Orange County Fiasco Prompts New Rules Far and Wide : Financial policy: Local governments from coast to coast are reviewing their investment tactics in attempt to avert losses.

The impact of Orange County’s bankruptcy is forcing several dramatic changes--and widespread second-guessing--among local treasurers and politicians far beyond California’s borders.

In Texas and Ohio, legislators are debating tough new laws on the investment of public funds. Madison County, Ala., will get its first written policy on what has become a very hot topic. Florida’s treasurer recently announced sharp limits on high-risk investing by outside money managers hired by the state.

And the Government Finance Officers Assn., in an unusual move, took the first steps this week toward asking its members to issue monthly reports on the market value of all public investment portfolios. In accounting argot, the technique is known as “marking to market.”

Shaken by the example of what can happen when an investment strategy crashes and burns, local governments coast to coast--from county commissions to sanitary districts--are reviewing their investment approaches.

Even the most conservative of them are putting renewed emphasis on the formula know as SLY--for safety, liquidity and yield--and giving safety priority by a big margin.

“If somebody claims to be able to get two percentage points more than everyone else, that should set off alarm bells,” said Douglas E. Hill, executive director of the Pennsylvania County Commissioners Assn. Hill is a member of a nationwide task force that will develop special training programs to help treasurers and elected officials deal with the dazzling range of financial choices.

The Government Finance Officers Assn. is a trade group whose members often adopt its recommendations as standard policy. Its cash-management committee approved the resolution calling for investments to be marked to market monthly, and it is virtually certain to be adopted by the trade group later this year.

“It would be an early-warning device” that was not available in Orange County, said Gary Bruebaker, Oregon’s deputy treasurer and a member of the finance officers association.

Ohio Treasurer J. Kenneth Blackwell has called for a ban on derivatives, the sometimes-complex investment contracts that helped get former Orange County Treasurer Robert L. Citron into trouble.

In populous Cuyahoga County, which includes Cleveland, the local treasurer’s speculations produced a $114-million loss and the elected commissioners have taken direct control of the investment portfolio. The county has said it will sue 10 brokerage firms that sold Cuyahoga the leveraged securities that produced the losses.

*

“Don’t ever believe you have the market figured out--it takes no prisoners,” warned Blackwell, who wants a new Ohio law that would severely limit where local treasurers can invest public funds.

But California Treasurer Matt Fong and other experts say they fear the flight to safety could produce an unwarranted ban on derivatives.

“You don’t get rid of sharp scalpels because the surgeon made a mistake,” he said.

Some worry that public officials will now be too conservative in their investments. The example in Orange County could “discourage local governments from even prudently investing their surplus funds,” said Julian D. Butler, county attorney in Madison, Ala., which is developing a formal investment code in response to the fiasco.

For some local governments in the South, notably in Tennessee, Mississippi, Alabama, Arkansas and Kentucky, “our real problem has been getting them to put money in any investment,” said Bob Patterson, the elected official who invests funds for Shelby County, Tenn.

Meanwhile, politicians everywhere are proclaiming that they have learned the lessons of Orange County.

“In an abundance of caution, the commissioner wanted to make sure that what happened in Orange County, Calif., could never happen in Florida,” said Janice Yecco, financial administrator for state Treasurer Bill Nelson. His new edict sets a 10% cap on the amount of state funds that may be invested in derivatives.

Texas has already learned a painful lesson in the need for diversification. Odessa Junior College had 100% of its portfolio tied up in derivatives--a misguided policy that caused a loss of $3 million last year because interest rates kept rising.

The Texas Legislature, meeting now, won’t outlaw derivatives, but it is certain to write new rules requiring diversification of investment portfolios at all times, predicted Sharon W. Cobb, the first assistant state auditor.

Even where state legislators are satisfied with their laws because losses haven’t occurred, a nearly frantic review of portfolios and investing methods is taking place.

“Every county I have talked to has done the same thing: asked treasurers to report on what products they invested in, and the life of the investments, and whether these meet state laws and procedures,” said Steve Swendiman, who heads a financial service center that advises county governments.

“We thought we were pretty sophisticated,” Commissioner Mary O. Boyle of Cuyahoga County said, recalling ruefully that she and her colleagues had not realized that the local treasurer was betting heavily that interest rates would fall.

*

In fact, most municipalities have not ventured into high-risk investments.

“We didn’t find another Orange County out there,” said Regis Shields, an official at Moody’s Investors Service, which reviewed investments at more than 1,000 bond-issuing government units.

RELATED STORY: A25