Supervisors Drop Fight Against Annexation : Government: In a ‘downsizing’ prelude, Laguna Hills gets tentative OK to take over an area the county had sought to keep.

In a move they said foreshadowed their determination to “downsize” Orange County government, county supervisors tentatively agreed Tuesday to allow the city of Laguna Hills to annex property the county has been fighting to keep for years.

Supervisor Marian Bergeson’s proposal to make a 1.5-square-mile pocket of county land known as North Laguna Hills part of the city proper would relieve the county of the burden of providing services to the area. Under another part of the deal, the county would continue to receive about $1.7 million in tax revenue from the North Laguna Hills area.

Board members said that allowing cities to annex county property, rather than contesting all such moves, is one way for the county to reduce its costs in the wake of the bankruptcy. The board is expected to formally approve the annexation in two weeks, after both sides work out specific details.

“If we’re really committed to downsizing, let’s do it,” said Bergeson, whose proposal would put an end to ongoing litigation and alleviate concerns that the county must inevitably lose tax revenue in such annexations. “It’s time to make the gesture to our cities that we’re really serious about downsizing.”

Tuesday’s board meeting, while covering a variety of housekeeping items, brought constant reminders that Orange County declared bankruptcy Dec. 6, after former Treasurer-Tax Collector Robert L. Citron’s investment pool lost nearly $1.7 billion following a risky investment strategy:

* The board certified the results of voting on Measure R--the proposed half-cent bankruptcy recovery tax that failed miserably June 27, leaving county officials scrambling for needed cash.

* A Los Angeles law firm charging $275 an hour was hired to represent former county Finance Director Eileen T. Walsh, who was called to testify before the U.S. Securities and Exchange Commission. Among other things, the SEC is looking into whether county contracts were doled out in exchange for campaign contributions.

* The board agreed to allow the county’s public defender to fill some existing vacancies, despite an existing freeze on hiring. By enabling the county to virtually stop using outside attorneys to defend indigents, public defenders have helped save millions of dollars. While applauding the savings, the board said it plans to consider whether limited privatization could save even more money.

About the only item up for discussion that didn’t touch on the bankruptcy was board approval of an environmental impact report that helps clear the way for a Disney resort development at Newport Coast. And Bergeson pointed out that the project would be a “revenue-enhancing gem” that would attract tourists and help the county’s economy.

Members of the Committees of Correspondence, an activist citizens group that helped bring about Measure R’s defeat, offered the board their help in crafting solutions to the county’s bankruptcy and suggested a volunteer panel of financial experts.

“It’s an offering in good faith, friendship and cooperation,” said activist Tom Rogers.

Board members, who are generally lambasted on a weekly basis by Committees of Correspondence members, said they would be grateful for the help. Bergeson urged people across the county to send the board their recommendations for bankruptcy recovery.

In a special study session to discuss the role of the county treasurer’s office, supervisors reviewed new investment policies aimed at preventing a similar financial fiasco from occurring again.

Among other things, the new policies prohibit the treasurer from investing in derivatives or leveraging his portfolio--the type of investment strategies that helped lead to the county’s unprecedented bankruptcy filing.

The board expressed little enthusiasm for a proposal by Bergeson to allow the state to manage a portion of the county’s $3.4-billion portfolio. Some members, however, did support the idea of having professional money managers invest some of the county’s funds.

Since the bankruptcy, the Wall Street firm of Salomon Bros. has been managing the county’s investments. The firm charges about $140,000 a month for its services. Treasurer Tax-Collector John M.W. Moorlach told the board Tuesday that he plans to begin bringing the county money back in-house to be managed.

Times staff writer Matt Lait contributed to this story.