Others Feel O.C. Bankruptcy

Nearly half the cities and counties responding to a recent survey said Orange County’s bankruptcy has pushed up their borrowing costs and caused a third of them to pull out of riskier investments.

The results of the survey, which sought to measure the lingering effects of the county’s bankruptcy filing nearly two years ago, was released Thursday at a meeting of California municipal finance officers in Los Angeles.

“Orange County’s bankruptcy was a watershed event,” said John S. Pizzarelli, Western region director for MBIA Insurance Corp.’s public finance unit. “It’s going to affect the public finance world for years to come.”

The survey, sponsored by MBIA in Armonk, N.Y., and the Bond Buyer trade publication, is the first to confirm what many public officials had suspected. Of the 201 responding municipalities, 47% reported that their interest rates and other costs on bond issues rose after Orange County’s investment portfolio collapsed in late 1994.

Since that financial fiasco, other counties and cities throughout the state have reduced their investments in the kinds of complex securities, such as repurchase agreements and derivatives, that had undermined Orange County’s investment pool and resulted in $1.64 billion in losses.

Of those responding, about a third said they had cut back on these investments. Most of the others either did not change their investments or did not have such investments.

“I think that’s good,” Orange County Supervisor Don Saltarelli said. “If there’s any good that can come out of the county’s bankruptcy, I’m glad that other agencies who may have had risky investments now ought to know they should unwind those investments.”

Saltarelli said he believes that Orange County’s troubles should be discussed at gatherings of public officials to “elevate the debate” over proper investment policies.

That should be no problem, MBIA’s Pizzarelli said. “It’s going to be a long time before people forget about Orange County.”

The survey, which also covered more general topics, was born of a desire to find out what was important to officials who hold the public purse strings and issue bonds to finance various projects, Pizzarelli said.

“California is an enormous market,” he said. “It’s such an important market that we had to find out what’s on people’s minds.”

The survey was sent out over the summer to 3,000 public finance officials and industry professionals, such as financial advisors and investment bankers. More than 13% responded, a rate MBIA called high for such a survey. A slight majority of those responding were public officers.

In responses to general survey questions, two-thirds of the public finance officers said they believe their biggest challenges are overcoming past and present voter initiatives that limit taxes.

Those challenges far outweigh worries about funding public-safety operations. Only 13% saw this as their biggest challenge.

Respondents said the most significant items in need of repair or replacement are the primary and secondary schools and roads and highways.

Because municipalities are finding it tough to win voter approval for taxes, Pizzarelli said, “you’ll see more financings backed by sources other than property taxes, such as road tolls.”