Audit Finds Some Risky Investments : Finances: State examiner urges curbs on local governments, even though the six counties are not as heavily involved as Orange County was. Officials counter that the holdings are safe.

At least six California counties are using risky investment strategies but not to the same extent as bankrupt Orange County, according to a report from the state auditor.

Nevertheless, Auditor Kurt Sjoberg recommended last week that the Legislature impose a series of restrictions on local government investments, including limits on the use of reverse repurchase agreements.

The six counties are Colusa, Placer, Monterey, San Diego, Solano and Sonoma, he said.

“Several counties employ at least one of three investment strategies we consider too risky,” Sjoberg said in a letter to the governor and legislative leaders.

“These high-risk strategies include excessive concentrations of structured notes, overuse of reverse repurchase agreements and holding too many long-term securities.

“Additionally, three counties utilized agents who are also custodians to make investments that are not required to be recorded in accounting records or disclosed to participants.”

Some county treasurers reacted angrily to Sjoberg’s conclusions. Monterey County Treasurer Louis Solton called the report “alarmist in tone” and said it may “become the cause of possible financial problems.”

“The Monterey County investment portfolio has never been, and is not now, in any danger of suffering a loss or of failing to provide needed cash flows for its depositors,” Solton said in a letter to Sjoberg.

“The funds are safely invested and provide an abundance of excess liquidity needed for anticipated and unexpected expenditures.”

Sjoberg said the counties incorrectly based their criticism of the report on the assumption that his office based its conclusions on Morningstar Mutual Funds data.

Sjoberg’s office surveyed 57 counties--all but Orange County--and sent auditors to eight of them. Of those, Sjoberg said in an interview, at least six were using at least one risky investment strategy.

The report said a seventh county, San Bernardino, had also used at least one risky strategy, but Sjoberg said officials there “reduced their risk by the type of structured notes they bought, where the other six increased their risk significantly by the notes they bought.”

Among other things, the report recommends that the state:

* Limit use of reverse repurchase agreements--in which a local agency borrows money by selling a security to a broker under an agreement to repurchase it--to 20% of a county’s portfolio.

* Limit use of derivatives or other structured investment instruments, ban those that put principle at risk and bar the purchase of these instruments with borrowed or leveraged funds.

* Require local governments to seek separate competitive bids for lending agents and fund custodial services.

Sjoberg said some of his recommendations are already in legislation moving through the Senate and Assembly.