Orange County Debacle’s Victims Set Sights on Reform : Finance: Proposals for changes are heard locally and at state and national levels. Privatization of services, tighter investment controls are among options.

Like holiday revelers awakening to pounding heads and guilt over their excesses, the victims of Orange County’s financial crisis are vowing to make reform their top priority in the new year.

Only weeks after the county’s unprecedented bankruptcy filing, calls for change in the system that allowed the fiasco to occur are ringing from many corners: from members of an outraged public, from groups like Common Cause, from state and federal lawmakers, and from the county’s own beleaguered leadership.

“It takes a crisis, and sometimes one of this magnitude, to lead people toward reform,” noted incoming Supervisor Marian Bergeson, who succeeds Supervisor Thomas F. Riley on Tuesday. “Orange County will never operate the same, and will never be the same, as it has in the past. Through all this pain, one has to know that.”

As the new year begins with the county struggling to emerge from the worst municipal finance disaster in U.S. history, proposals for changes linked to the crisis are advancing locally, in Sacramento and in Washington D.C.

Proposals range from making county government more open and accountable to eliminating it altogether. Some observers argue for oversight committees, while others suggest that many problems could be solved with a switch to an appointed, not elected, county treasurer.

Others have called for privatizing county services, placing stricter limits on the investment of public money, and examining the idea of converting the county to a charter jurisdiction, which makes it easier for government to contract with private companies.

Simultaneously, with the county suddenly facing a revenue shortfall that could reach $120 million for the next six months alone, the Board of Supervisors already has begun to focus on the long-term shrinking of county government. Led by Supervisors Roger R. Stanton and William G. Steiner, the board has established a task force to explore how it might make sweeping modifications in the way government operates here.

But some observers believe that the single most important change to be made may also be the most fundamental.

“The reform we really need,” says Jean Askham, treasurer of the Orange County Chapter of the League of Women Voters, “is not new laws, but new attitudes.”

In light of the crisis, Askham said, government leaders need to be more open and involve the public in the painful decision-making that lies ahead.

“The league believes very strongly that the collective common sense and fairness of an informed public exceeds that of any hired consultant,” added Connie Haddad, president of the organization’s Orange County chapter.

Bergeson says she plans to ask her new colleagues to study the idea of enacting a charter, which would make the county independent from the state and allow it to enter into private contracts for certain services.

Currently, California has 12 charter counties, including San Diego, San Bernardino and Sacramento. Orange County and more than three dozen other counties are general law jurisdictions that have less flexibility in privatizing services because they are subject to state employment practices.

Others are exploring the idea of privatizing county services, a trend that has caught fire in many places as financially strapped municipalities struggle to find cheaper ways to serve the public.

In the wake of the bankruptcy, the conservative Lincoln Club of Orange County is expected to reach an agreement this week with one of Southern California’s leading privatization experts to study the concept and how it might work here.

Robert W. Poole Jr., president of the Los Angeles-based Reason Foundation, said he will meet Wednesday with the influential political organization, which has expressed interest in developing recommendations to assist the county. Poole said he will also study the ideas of selling off certain county properties.

The crisis was precipitated by the high-risk investment practices of former county Treasurer-Tax Collector Robert L. Citron. The county filed for bankruptcy Dec. 6, after the discovery that an investment pool containing the savings of 187 cities, school districts and other public agencies had lost more than $2 billion under Citron’s management.

Steiner, who was appointed to the board 18 months ago, said he believes some reforms are all but certain, including making the position of county treasurer appointive and strengthening the position of County Administrative Officer Ernie Schneider so department heads report directly to him and not the Board of Supervisors.

With the embarrassing revelations that several audits critical of Citron’s investment practices were never discussed--or even read--by the supervisors, Steiner also said he hoped that in the new Orange County, “no audit of any county department would be handled in a routine manner ever again.”

But Steiner cautioned that in the rush to recover from the bankruptcy, county government should be restructured, not eliminated. Since the crisis began, several officials have proposed doing away with county government altogether, arguing that its authority should be returned to the cities.

“I think government has a role,” Steiner said, citing the abused and neglected children sheltered by the county. “We have to be very careful right now that we don’t end up dismantling county government, which provides essential services to so many people.”

But others, like Orange County Common Cause chairman Bill Mitchell, suggested that the expected wave of change should not stop at the doors of the county’s Hall of Administration but should sweep through city and school district offices as well. Prime targets should be those officials who borrowed extra money to invest in the ill-fated bond pool, Mitchell said.

Although bright spots in the bond crisis may be tough to find at the moment, particularly for the thousands of county employees who must begin the New Year uncertain about how long they may have jobs, Mitchell says there is at least one positive result: The realization on the part of many citizens that it is high time they pay more attention to local government.

After all, Mitchell said, such crises “can only happen because our public has gone to sleep, not just our public officials.”

For state auditors poring over the county’s books at the request of the governor, the most glaring need for change is in the requirements for disclosure by the managers of investment pools such as Orange County’s.

Marianne Evashenk, California’s chief deputy auditor, said that for all but the most sophisticated analysts, the true risks of Orange County’s investment pool would have been hard to discern.

Those who handle such funds “need to come up with a requirement to assure that at least an informed reader could read the statement and understand it . . . and all these exotic instruments (Citron) used,” said Evashenk. Had potential investors known of the pool’s risks, she said, “it would have deterred people.”

In the state capital, a special Senate committee already has begun searching for ways to help extricate Orange County from its investment troubles and prevent any recurrence.

The special committee on local government investment practices is scheduled to hold its second hearing on Jan. 17 to delve into such questions as whether public fund managers should be prohibited from investing in derivative securities and other risky instruments, and whether they should be barred from borrowing extra money to sink into such investments.

Meanwhile, several state lawmakers have introduced legislation designed to limit the kinds of high-risk investments that led to the crisis. State Sen. Quentin L. Kopp (I-San Francisco), Assemblyman Curt Pringle (R-Garden Grove) and state Sen. Tom Hayden (D-Santa Monica) have submitted bills calling for limits on complex derivatives--complex financial instruments that derive their value from the performance of an underlying security, interest rate or market index--and other chancy investments. The legislators also are calling for stronger oversight of local investment funds.

Times staff writer Tracy Weber and correspondent Shelby Grad contributed to this report.