ORANGE COUNTY IN BANKRUPTCY : Records’ Disarray Has Slowed Probe : Revelations: County’s financial adviser is not surprised that irregularities are still coming to light. More may be forthcoming, he says.

Orange County’s financial records have been in such disarray that it is not surprising that additional irregularities are being discovered, Orange County financial adviser Thomas W. Hayes said Friday.

Hayes said he supports interim Treasurer Thomas E. Daxon’s decision to suspend his office’s remaining 14-member staff if he believes problems still exist.

“It certainly is a significant step, but when you have irregularities, you have to get to the bottom of it,” Hayes said after testifying before a state task force studying the Orange County bond debacle in Los Angeles.

Hayes, a former state treasurer, cited the sheer complexity of county financial records “that were not up to standards that I would like to see” when he was hired last month. Even finding fund balances was difficult, he said.

As a result, Hayes said “it wouldn’t be surprising to me if additional irregularities arise.”

And he predicted another municipal financial catastrophe is inevitable because the public generally finds government finance boring, and consequently pays little attention to safety of public investments.

“This will happen again, maybe not on the scale of Orange County, but it will happen again,” he warned.

Orange County has sold the riskiest, long-term securities in a its troubled portfolio--now valued at $5.9 billion--and replaced them with short-term notes. The county investment pool has more short-term notes than perhaps it should for a fund its size, Hayes said.

But liquidity is important as the 186 school districts, cities and other agencies that have invested with the county clamor for the return of their funds and creditors demand payment, a process being sorted out in U.S. Bankruptcy Court. The investment pool has lost an estimated $1.69 billion.

State Treasurer Matt Fong, who chaired the task force hearing, said he plans to propose legislation to avoid future municipal bankruptcies. He has proposed requiring local treasurers and chief fiscal officers to make annual disclosures of their investment policies and monthly reports available to the public describing the agency’s investment holdings.

He also wants to limit the use of reverse repurchase agreements to no more than 20% of a portfolio. Such agreements allow fund managers to use leverage--to borrow against the funds in an investment pool--greatly enhancing the amount of their losses and gains.

By using such borrowing techniques, former Orange County Treasurer Robert L. Citron ratcheted the $7.42 billion contributed by public agencies into the county pool to about $20 billion, delivering sizable gains before the Fed’s hike in interest rates drove down the county pool’s returns and eventually led the county to file for bankruptcy Dec. 6.

While legislation may help, Fong readily acknowledged that there are limitations to how far the state can go in restricting poor investment decisions.

“You cannot legislate common sense,” he said.