardino County after the value of securities in the county’s $2.4-billion investment pool dipped by $150,000, said Dick Larsen, assistant treasurer and tax collector.
About a third of the San Bernardino County fund consists of money borrowed through reverse repurchase agreements, the same type of loan that accelerated Orange County’s woes.
Government agencies also appear to be edgy about their money. Municipalities pulled $326 million out of the state of Texas’s investment pool Friday after a story in the Wall Street Journal drew unflattering analogies between it and Orange County’s fund. At the end of the day, the fund--called TexPool--was down to about $3.3 billion. TexPool invests money on behalf of more than 1,350 school districts, municipalities and others.
Officials held a news conference to dispute the story, arguing that TexPool is not leveraged like Orange County, and--as of Friday--had no investments in derivatives, said Steve Garven, a spokesman for the Texas State Treasury in Austin.
Meanwhile, credit rating services, which have come under critical fire for underestimating the exposure of Orange County and other communities, have quietly begun to re-evaluate the credit-worthiness of various municipalities around the country, while publicly downplaying the danger.
“Out of the 50,000 issuers across the country, we think it is a fairly isolated event,” said Michael Dorfsman, spokesman for Standard & Poor’s. “But we are in the process of doing a scan.”
While observers say Orange County stands out both for the magnitude of its losses and the degree of its borrowing, other local government officials were insufficiently wary of high-risk investments.
“Orange County’s case is extreme, because of the borrowing it did to build the size of its portfolio. But in fact, any municipality that invested in any kind of long-term instrument is suffering at least a paper loss now, and will suffer an actual loss if it needs cash,” said bond expert Joe Mysak in Friday’s edition of Grant’s Municipal Bond Observer.
Walworth County, with 75,000 people, pales in size compared with Orange County. But that’s not to minimize the financial trauma to the idyllic community.
Starting with $13.3 million in general-fund money, the county invested heavily in mortgage-backed derivatives, said county corporation counsel William Weiland.
As interest rates climbed this year, it saw the value of its holdings decline dramatically.
Some of the securities were sold in the spring and summer, resulting in an $820,000 loss. The value of the remaining fund plunged to about $8 million, Moody’s estimates.
On Friday, Moody’s placed the county’s double-A rating under review for possible downgrade.
County officials are investigating how the loss occurred, but say they have sufficient funds to meet payrolls and finance normal operations.
“What’s unusual is that (the fund) comprises such a large portion of their general fund,” said Arlene Bohner, a Moody’s senior analyst. “It appears virtually all of their general fund balance is tied up with these securities.”
Farther south, the Odessa Junior College District in Texas had a pool of cash that eventually reached $25 million, including the college’s operating fund.
With virtually no oversight of its investment policies, the one-campus district invested completely in long-term, mortgage-backed derivatives, said Sharon Cobb, a Texas state auditor.
Over the last two years, as the value of the holdings sank, the college sold some of the securities at a $3-million loss, part of which was offset by interest income.
But by this month, the value of the fund had fallen to around $8 million. And Moody’s has downgraded the district’s bonds to Baa from A.
* CALM ON WALL STREET
Blue chip stocks ended with a modest gain as Wall Street momentarily shrugged off its worries about the Orange County fiscal crisis. D2
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Not Alone
Municipalities around the country are adding up their losses as a result of too much borrowing, investment in risky securities, or both. A sampling:
* Walworth County, Wisc.: Starting with $13.3 million in general fund money, the county invested heavily in mortgage-backed derivatives. As interest rates climbed this year, it saw the value of its holdings decline dramatically. Some of the securities were sold in the spring and summer, at an $820,000 loss. The value of the remaining fund plunged to about $8 million. On Friday, Moody’s Investors Service placed the county’s “AA” rating under review for possible downgrading. The county is investigating how the loss occurred, but says it has sufficient funds to meet payrolls and to finance normal operations.
* Odessa Junior College District, Odessa, Tex.: The college had a pool of cash that eventually amounted to $25 million, including the college’s operating fund. With virtually no supervision of its investment policies, the one-campus district invested all in long-term, mortgage-backed derivatives. In 1993 and 1994, as the value of the holdings sank, the college sold some of the securities at a $3-million loss that was offset somewhat by interest income. By December, the value of the fund had fallen to around $8 million. The college intends to hang on to the securities, raise tuition, cut programs and take out bank loans to meet expenses. In the meantime, the district’s financial adviser has resigned and college officials have been subpoenaed.
* Cuyahoga County, Ohio.: An investment pool of $1.1 billion was boosted to $1.8 billion with borrowed money and invested in bonds, but not in derivatives. Nevertheless, as yields rose and prices fell, the value of the county’s investments dropped. In October and November, the county sold most of the securities--at a loss of $114 million--to meet its cash needs and pay about 80 pool participants back their principal and interest. The county will absorb the loss and is left with an investment pool valued at $258 million. In response, the county is asking its departments to cut their budgets by 11% in 1995.
