O.C. Fund Draws Interest

Public agencies hoping to squeeze a bit more out of their investments shouldn’t bother looking at the Orange County investment pool. That’s a welcome change from the not-too-distant past.

In recent weeks the pool has yielded 5.13%, which isn’t much more than the 4.61% that a 90-day Treasury bill was earning at the time. And investments don’t come much safer than the Treasury bills, since the federal government has stayed in business for more than 200 years now.

Orange County’s low-risk investing paid off last month with the welcome announcement that a small Villa Park water district was putting money into the county’s pool voluntarily. It marked the first deposit not required by law since the county declared bankruptcy nearly five years ago.

Orange County Treasurer John M.W. Moorlach, who took office after the bankruptcy, had been seeking investments from several government agencies. It was the Serrano Water District that stepped forward.

The Serrano district president said only a fraction of its portfolio would wind up under Moorlach’s stewardship, probably just a few hundred thousand dollars. But the investment is symbolic of the county comeback, and the symbolism is important.

Until Serrano’s announcement, only the county’s own agencies and school districts had invested in the county pool, and they had been required legally to do so.

As a result, the pool has hovered at less than $3 billion. At the time of the bankruptcy, it contained more than $7 billion.

Serrano’s announcement came soon after the county announced it had settled its last lawsuit stemming from the bankruptcy. In all, the county managed to recover more than $860 million, about half what it lost when fiscal disaster struck.

The amount recouped also was more than many expected in December 1994, when then-Treasurer Robert L. Citron disclosed the devastating effect on his portfolio of a year of interest rate hikes. The recovery is a tribute to the county’s tenacious battling against financial firms that were only too eager to handle Citron’s investments and garner commissions despite the dangers of the economic climate. Citron’s persistence in investing recklessly even after interest rates began going up, as well as his later guilty plea to fraud charges, were considered likely to weaken the county’s case if any of its suits went to trial. Nonetheless, the county rightly persisted, and ended up recouping much of the settlement money from Merrill Lynch & Co., Citron’s chief investment company.

The federal and bankruptcy courts in Santa Ana are expected to approve the settlements in the next few months. The disbursements will mean that school districts recovered 97% of their investments. They deserve to get back as much of their funds as possible, since they had no choice but to invest with the county. Cities and other government agencies also recovered more than 90%; the county, by contrast, got back 35%.

Not long after the bankruptcy, county officials asked voters to approve a temporary half-cent increase in the sales tax to make up at least partially for the lost funds. The measure was rejected.

That forced the county to slash budgets, especially for parks and beaches and flood control. The Orange County Transportation Authority agreed to a diversion of some funds it would have received.

Money that would have gone for parks, transit and other causes instead will be used to pay off buyers of bonds the county sold to get out of the hole. The new debt and resulting funding cuts will last another 17 years and are bound to take an increasing toll.

A more beneficial aspect of the fiscal chaos was a focusing of attention by regulatory agencies on Wall Street’s relationship with counties and cities. It was an area that received too little scrutiny until disaster struck, although financial firms went to great lengths to win the lucrative business of government agencies. Analysts said brokerages understand they will be open to more scrutiny in their dealings with cities and counties.

Orange County, too, understands the need for caution in investing. It is not surprising that, until Serrano, other agencies had steered clear of the county’s investment pool. Continued watchfulness over the public’s money may win other investors in the future, but the effects of the bankruptcy on parks, beaches and budgets of county agencies will be long-lasting.