LOS ANGELES - A California assemblyman plans to introduce legislation next month that would law the kinds of high-risk investing tools that have gutted the Orange County investment pool and triggered an ongoing bankruptcy crisis.

The draft bill targets most types of derivatives and reverse repurchase agreements - both of which contributed greatly to the portfolio's early successes, but also to the devastating $1.5 billion loss reported last week.

"While this strategy appears to have worked for a time, Orange County has clearly paid too high a price in our view," said Deborah Gonzalez, a legislative aide to the bill's sponsor, Republican Assemblyman Curtis Pringle.

Pringle represents Garden Grove, an Orange County suburb that has $5.5 million locked up in the now-frozen investment pool.

"We think public funds should be invested in a safe manner," Gonzalez said.

Pringle wants all governments in the state to follow the same conservative investment guidelines set up by the Local Agency Investment Fund, a branch of the state treasurer's office that was established years ago as an alternative to county funds.

Some cities that have invested in both the Orange County fund and the state fund are now relying solely on proceeds from the state.

The state fund does not use derivatives, reverse repurchase agreements, or any other strategies deemed to be speculative. Those state investment guidelines were formerly the standard for all local government funds.

But in 1979, Orange County Treasurer Robert L. Citron - the same man who resigned Sunday after announcing the billion-dollar loss - convinced state legislators to change the law.

Citron helped draft legislation giving counties more freedom to borrow, for the purpose of investing in high-yield securities.

Citron then used the new law to leverage the county's $7.8 billion investment pool, eventually inflating its value to more than $20 billion.

But when interest rates skyrocketed this year, the fund's value plummeted 20% to last week's $18.5 billion level.

"Citron bought the rope that he hung himself with," said John Moorlach, a Costa Mesa accountant who ran unsuccessfully against Citron for the treasurer post last spring.

"I remember him bragging during the campaign, `I wrote the law, I'm getting the best returns in the state,'" Moorlach said.

Moorlach is also advising Assemblyman Pringle on the bill to outlaw the use of risky investment strategies by public agencies.

But while he has Pringle's ear, Moorlach is concerned that the bill may go too far.

He just has to be careful that he doesn't swing the sword and knock everything out"' Moorlach said. "If we were to get really tough, we could say just about everything is a derivative. I mean, we're still having trouble defining exactly what a derivative is."

Gonzalez, Pringle's aide, said she has discussed the options with several public finance administrators, as well as officials in Orange County. Those officials will continue to be consulted as the bill moves through the legislature, she said.

"One of the concerns is that we don't want to introduce something that adversely impacts the current situation [in Orange County]" Gonzalez said.

But it may be a while before an actual vote is taken on the bill, she said, because of an unrelated battle going in the legislature over the House Speaker's job.

Republican lawmakers, who now have a majority in the House, are refusing to attend house sessions because they could not muster enough votes Monday to oust the current speaker, Democrat Willie Brown.

The Republican boycott has paralyzed the House, leaving it without enough members to form a quorum. The GOP legislators say they will return for the new session on Jan. 4, when they will try again to elect a Republican Speaker.

Pringle had planned to introduce the bill today, but could not because of the boycott, which he is participating in.

"So we're in kind of a stalemate" Gonzalez said. "We have made arrangements to introduce the bill, but we can't do anything until next month."

In other Orange County developments:

* The Board of Supervisors announced Wednesday afternoon that it has adopted a plan to restore financial confidence in the troubled investment pool.

The plan includes a commitment to continue paying all county and school district employees, and a promise to hire "one or more of the nation's top financial advisers to join its investment advisory team."

The board also authorized the treasurer's office and the chief administrator's office to hire additional personnel until the current financial crisis is resolved.

* The Orange County Transportation Authority, the pool's largest investor, said Wednesday night that it is stopping the flow of transportation moneys into the troubled fund.

The authority will use its own bank accounts and ongoing revenues to sustain its day-to-day operations while its invested money remains frozen, said authority spokeswoman Elaine Beno.

The authority has instructed the State Street Bank & Trust Co. to deposit all incoming Measure M sales tax receipts into a special account to be held and invested solely by the bank.

* The Orange County Transportation Corridor Agencies, another large investor, said yesterday the authority is unsure whether the county's financial troubles will endanger the scheduled spring issuance of $1.25 billion of revenue bonds for toll road construction.

The highly anticipated issuance, expected to be one of the largest bond sales of 1995, depends largely on what county officials do in the days and months to come, said agency spokeswoman Lisa Telles.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.