O.C. Fund Is Stabilized, Loss Is $1.69 Billion, Officials Say

Six weeks after declaring bankruptcy, relieved Orange County leaders said Wednesday that they have stabilized the county’s beleaguered investment pool by selling nearly all of its riskiest securities and concluded that its losses are less than previously believed.

Former state Treasurer Thomas W. Hayes pegged the county’s losses at $1.69 billion; the earlier estimate by the county’s financial advisers was that the portfolio’s value had dropped $2.02 billion.

“The hemorrhaging in the pool has stopped,” said Hayes, who was hired to restructure the county portfolio, which includes the investments of 187 cities, school districts and other agencies. “The pool is now safe, very short term and very liquid, with the ability of the county to pay its bills and to reach an early settlement with the investors.”

The revised figures mean that the loss to the county pool was 22.3% on its participants’ $7.4 billion in deposits, down from an earlier estimate of 27%.

The newfound funds, however, are unlikely to help shrink the expected shortfall of $172 million in the county’s general fund over the next six months; expected interest revenues still will not materialize in the wake of the county’s Dec. 6 bankruptcy filing, officials said.

In other developments Wednesday:

* County administrator Ernie Schneider released his plan for bridging the $172-million budget gap. Besides $47.9 million that the county expects to save through layoffs and canceled projects, Schneider wants to reap $17.35 million by charging impound fees on the cars of unlicensed drivers and withholding some payments into the county’s risk management and retirement funds. An additional $107 million would be covered by postponing some short-term debt payments and seeking new loans.

* In the aftermath of a Sacramento hearing on the bankruptcy, members of a special state Senate committee buckled down to the task of determining what new laws are needed to prevent similar problems in the future--and help yank Orange County out of its predicament.

Some lawmakers, such as state Sen. Quentin L. Kopp (I-San Francisco), talked about pushing for wholesale reform of the state’s legal checks and balances on municipal finance, among the most lax in the nation. Others want to work with a finer blade to sculpt regulations that will eliminate the pitfalls that plagued Orange County without hamstringing municipal treasurers.

The committee also is weighing a proposal to establish the sort of state-sanctioned independent corporation that was used to lift New York City out of its financial crisis in the 1970s.

* The Board of Supervisors hired underwriters Goldman Sachs and A.G. Edwards & Sons to help restructure the county’s debt and--possibly--underwrite new bonds. Schneider’s plan indicated that restructuring more than $106 million in debt is a critical step for the county.

While supervisors expressed great relief at word that estimates of the investment pool’s losses had narrowed, board Chairman Gaddi H. Vasquez warned that the crisis was still severe.

“We still have a long way to go,” he said. “We have some difficult decisions to make, not only relative to the portfolio, but to the restructuring of government.”

The county’s advisers blamed poor bookkeeping by resigned Treasurer Robert L. Citron and his staff for the shifting numbers.

“I think the Orange County accounting system needs to be brought into the 21st Century,” Hayes said. “We live in a state where we have access to computers. Any business out there uses computers. And while some of the records here were computerized, some were not.”

Arthur Andersen & Co. spent hundreds of hours combing through the county’s antiquated records, Hayes said.

The auditors found $310 million in cash and $92 million in securities that they had not known the county possessed and collected $40 million in bonds that had been held as excess collateral by county lenders.

“There were assets of the pool that were scattered all over the county,” Hayes said.

In addition, the county earned $36 million more than expected from selling its holdings. On the other hand, the auditors discovered that investors had $150 million more in the fund initially than was thought.

That was “unaccounted for money,” said Hayes, adding that “there was no evil intent” or sense that the money was socked away by county officials for other purposes.

The net result of the auditors’ review was that the fund’s losses were $330 million less than feared.

“There will be more money to distribute to investors,” Hayes said. “How that is allocated will depend on the Bankruptcy Court.”

According to Hayes, the investment fund is in much better shape than at the time of the bankruptcy filing, is beginning to earn moderate interest from its safer, short-term investments, and is much less susceptible to any future interest rate hikes.

The pool now holds mostly short-term government securities, such as U.S. Treasury bills. Hayes said the average maturity of the securities owned by the county was cut to 10 days from about four years, meaning that the fund is much more liquid.

As part of the effort, the county sold $58 million of high-risk securities Wednesday. County officials expect to sell or restructure the final batch of complex securities--about $380 million of so-called structured notes issued by U.S. government agencies--by the end of the week, said William D. Rifkin, managing director of Salomon Bros., the county’s financial adviser.

These notes, from agencies such as the Student Loan Marketing Assn., or Sallie Mae, were set up to pay fluctuating interest returns linked to changes in market rates.

The pool is now earning about 5.4% interest, said Hayes, although how those interest earnings will be distributed among investors in the pool depends on how the 22.3% overall loss is shared.

“I would say that anybody who had money in the pool is in fact earning interest. It’s just not at the high market rates they were accustomed to,” Hayes said.

His job nearly over, Hayes said he will return Feb. 3 to Sacramento, where he is president of Metropolitan West Securities.

Also on Wednesday, Schneider released a more comprehensive proposal for how the county should dig its way out of a $172-million budget shortfall over the next six months. The proposal will be considered by the Board of Supervisors today.

A key element in Schneider’s recovery plan has the county restructuring or postponing payments on about $107 million of its short-term debt obligations. Essentially, Schneider is counting on the county’s ability to get new loans and stretch out existing ones to fill the budget gap. Those loans would be paid back over time as the county regains its financial footing.

“It must be stressed that even with restructuring of the short-term debt, long-term cost cutting and revenue enhancement measures are absolutely critical to the recovery effort,” Schneider wrote in his 29-page report.

Schneider addressed the remainder of the shortfall with a variety of cuts and revenue enhancements. One of the most workable options, Schneider said, would be for the county to reduce the gap by about $17 million by hiking filing fees at the county clerk’s office, halting payments to the retirement fund and charging fees for impounding cars.

A less likely scenario, Schneider said, has the county saving $4.5 million by cutting employee salaries 5% across the board, recouping about $124 million through legislative actions to accelerate funds due the county, and seeking relief from paying state and federal mandates, including a host of welfare programs.

Meanwhile, there was relief in Anaheim, where officials learned that the city’s short-term bond issues had been taken off credit watch by Standard & Poor’s, a major credit rating agency, although the city’s long-term debt remains on that status.

Among the issues that had been on credit watch was the $95 million that the city borrowed last year to invest in the county pool. In all, the city had $169 million invested in the fund.

“Anaheim is the first city to be taken off of credit watch, which is a tribute to our financial stability,” city spokesman Brett Colson said. “We are sure that Wall Street will react positively to this news.”

Times staff writers Debora Vrana and Greg Hernandez in Orange County and Eric Bailey in Sacramento contributed to this story.

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More on Orange County Finances

* Complete copies of the reports on Orange County’s finances from the state auditor general and Salomon Bros. are available from Times on Demand. To order, call 808-8463, press *8630 and select option 3. Order Item No. 2825. $5, plus $1 mail delivery. Please allow one week.