LOS ANGELES -- A combination of grim news and rumors swirled around Orange County's investment pool yesterday.

The specter of a Chapter 9 municipal bankruptcy filing was raised by U.S. Rep. Christopher Cox, who represents parts of the California county. The Republican told reporters he heard the report from a county lobbyist.

County officials, meeting in closed session, were not immediately available to comment on the report that the county might file for bankruptcy.

The lobbyist, Jim McConnell, told The Bond Buyer yesterday afternoon that he never said the county was going to file for bankruptcy. He said he was merely discussing possible options with the county's legislative delegation in Washington.

"I think it may be misinterpretation or rumors feeding on one another," McConnell said of the uproar. "There are an infinite number of options for Orange County, so people say bankruptcy is one, and that catches people's attention."

Reached at midday, Dave Kiff, executive assistant to Thomas Riley, chairman of the Orange County Board of Supervisors, said he heard the rumor of the possible bankruptcy, but could neither confirm nor deny it was being discussed.

Supervisors are "in closed session," Kiff said. "I know they are trying to look at all the options to get out of the crisis, and I imagine that Chapter 9 is on the list." The board was not expected to take action yesterday, he added.

Many of the pool's 187 government participants held emergency meetings yesterday, where they weighed their options, including whether they should cash out their holdings.

Several government participants expressed alarm over the disclosure late Monday that veteran Orange County treasurer-tax collector Robert L. Citron has resigned over his handling of the investment fund.

The participants questioned whether Citron would have stayed aboard if he had any practical approach to shore up the beleaguered $18.5 billion fund, which since January has suffered $1.5 billion in paper losses.

In another development, John Moorlach, a certified public accountant who ran against Citron last spring, said yesterday he expects to be offered the job later this month when supervisors must appoint a new treasurer-tax collector.

Matthew Raabe, the county's assistant treasurer-tax collector, was named acting treasurer Monday.

"Right now, it's rehabilitation time, and I'm ready to serve," said Moorlach, a Republican from Costa Mesa. "I got 40% of the vote against an incumbent, so I would think, even if they didn't want me, it would just be courteous to put me in the mix."

Moorlach said whether he is offered the job or not, he will continue to pursue changes in the laws that have contributed to Orange County's financial mess.

He has been helping state Assemblyman Curt Pringle, a Garden Grove Republican, draft a bill that would curb the use of risky investment strategies by public agencies.

Moorlach said he would also like to eliminate the law requiring Orange County school districts to invest their funds with the county.

"Why can't they just go to a bank if they want to?" Moorlach asked.

Meanwhile, several city councils met in closed session yesterday to discuss their options.

Anaheim, home to Disneyland and two professional sports teams, said it would announce after a closed meeting last night whether it plans to pull its $169 million out of the fund.

Officials of Orange plan to hire a consultant to explore the city's legal and investment prospects relating to the $1.28 million the city has in the county pool. Newport Beach is also considering pulling out its $16.2 million.

County officials have said that any agency that pulled money out would take a 20% penalty as its share of the loss. The 20% penalty was intended to prevent paper losses from turning into real losses.

Some observers said concerns are growing that cash-outs by a large number of participants could cause a run on the pool.

"The portfolio has got negative carry, and cash is going out the door," said Chriss Street, a Newport Beach investment banker and longtime critic of the county's investment practices. "There's probably over a million dollars of cash going out the door to lenders everyday."

Street said litigation might be the next step.

"There could be taxpayer lawsuits," he said. "There's any number of possibilities. We don't know. We've never had this since the Depression. This is all new stuff."

Foreshadowing the likelihood of litigation in the wake of the investment pool crisis, Jeffrey Niven, finance director for Irvine, said yesterday that the county has been ignoring a request he made last Thursday to allow the city to withdraw $27 million of its $209 million from the pool.

Of the $27 million the city wants to withdraw, $12 million of the investment is from the city's defined contribution pension plan and $15 million is from its defined benefit retirement program.

The Irvine council has scheduled a meeting late today to discuss its investment options, Niven said.

"We're not discussing the [withdrawal of the] other hundreds of millions of dollars we've got invested" with the pool, Niven said.

Niven said he called Raabe, the county assistant treasurer, last Thursday, but "I was unable to reach him." A request to withdraw funds was hand-delivered to county officials on Monday, but as of midday yesterday, the county had not responded.

A legal showdown between Irvine and the county could be brewing, Niven said, if the county insists on a mandatory 20% penalty it said it would impose on withdrawals.

"It is the city's position right now that that withdrawal should not be subject to any 20% reduction by the county," Niven said.

The Irvine city attorney "is looking at the legality of the county's statement that they would reduce entity deposits down to an approximation of market value," Niven said. "We would view that to be contrary to the state government code which precludes the county from attaching any principal on deposit with it."

Irvine has invested in the pool since 1989, Niven said. In the fiscal year ended June 30, Irvine earned $2.2 million on the issuance of $60 million of one-year taxable notes whose proceeds were invested in the pool. The city has a similarly structured $62.5 million investment in the pool that matures July 27, Niven said.

Noting that Irvine has "no written guarantee with the county" that the principal is secure, "I am worried about what is going to happen" to the county pool's interest rate, Niven said. "Certainly if the interest rate that the county pays drops below the interest expense on the notes I've issued, then that would be a concern to us."

Moorlach said he believes Irvine's "legal position is correct" to pursue its demand for cash without a 20% penalty. "We might even be talking about constitutional issues like the Fifth Amendment -- illegal seizure by a government."

"They're only asking for $27 million," Moorlach said. "Whether that starts a run, I don't know."

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