County Will Let Public Investors Back in Pool

Three years after dozens of cities and special districts lost tens of millions of dollars when Orange County went bankrupt, the Board of Supervisors on Tuesday paved the way for these same agencies to once again invest with the county.

Several cities and special districts, including Tustin, Garden Grove, Costa Mesa and the Mesa Consolidated Water District have expressed interest. The board gave Treasurer-Tax Collector John M.W. Moorlach the go-ahead to prepare investment plans for interested government bodies but required that supervisors approve each new investor before the agency places money in the investment pool.

The decision marks an important milestone in the county’s journey back from the December 1994 bankruptcy.

“I never thought I’d see the day when any outside entity would put a dime in that pool,” said William G. Steiner, the only current supervisor to hold his office when the bankruptcy occurred. “I never thought we’d get over the distrust and bad feelings.”

The vote highlighted a generational shift on the board. Supervisor Jim Silva, who took office a month after the county declared bankruptcy, and Steiner opposed opening up the pool, saying the county should learn from its mistakes and never invest other governmental bodies’ money.

But the three supervisors who took office this year--Charles V. Smith, Todd Spitzer and Thomas W. Wilson--said they were satisfied with the strict regulations and oversights imposed over the last three years.

“This is evidence that things are now different and that we have investment safeguards,” Spitzer said. “At this point, the investment pool is the safest place to put money.”

Orange County plunged into the nation’s biggest municipal bankruptcy after the county-run investment pool, brimming with deposits from 187 cities, schools districts and special districts, lost $1.64 billion on some of the most volatile securities Wall Street sold. Cities and school districts lost about $500 million total.

These investors, along with the county, have yet to recoup all their losses.

The new investment pool stresses liquidity and safety over high yields and prohibits the kind of high-risk trading practiced by Moorlach’s predecessor, Robert L. Citron. Citron pleaded guilty to six felony counts of falsifying public records and breaking securities laws. He was sentenced to a year in a jail work-release program.

Most local agencies, including the county, adopted strict investment guidelines over the last two year that outlaw the exotic investment strategies that contributed to the pool’s collapse.

Citron, for example, favored securities known as “inverse floaters,” which lose their value when interest rates rise and gain value when rates decline. Citron continued to purchase the securities even as interest rates climbed in 1993 and 1994.

Moorlach now manages money from the county and local school districts, which are required under state law to place their investment funds with the county treasury. The pool invests in low-risk securities such as bankers’ acceptances, certificates of deposit, treasury bonds and commercial bonds.

The securities are less affected by volatile market conditions than those used by Citron and are far less likely to eat away at any of the principle investment.

“This is plain vanilla stuff,” Moorlach said. “I don’t expect every city to immediately place all their investments with us. But we can be another investment option for them. I see a lot of synergy here.”

Moorlach said that local governments could benefit from the economies of scale and get better returns on their money than if they acted independently.

Despite the conservative investment rules, the county’s pool has earned respectable yields this year when compared with other money market funds. In October, for example, the county’s yield of 5.60% was slightly ahead of such big-name funds as Dreyfus Cash Management, which earned 5.47%, and Fidelity Prime, which earned 5.04%. The funds are among the largest and best-known of their kind, and use investments similar to the county’s.

Citron earned yields averaging 8%.

George W. Jeffries, Tustin’s treasurer, said his City Council is interested in placing a portion of its investments with the county. “Opening [the pool] is a help to us and the other cities . . . in terms of investments,” he said. “It gives us more options and helps us provide better services at the local level.”

Other city officials, however, were less enthusiastic.

“It’s an option, but not one we are considering,” said Josephine Julian, Mission Viejo’s deputy treasurer.

While county officials insist the pool is safe, Julian added, “That’s what Mr. Citron used to say.”

Howard Longballa, Placentia’s director of finance, said that “while I’m sure the county’s pool is now conservative and safe, I have a feeling that philosophically the [City] Council would not want to avail itself of that option.”

Steiner also noted the lingering public anger over the bankruptcy, expressing surprise that any city officials would risk the political fallout that might come with placing money back into the notorious investment pool.

County Chief Executive Officer Jan Mittermeier had urged board members not to accept new investors, saying that the county should not chance the potential liabilities of handling outside funds.

But Moorlach said the county faced no risk by accepting the outside deposits. He said all investors could request their money returned without collapsing the treasury. “We could even handle a total liquidity within 24 hours,” he added.

Wilson changed Moorlach’s proposal to require that the supervisors approve each new investor. “This places the board in an oversight role,” he said.

Cities and special districts have yet to receive 16% to 20% of the money they invested in the pool. Schools are owed about 7% of their investments. They will receive the remainder only if the county is successful in its lawsuit against the Wall Street firms it holds responsible for causing financial collapse.

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Lower but Surer

UNDER CITRON

When Treasurer-Tax Collector Robert L. Citron controlled its investments, the county engaged in complicated, high-risk strategies that claimed an average yield of 8%. When interest rates rose after Citron bet they would fall, the investment pool lost $1.64 billion, and the county declared bankruptcy in December 1994.

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UNDER MOORLACH

Since Treasurer-Tax Collector John M.W. Moorlach took over in 1995, he moved the county’s portfolio into low-risk investments such as treasury bonds, commercial bonds, certificates of deposit, bankers’ acceptances and so-called Fannie Maes from the Government National Mortgage Assn. Moorlach says the pool earned at a 5.6% annual rate in October.

The county’s new policy allows cities and special districts to once again place their money in the investment pool.