CHICAGO - Cuyahoga County, Ohio, commissioners last week outlined a plan to cut spending by 11% next year in an effort to rebuild county funds depleted by losses in a defunct local government investment pool.
Dennis Roche, a county spokesman, said the plan calls for shrinking the operating budget for the fiscal year that begins Jan. 1 to about $303 million from $340 million.
The spending cuts, winch would be in place through fiscal 1998, are expected to result in fund balances of $28.5 million at the end of fiscal 1995, $57 million in fiscal 1996, $85.5 million in fiscal 1997, and $115 million in fiscal 1998, according to county documents.
For the current fiscal year, the county is anticipating a zero balance, compared with a $127.1 minion balance at the end of fiscal 1993. Roche said the county does not expect to end fiscal 1994 with a budget deficit despite sustaining $114 million in losses recently from the partial liquidation of the Secured Assets Fund Earnings, or SAFE, Program.
"Overall, the county has enough cash to cover the losses, but as you can see not by much," Roche said.
The commissioners are expected to adopt the fiscal 1995 budget on Thursday.
Commissioners shut down the investment pool in October in the face of huge paper losses and after learning about the program's investment strategies, which included reverse repurchase agreements. The use of reverse repos was a major cause of the downfall of the Orange County, Calif., investment pool this month.
The Cuyahoga program, run by county Treasurer Francis Gaul, invested in public funds for about 75 local governments, including the county itself. While principal was returned to the governments, the county, which was the largest investor in the pool, was left with the bulk of the portfolio.
So far, the county has sold just over $800 million of securities, realizing losses of $114 million. The county still has a portfolio of about $258 million of securities that it had been contemplating restructuring with proceeds from a $138 million five-year, special obligation bond issue.
But Roche said that Internal Revenue Service regulations governing the issuance of tax-exempt cash-flow debt prohibit the county from issuing the bonds. Tax exemption was a key criteria for proceeding with the bond issue, according to Roche.
"It's unlikely we'll do the issue on a taxable basis," he said.
Bond proceeds would have been used to defease outstanding loans that resulted from die reverse repurchase agreements and to eliminate the market risk to the remaining portfolio.
Cuyahoga County is now assessing other options, including selling the securities, Roche said.
The fiscal 1995 budget will contain no tax increases, program expansion, or salary raises, according to county documents. The county also is considering raising money from asset sales and through the filing of lawsuits against securities firms that sold investments to the SAFE program.
The Cuyahoga County prosecutor's office already has sent subpoenas to and taken depositions from officials at several firms in Cleveland as part of an ongoing civil and criminal investigation.
Last week, commissioners made it clear that they intend to control investment of county funds in the future. Roche said commissioners notified Gaul of their intention to pass a resolution at the end of the month to take over the investment function. In October, the treasurer agreed to relinquish his control over investments until yearend.
Roche said the county will not be operating another pooled investment program.
Meanwhile, the county is scheduled to meet with officials from Moody's Investors Service on Friday. The rating agency placed the county's Aa long-term general obligation rating on review in the wake of the investment losses. Jeanne Wilson, a senior analyst at Moody's, said she has not yet received information on the county's proposed budget.
Moody's and Standard & Poor's Corp. have confirmed their highest short-term ratings for $246 million of county notes due to mature on Dec. 30. The county raised most of the money needed to pay off the notes through the sale of some of the securities in the investment pool's portfolio.