SANTA MONICA, Calif - Phil Angelides said on Friday that he would "do what is necessary" to erase California's nearly $4 billion accumulated deficit, including dedicating sales tax revenues to its elimination and placing income tax surcharges on California's highest wage earners.

Angelides, the Democractic candidate for California treasurer, made his comments during a keynote address Friday at the fourth annual California Public Finance Conference sponsored by The Bond Buyer.

"The accumulated and perpetual deficit ... is slowly and inexorably undermining the confidence of the public in the state of California," Angelides said. "I fundamentally believe we've got to wipe out that accumulated deficit, even if it is [accomplished through] a dedication of revenues from a sales tax or a tax on people who make more than $200,000 a year."

Erasing the deficit is the only way "to restore the credibility" of state government, Angelides said. The deficit elimination issue was also addressed on the opening day of the conference by Angelides' rival for the post, Republican Matt Fong, who endorsed a plan to issue deficit-reduction bonds, backed by state-owned oil reserves.

In a panel on derivative products on Friday, Sharon N. Yonashiro, assistant administrative officer for the Los Angeles County Chief Administrative Office, said she believes financial statements will be expanded in the future to add more information on the risk of derivatives to investors.

Noting the complexity of derivatives, she said issuers should fully understand the product: "Don't get caught up in the vendor's hype." Morever, if investors on pricing day "want to extract a high price from you," be willing "to abandon your plan" of using derivatives, Yonashiro said. "Take this dog off their hands," she said.

Investing public funds was the topic of a panel discussion held Thursday, and Orange County assistant treasurer Matt Raabe used the forum to explain how the county investment pool achieves above-average interest rate returns.

Raabe said the county uses a leveraging strategy to allow it to achieve high returns on its $8 billion fixed-income investment portfolio, which Raabe is responsible for managing on a daily basis.

Raabe did not specify the pool's current interest rate return, which historically has averaged 8% - much better than the 4% to 5% achieved by the investment pool administered by the California treasurer's office.

But Raabe indicated the county's return has dropped, noting that "a significant impact" on the pool occurred earlier this year when federal funds rates were increased. "I wish we had been right about where interest rates are going, because I would be breathing a lot easier these days," he said.

"Over the years, we've developed a reputation for being aggressive investors," Raabe said. He said the aggressive reputation is accurate. "We like to take our base portfolio and leverage it."

The leveraging strategy is based on an analysis of the cash flow needs of the 180 taxing districts that invests in the pool, Raabe said. Orange County asks the taxing districts, which include special districts, school districts, and cities, to provide cash flow projections.

"We tell them our current balance, and we ask them to define for us how much money they plan to leave with us for several years," Raabe said. The separate cash flows are combined, and the county derives "one cash flow for our investment purposes," he added.

This single cash flow "allows us to stretch out further on the maturity range" investment expectations "than we could otherwise do," Raabe said. "We can extend further along the yield curve."

Raabe said the pool contains "a large number" of long-term dollars pledged by the county's airport, sanitation district, and other enterprise funds that give him "flexibility I might not otherwise have."

Unexpected cash flow demands are covered by maintaining $1 billion "in overnight money" that can be tapped immediately "in case we're wrong on some of our investment guesses, and our investors need their money sooner than they thought they did," Raabe said. The liquidity "brings out overall yield down, but it is important to have, particularly in this environment" or rising interest rates.

Orange County has not crossed the line between being "aggressive and an overly risky investor," Raabe said. For example, "we don't trade our portfolios" like some public agencies. "We buy fixed-income government securities, and we intend to hold them until maturity."

Another panelist, Christopher J. Ailman, chief investment officer and manager for Sacramento County's $1.8 billion short-term fixed-income portfolio, said investment pools would be managed differently if they had to meet SEC requirements for daily valuation of their worth.

Municipal pools are run on an historical-cost basis, not on the mark-to-market basis required of mutual funds, which must maintain a $1 net asset value daily, Ailman said. "We'd look horrible" if the pools are required to meet the mutual fund standard, he said, adding that "we would manage the portfolios differently" if that were the case.

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