ORANGE COUNTY IN BANKRUPTCY : State Officials Take Wait-and-See Stance : Capitol: Response to the crisis has lacked any sense of urgency so far. But some legislators are calling for tighter restrictions on investments.

While Orange County officials are trying to extricate themselves from the worst local government financial mess in U.S. history, the response up to now from the state Capitol has been extremely subdued, almost silent.

Despite being used to dealing with earthquakes, fires, floods and riots, lawmakers and state public officials were not prepared to cope with a different sort of crisis.

In fact, a few Democrats have compared Sacramento’s initial response to Orange County to President Gerald Ford’s refusal in the 1970s to bail out a nearly bankrupt New York City. Ford’s reaction was immortalized in the now famous headline: “Ford to New York: Drop Dead.”

These critics cite Gov. Pete Wilson’s reluctance to intervene, the absence of leadership by most other statewide elected officials and caution among many lawmakers preoccupied by a pitched battle over the Assembly speakership.

There was little outward sense of urgency. In their own defense, many elected officials say that this is a complicated crisis with national implications that cannot easily be solved by dispatching firetrucks or National Guard troops.

But as lawmakers sought to understand the multibillion-dollar disaster, there were stirrings of activity under the Capitol dome. Assembly Democrats were calling for a special legislative session, a few lawmakers were introducing legislation to prohibit the risky investment practices that led to the crisis, and a bipartisan committee was being formed by Senate President Pro Tem Bill Lockyer to investigate.

The Hayward Democrat said: “Unlike Gov. Wilson, we’re not ready to say drop dead to Orange County.”

In contrast, newly elected state Treasurer Matt Fong issued a brief statement of concern after he took off on a scheduled vacation. Lt. Gov.-elect Gray Davis, usually ready to comment on state fiscal issues in his current role as state controller, was in New Orleans attending a conference of lieutenant governors.

Several Capitol observers say the sluggishness in grappling with Orange County’s problems is a product of post-election weariness.

“You have a lot of exhausted candidates,” said one Senate staffer, who had been meeting on the issue behind closed doors.

Many politicians--including the governor--talked about the need to scrutinize Orange County’s fiscal difficulties before moving ahead with corrective legislation.

Elected officials also called for an examination of the investment practices of other local governments in the state. “Nobody knows yet how widespread this is,” said state Controller-elect Kathleen Connell.

On Tuesday, Orange County filed for bankruptcy protection after it failed to meet the obligations of its $20-billion government investment pool. The failure was the result of complicated financial transactions designed to increase the return on idle funds held on behalf of the county, school districts and other local governments.

A number of financial experts--including state Treasurer Kathleen Brown--blame the crisis on the county’s elected treasurer-tax collector, Robert L. Citron, who resigned his post amid the financial chaos. In a piece written for The Times, Brown said she first sensed the problem two years ago when she learned that Citron was taking high risks with his investments.

Although Brown offered advice on how to prevent other counties from sliding down the same path, she was not serving up any solutions for Orange County’s immediate need to produce cash for schools and other services.

“There is absolutely no statutory ability for the treasurer of the state of California to step in, in any way, shape or form,” said Brown spokesman Michael Reese. “That has left her feeling very frustrated, but with the ability to simply monitor the situation.”

Similarly, Wilson, who defeated Brown last month, offered little comfort to beleaguered county officials. “The state is eager to be helpful,” he said. “But we are not in a position where we can bail out bad judgments.”

Criticized for his seeming callousness to the problems of a county that provided him with strong support in his bid for reelection, Wilson questioned whether the state even had the legal ability to intervene or the financial resources to do so because of its own serious budget woes.

“What I said was . . . a statement of fact in terms of existing legal authority. And I think it is not sensitive to hold out false expectations,” Wilson said late last week. “And if we can help in a way that does not expose the state as a whole, we are obviously here to do so.”

His most visible act was to dispatch former state Treasurer Thomas Hayes, now managing director of a Los Angeles brokerage firm, to help unravel the county’s difficulties and formulate a plan to restore the county to fiscal health.

“When he (Hayes) works out his plan, we’ll determine what the state can do within our own constraints,” said Wilson spokesman Sean Walsh.

A number of elected officials, Democrat and Republican, support Wilson’s restrained approach to the crisis.

But the fiscal hemorrhaging has a potentially major impact on public education, which relies heavily on state funds.

Incoming state schools chief Delaine Eastin, who takes office Jan. 2, said she wants to make sure that state education money is channeled to potentially hard-hit districts for education and not siphoned off to pay the county’s debt. She points out that if the schools run short, the state could be forced to come to their rescue.

“I’m a big believer in the free market, but the free market is never free when the rest of the state is on the hook for someone’s screw-up,” said Eastin, a former Democratic assemblywoman from Fremont. “Short term, the state has to help make sure that kids get an education.”

Eastin is one of many public officials who say that in the future the state needs to prevent risky investments made with the public’s cash.

However, since 1987 the Legislature has approved at least five bills that broadened the authority to put local tax money into ever more exotic financial instruments to increase earnings.

“I would expect the failure in Orange County ought to require a complete review of practices and the level of oversight for public funds,” said Sen. Patrick Johnston of Stockton.

By week’s end, Sen. Tom Hayden (D-Santa Monica) said he plans to introduce a package of bills that would establish a strict investment policy for local governments.

Hayden would ban gifts and contributions from brokerage and bond firms to local officials who make investment decisions, set up local oversight boards to review investment decisions and require disclosure of investments on a prompt basis.

Also under consideration by Hayden is a ban on the leveraging of investments to purchase other investments, a practice he called “the death knell of the Orange County investment fund.”

Lockyer sketched the outline of a plan for what the state might do to cope with the biggest municipal bankruptcy in U.S. history. He said he is forming a special committee to assess the extent of the problem, consider new laws to safeguard future investments and determine whether there are any hardships, especially affecting pensioners, that need to be handled.

But Lockyer might be upstaged by Assembly Democratic Leader Willie Brown of San Francisco. Brown, battling to retain the speakership he has held for a record 14 years, said he is seriously considering calling a special session of the Assembly for Dec. 20. As the senior member of the lower house, Brown is the presiding officer and, he says, has the authority to bring his members back to the Capitol.

In the Nov. 8 election, Democrats captured 39 seats while Republicans won 41. However, last Monday one Republican bolted to Brown’s side, deadlocking the Assembly 40-40. When the chief clerk fell ill, Brown took the gavel to preside. Republicans refused to gather in the chamber, fearing that Brown would disqualify one of their members who was simultaneously elected to the Assembly and Senate in a special election. Without a quorum, the Assembly on Friday adjourned until Jan. 4.

But Brown contended that a special session on the Orange County default is needed. “Believe me, whether we get a quorum or not we can discuss this matter and show interest.”

Around the Capitol, other politicians say that Brown is seeking to use the financial quagmire to mask his real intent in calling a special session. His underlying objective, they say, is to pressure lawmakers to resolve the speakership impasse.

Said one veteran senator: “We think that they are hoping a special session will force them to organize.”

However, Brown denied having a hidden agenda in considering a special session. “My focus is not the speakership,” Brown said. “The speakership will take care of itself on Jan. 4.”