Bond Plan Called Risky

Nine years after its borrow-and-invest strategy helped plunge Orange County into bankruptcy, some county finance officials want to borrow more than $300 million and invest it -- an idea that has met strong resistance from county leaders.

The plan calls for Orange County to borrow the money at 5.85% interest and add it to the county’s undernourished retirement fund, which over the past 10 years has returned 8.83% on investments primarily in stocks, bonds and real estate.

The idea would create two potential benefits: helping the county pay off its debt to the pension system at a lower annual payment and generating a profit, said Thomas Beckett, the county’s public finance manager.

But some county officials said investing borrowed money in the stock market is too great a risk for a public agency. The county retirement system investments posted a gain of about 9% the first six months of this year but lost 5.5% in 2002 and 3.2% in 2001.

“It’s just not prudent to go out and risk taxpayer money based on the possibility of a short-term gain,” said Orange County Auditor-Controller David Sundstrom. “If this was a really good strategy, then what I should do is mortgage my house up to 90% loan-to-value and take all that money and invest it in the stock market.”

Orange County declared bankruptcy in 1994 after a series of investments by then-Treasurer Robert L. Citron collapsed, leaving the county more than $1 billion in debt. Citron had borrowed money to make the investments, exposing the county to even greater liability. The latest investment strategy has met resistance in a county that still feels the pain of the bankruptcy: Its $873-million bankruptcy debt requires a $91-million annual payment and is not scheduled to be paid off until 2026.

Beckett said the plan for the so-called pension obligation bonds is not comparable to Citron’s investments. “He bet on a derivative product that was highly speculative,” Beckett said. The retirement system runs “a balanced fund, spread between equities, fixed income, real estate ....We’ve already got $4 billion in there. All we’re doing is adding to what’s already in there.”

Keith Bozarth, chief executive officer of the retirement system, said it’s inaccurate to compare his investments to those made by Citron. “Our investment strategy is designed to produce reasonable returns and avoid significant risks,” he said. “It is very unlike the strategies that the former treasurer used.”

The county’s retirement system is underfunded by about $1 billion, in part because of the losses in 2001 and 2002 and an increase in retirement benefits paid to county sheriff’s and fire employees, Bozarth said. The county will have to pay an estimated $58 million per year to help repay its debt to the pension system, Bozarth said.

About 22,000 government employees are part of the pension system, and 9,000 retired workers are receiving benefits.

Beckett asked the county Public Financing Advisory Committee to approve the bond issuance last week. He said the retirement system’s investment pool is conservative but one of the best performing of its kind in the state.

By borrowing money and investing it in the pension portfolio, the county would reduce its payments to the fund by about $5 million a year, he noted in a report to the committee.

Orange County Treasurer John M.W. Moorlach, a nonvoting member of the finance committee, said he has concerns about the plan.

“This is something Citron did. Before you enter into it, you better be darn sure you know that [losing money] is something that could happen,” said Moorlach, who campaigned against Citron in 1994 and argued that his investment scheme was too risky for a county government.

Still, Moorlach said he’s not ready to rule out the latest investment idea.

“You can’t just have a knee-jerk reaction and say, ‘Oh, I did that before and I have bad feelings,’ ” he said. “My big concern is I’d like to spend more time analyzing whether this is a good time to put money in [the stock market].... If you’re looking for a good time to borrow, this is the time.”

The idea met with some resistance at the finance committee and was not forwarded to the Orange County Board of Supervisors. If the committee eventually agrees that borrowing money by selling bonds is a good idea, the matter would go to the board.

Two board members said they are concerned about the idea. “To go out and borrow money to invest, to me, is very scary, and it will take a lot to convince me that would be the prudent thing to do,” Supervisor Jim Silva said.

Supervisor Chris Norby said, “Borrowing to invest: bad idea. Those words have special meaning in the Orange County context.”