AREA INVESTMENT WATCH : High-Rolling Montebello Watches Fortunes Crumble : Finances: City has $47 million tied up in Orange County’s bankruptcy crisis. Officials say they were assured the investment would be safe.

Borrowing money to make money sounded like a good idea to Montebello officials in 1991.

And, for a while, it paid off handsomely. In three years, the city raked in almost $5 million by borrowing millions of dollars at low interest rates and putting them into Orange County’s high-paying investment pool.

“It was a profitable deal,” City Administrator Richard Torres said.

Like a Las Vegas gambler caught up in the euphoria of a winning streak, the city kept raising the stakes. It started off investing $7.8 million in the Orange County pool. In 1992, it was $23.7 million. This year, it anted up $47 million, borrowing $31 million to pour into the fund in anticipation of greater gains.

But Montebello’s luck ran out two weeks ago when managers of the Orange County investment fund disclosed that their $7.5-billion pool had lost at least $1.5 billion. Last week, the county filed for protection under the federal Bankruptcy Code, leaving Montebello and 186 other cities, school districts and special districts that contributed to the pool in the lurch.

“We don’t know all the ramifications of the bankruptcy,” said Torres, who has been shuttling between City Hall and Orange County in search of answers since the crisis began.

The city clearly is in a world of financial hurt.

No one knows for sure how much of the city’s $47 million has been wiped out. Orange County officials now say the value of the pool has dropped by $2 billion, or about 27%. For Montebello, a 27% loss would be $12.7 million.

City officials also are uncertain how much interest income from the Orange County pool will materialize in the 1994-95 fiscal year. The city had expected to receive about $1.9 million from the pool and had included that amount in its $32-million budget this year.

But the most critical problem facing the city is how to pay off a $25-million loan that comes due Dec. 30. The city had borrowed the money to invest in the county pool and had counted on withdrawing $25 million from the pool to pay the debt.

Torres said the city has appealed to Orange County officials to release the $25 million. Torres and his staff are exploring other options to avoid defaulting, including extending the loan and borrowing $25 million from a bank.

The City Council met Sunday and hired the Los Angeles law firm of Clark & Trevithick to help the city deal with Orange County’s bankruptcy. The council spent 3 1/2 hours behind closed doors with city and bankruptcy attorneys.

City officials insist they have no intention of following Orange County into bankruptcy.

“We’re not interested in that,” Councilman Edward C. Pizzorno said.

Although Torres says he is confident that the city can pay all of its bills this year, the uncertainty over the Dec. 30 debt payment has led Standard & Poor’s Corp. to lower its rating on two outstanding notes--the $25 million due Dec. 30 and $6 million due in September, 1995.

Montebello was one of only a handful of local governments outside Orange County that invested in the Orange County pool. Its $47-million stake was the fifth-largest among 37 cities. Only Anaheim, Huntington Beach, Irvine and Santa Ana invested more.

At the time Montebello decided to invest in Orange County, many cities were desperate to find new sources of revenue. The recession was sapping them of retail sales taxes, and the state was taking away some of their property taxes and other income.

Montebello’s need for new revenue was acute, according to its annual financial reports. The city’s general fund, which pays for basic government services, had run deficits of $2.5 million in fiscal 1989-90 and $4.1 million in 1990-91.

Officials decided to borrow money against future revenues--which cities are allowed to do to avoid cash-flow problems--and invest it in the Orange County pool.

Montebello had actually started borrowing money to make more money in 1988, but it invested the funds in the state’s investment pool, which pays less interest but has a more conservative investment policy.

In 1991, John Fitzgerald of Seidler & Fitzgerald Public Finance Inc., the city’s bond underwriter, recommended investing in the Orange County pool, which was paying a higher interest rate, said Ted Nix, city finance director.

Fitzgerald could not be reached for comment.

Kathy Salazar, who was on the City Council then, defended the decision. “Based on the information given us at the time, it sounded like a good investment,” Salazar said.

In September, 1991, the city moved $7.8 million from the state pool, which was paying about 7.2% interest, to the Orange County pool, which had a yield of 8.6%. The city was paying 4.75% on the money it was borrowing to invest in the pool, so it was earning about $40,000 a year on every $1 million invested, according to city financial records.

In January, 1992, the city shifted another $2.4 million in surplus city funds and $13 million in redevelopment reserves to the pool, which was then producing yields of 9.4%.

The pool’s rate of return peaked at 9.6% two months later, and then began a slow but steady decline to 6.4% last month. But it was still better than any other investment, and the city kept pouring in more and more money.

But this year, when it came time to take out another short-term loan to invest in Orange County, Mayor Art Payan apparently became edgy.

According to minutes of the April 5 council meeting, the council directed city staff to set up a study session on the city’s investment policy.

The meeting was scheduled for June 7. Beforehand, Payan, Councilman Jesus (Jess) Ramirez, Finance Director Ted Nix and City Treasurer Phillip M. Ramos flew to New York City to confer with officials of two investment rating firms, Moody’s Investors Service and Standard & Poor’s Corp.

“I specifically asked them how solid the Orange County pool was,” Ramirez said. “Both of them said it was very solid.”

At the June 7 briefing, Ramos assured the full council that the Orange County pool was providing the city with “the safest and highest interest-bearing investments available in today’s economic environment,” according to the minutes.

When the council considered borrowing the $25 million that must be repaid Dec. 30, Payan voted against it.

Payan has declined to discuss his vote. “This is an issue that the council is pulling together on,” the mayor said.

Former Councilwoman Salazar, who was at that meeting, recalled Payan saying the city should not “put all of our eggs in one basket.”

But Ramirez was equally adamant about putting the money in the pool, Salazar said.

“I don’t recall exactly what I said back then,” Ramirez said, but he confirmed that he had no qualms about keeping much of the city’s money in the pool. “I was comfortable with it,” Ramirez said.

Torres said he learned of the Orange County pool’s troubles “the same time as everyone else. We felt all along it was a safe investment.”

This is not the first time Montebello’s investments have gone sour.

In 1984, former City Treasurer Thomas C. Wong was accused of losing $4.4 million on city investments. In one transaction, the city bought $8 million worth of so-called stripped U.S. Treasury bonds that were to mature in 2011. But when interest rates fell, the value of the bonds plummeted. Wong sold them at a $3.2-million loss to avoid a deeper decline in value.

Wong blamed the City Council for the loss, saying it sold the bonds too quickly when the value started falling.

Wong lost his bid for reelection in November, 1987, to Ramos, a former councilman who helped engineer the city’s investment in the Orange County pool.

“That was bad enough,” Salazar said of the $4.4-million loss 10 years ago. “What the heck is going to happen now?”