A Small Investment in Insurance

If anyone is entitled to speak from experience about the need for fiscal caution, it should be the treasurer of Orange County, which went bankrupt barely more than five years ago. When his advice is seconded by the state treasurer, it’s definitely worth listening to.

County Treasurer John M.W. Moorlach and state Treasurer Phil Angelides both have come out squarely in favor of keeping a law requiring counties to send investment reports to the state every three months.

By no coincidence, the law is about 5 years old. The Legislature passed it right after Orange County’s bankruptcy, caused by the reckless investing of Moorlach’s predecessor, Robert Citron.

Now one assemblyman says it’s costing the state too much money to have the financial reports done, especially when they would do little to prevent another bankruptcy like Orange County’s. Assemblyman Bill Leonard (R-San Bernardino) says the reports just get “filed away in Sacramento.”

It’s true that if the reports merely get filed and forgotten they are not doing any good. But the remedy would not be to stop filing reports. It would be to ensure that they are reviewed, that designated staffers in Angelides’ office monitor the investments and debt of counties to keep them from going down Orange County’s path.

The state legislative analyst said it costs around $3.5 million a year for the state to reimburse counties and school districts for the cost of complying with the reporting requirements. That’s not a small piece of change, except when compared to the $1.64 billion the Orange County investment pool lost when interest rates rose in 1994.

The schools, cities and public agencies that put their money in the pool are likely to recover their shares of about $860 million in settlements next month.

If the U.S. Bankruptcy Court approves the report on the lawsuits that was filed several weeks ago, the funds will be distributed Feb. 24. Schools will get back about 97 cents for every dollar they invested in the pool. A substantial amount of the settlement funds already has been returned. Cities and other public agencies will recover about 93 cents on the dollar. The county will get back less.

Much of the money, nearly $450 million, came from the county’s settlement with Merrill Lynch & Co., which county lawyers accused of steering Citron into unsuitable investments. Merrill Lynch contended that the former treasurer, who pleaded guilty to six felony counts and was sentenced to house arrest, knew the risks.

But if there had been a second set of eyes scrutinizing the county’s investments in Sacramento, alarm bells might have rung earlier. In economic boom times, it may be difficult to see how public agencies could get in financial trouble. But the good times don’t last forever, and memories should be long enough to recall how Orange County headed into fiscal disaster.