ORANGE COUNTY IN BANKRUPTCY : House Hearings to Gauge States’ Debt Oversight

Looking to Orange County for lessons from its financial crisis, a House Banking subcommittee next week will explore whether states have done enough to improve investment practices of local governments.

While Orange County’s $1.7-billion loss has been the most notorious--resulting in the largest municipal bankruptcy in history--subcommittee Chairman Rep. Richard H. Baker (R-La.) said in a statement that during the last year there have been “numerous instances in which state and local governments lost money on investments through practices which eventually cost the taxpayers money.”

Baker said the two days of hearings would focus on two broad questions: “First, has there been a fundamental shift in the credit relationship between the issuers of state and local debt and investors in the debt? Second, are the states taking adequate steps to improve the investment practices of state and local governments?”

A congressional staff member added that House members also want to explore whether Orange County’s financial collapse was a precursor to other municipal failures that could also impact the nation’s capital markets.

“Since the annual size of the market is well over one trillion dollars, this is a concern . . . because banks invest in municipal securities for their own account and for the accounts of others,” Baker said in the statement. “Banks also deal in municipal securities and use municipal securities to secure public deposits.”

Given the recent defeat of a sales tax initiative that would have helped the county restructure and eventually repay its debt, the committee also will explore “the difficulty the county will incur in resolving its obligations.”

Among the 23 witnesses scheduled to testify next week are Rep. Christopher Cox (R-Newport Beach), state Treasurer Matt Fong, state Auditor Kurt Sjoberg, the county’s outgoing chief executive officer, William J. Popejoy, and Orange County Board of Supervisors Chairman Gaddi H. Vasquez.

Also included on the witness list are UC Irvine Prof. Mark P. Petracca, who helped lead the opposition to the sales tax initiative, as well as municipal finance specialists, representatives from the municipal rating agencies and the Securities and Exchange Commission, and the state treasurer of Ohio, the home state of Cuyahoga County, which experienced losses in the derivatives market similar to Orange County.