ORANGE COUNTY IN BANKRUPTCY : Fiscal Quake in O.C. Causes Texas Tremors : Panic: Statewide fund has lost 40% of its deposits in a week. Counties and agencies in other states have also reported losses.

Jitters over Orange County’s fiscal crisis continued to ripple across the country Tuesday, as nervous officials in Texas resumed their run on a statewide investment pool that has lost 40% of its deposits in the past week.

TexPool, which manages investments for more than 1,300 school districts and municipalities across the state, has been sapped of $1.5 billion since the Orange County debacle began unfolding. Though many local officials believe the fund is sound, they say the stampede of withdrawals has forced them to pull out their own deposits to avoid getting stuck with any losses.

“There’s a panic out there,” said Ft. Bend County Treasurer Kathy Hynson, who Monday withdrew $4.4 million of her government’s $20.4 million in TexPool deposits. “If everything cools down, I think we’ll be fine. But I just wanted to be sure that if the bottom fell out, I’d at least have some funds left over.”

In an effort to calm anxious officials, Texas Treasurer Martha Whitehead on Tuesday reiterated her pledge to insure the $2.2 billion now left in the TexPool account. By using state funds to buy TexPool securities, Whitehead said, she could guarantee that no investor would lose money or be denied access to deposits.

“I am confident we will weather this storm,” she said. “My top priority is to reassure participants that they will not lose a dime.”

Many analysts agree that TexPool’s problems have been largely psychological. The fund, founded five years ago to give small municipalities the same investment options as large governments, usually hits a low in November or December anyway, as agencies withdraw revenues traditionally deposited at the beginning of the year.

The drop-off, which has tended to run between 30% and 50%, was sharper this year because higher interest rates lured away many investors, experts said. Even before Orange County declared bankruptcy, TexPool’s assets had dropped from a high of $10.8 billion in February to $3.7 billion last week.

But then came Orange County’s woes and a critical article in last Friday’s Wall Street Journal, which suggested that TexPool’s investment strategies were similarly suspect. State officials decried the story as “unfair and irresponsible,” saying 90% of their investments are in the low-risk U.S. Treasury market.

By then, however, the rush was on.

Investors yanked $369 million on Friday, $662 million on Monday and $463 million on Tuesday.

“It’s a herd mentality,” said Richard Scott, a former Texas treasury official who now runs his own investment group in Dallas. “People are withdrawing funds without the economic rationale to do so.”

Counties and other public agencies in Ohio, Wisconsin, Maine, Alaska, Georgia and West Virginia have also reported significant losses in investment portfolios in recent weeks.

Glenn S. Goldberg, a managing director of Standard & Poor’s, the bond-rating agency, said that despite these woes, Orange County is an extreme case. Nonetheless, S&P; has expedited a review of the riskiness of other local government investment pools.

“The vast majority invest in very to relatively safe securities, many of which have no leverage and no derivative securities,” Goldberg said. “But you’re always looking for the exception.”

(In leveraging, a fund borrows money in the hope of investing it at a higher rate of return. Derivatives are complex securities whose value is based on the movement of other financial indicators, from interest rates to oil prices. Both figured in the Orange County debacle.)

One exception was Auburn, Me., a city of 24,000 north of Portland. It has lost $6.5 million out of $15.5 million in derivative investments, due to rising interest rates. Auburn’s investments totaled $18 million; its entire budget is $44 million.

“We didn’t have an investment policy,” acting City Manager Patricia A. Finnigan said. “We didn’t have sufficient internal controls to know what we were investing in.”

Auburn had planned to use the investment funds to cushion the city’s share of the cost of a new regional waste-to-energy incinerator. With the losses, Finnigan said, taxes may be raised as much as 10%--a blow to a city unaccustomed to double-digit hikes.

Nevertheless, she said Auburn’s plight is far from being as bad as Orange County’s.

“Orange County was highly leveraged in that they borrowed money to invest, and we weren’t doing that,” Finnigan said. “We’re not going to have to declare bankruptcy. We’re going to have to watch things a lot more closely. We can live with that.”

In Alaska, the state’s Permanent Fund, set up in 1976 to preserve Alaska’s oil wealth from boom times, has incurred paper losses of more than $1 billion since February, a spokesman said Tuesday. The market value of the fund--which has paid each Alaska resident a dividend every year since 1982--is $14.9 billion.

In Alaska, as in Orange County, the losses are in the fund’s bond portfolio.

The rise in interest rates this year, which has sharply diminished the value of bond holdings, “has been eating up our unrealized gains, but we’re not too excited about it,” spokesman Jim Kelly said. The fund includes no derivatives, and “we didn’t do any leveraged buying,” he added.

“We’re meeting our cash needs. Eventually the rates will go down” and the bond fund will again show strength, Kelly predicted. “We’ve just got to ride it out.”

Katz reported from Houston and Miller from Washington. Times researchers Doug Conner in Seattle, Edith Stanley in Atlanta and Lianne Hart in Houston also contributed to this report.

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Getting Municipal Bonds to Market

The normally low-profile municipal bond market has been pushed into the spotlight by Orange County’s bankruptcy, which followed deep losses on bond held in its investment pool. Here are soe key dimensions of the muni market:

How the Money Is Used Top uses nationally, by market share in 1994: General purposes: 27% Primary and secondary eduation: 12% Water and sewer facilities: 8% Acute-care hospitals: 7% Single-family housing: 6% Higher education: 4% Public power: 4% Pollution control: 4% Multifamily housing: 3% Airports: 3%

Top Issuers of Bonds By market shares in 1994: California: 4.0% New York State: 2.2% Los Angeles County: 1.3% New York State Medical Care: 1.0% New York State Dorm Authority: 1.0%

The Deal Makers

Bond deals are put together by special departments of major brokerage houses. They have been profitable sources of business for Wall Street. Top undersriters in 1994, by market share: Merrill Lynch: 11.6% Goldman Sachs: 10.2% Lehma Bros: 8.9% Smith Barney: 7.3% CS First Boston: 5.6%

Types of Municipals

Municipal bonds are eiter “general obligation,” meaning they are backed by the general credit of the goerment or agency, or revenue bonds, backed by the money produced by the project being financed, such as bridge tolls or public housing rents. Normally, general obligation bonds are considered less risky and pay lower yeilds. But because of the bankruptcy, Orange County’s revenue bonds are now considered less risky.

Bond type, Revenue: 36.4%, General obligation: 63.6%

What They Pay Investors

The great majority of municipal bonds are held by mutual and money market funds, banks, insrance companies and wealthy individuals, either directly or in trusts. The investor appeal is that the interest is exempt from federal taxes. One key measure of municipal bond interest rates looks at the average yeild on the top 40 municipal bonds.

Monthly interest rates at second Friday of each month: December, 7,430%

Source: Securities Data Co., the Bond Buyer * LIQUIDATION

The county will try to unload its riskiest securities. A1

More coverage: A1, A22-23