LOS ANGELES--A grand jury in Stanislaus County, Calif., said in a recent report that it found "a pattern of mismanagement" relating to the country's capital borrowing and recommended stricter oversight for bond issuance.

The grand jury on June 27 released its third report in connection with public finance matters in the county. Previous reports included criticism of county officials for their handling of gifts from Prudential-Bache Capital Funding, which underwrote various bond issues for the county in the late 1980s.

In the latest report, the grand jury concluded that "large sums of money were borrowed hastily for ill-defined building projects, most of which have yet to begin construction, resulting in serious detriment to the county."

The jurors found that department staff members may bear partial responsibility for any lack of financial expertise or wisdom for the borrowings, but said "the responsibility for the failure to follow through with these projects rests squarely with the Board of Supervisors."

The grand jury also took a dim view of the supervisors' understanding of the financings they approved.

In questioning witnesses, the jury said that "individual members of the Board of Supervisors and the board as a whole lacked a clear understanding of the county's position relative to these borrowings, or of the potential financial consequences to the county of a failure to meet scheduled project completion dates."

The jurors also found that the board "did not understand simple financial and legal concepts and terms related to public financings."

Among seven recommendations made to the board, the grand jury said officials responsible for overseeing borrowings should "acquire a thorough grounding" in assorted methods of public financing.

Other recommendations ranged from completing preliminary work on site selection before engaging in a borrowing, to obtaining "expert legal counsel in connection with projects and expenditures beyond the competence of county counsel and his staff."

The outgoing grand jury, whose term expired on June 30, recommended that the new 1991-1992 grand jury also "investigate any proposed county borrowing during its term" and monitor the progress of prior bond-financed projects that have not been completed.

Grand juries in California not only hear evidence on criminal indictments by district attorneys, but also examine functions of various county departments and city governments.

The Stanislaus County grand jury's first report, released in late March, found that a number of county officials "clearly violated" established county policies in accepting gifts from Prudential-Bache and also apparently violated state laws governing the disclosure of such gifts.

Those findings were forwarded to the state's Fair Political Practices Commission, which can impose fines if its enforcement division concludes that county employees violated reporting requirements. The commission is examining the issue.

In its latest report, the grand jury included a clarification of its findings in the first report regarding gifts.

"Although the grand jury recognizes that ratings trips to New York related to county business, and that the trips may have benefited the county's bond rating, the grand jury reiterates its concerns regarding apparent under-reporting of gifts and the possibility of conflicts of interest, inadvertent or not," it said.

The grand jury stressed again that it found no evidence that the gifts received by certain elected and appointed county officials influenced their decisions regarding underwriters or others.

But the jurors expressed discomfort over such things as closing dinners, which "amount to little more than lavish parties for public officials at taxpayer expense." They added that "the acceptance of gifts is a practice dangerous to the public which should be prohibited whether or not the acceptance violates state regulations."

The grand jury did express pleasure that the county has revised its gift acceptance policies to address some of the jury's concerns.

Much of the grand jury's third report focused on a $21.5 million loan the county obtained for a health facility project from a state authority. The California Health Facilities Financing Authority raised proceeds for the loan with a pooled bond sale in 1986.

Not all of the blind pool proceeds were used, and that subsequently prompted a dispute between the state and certain counties over the division of resulting arbitrage profits.

Stanislaus and Santa Cruz Counties sued the state, charging the health authority with misrepresenting the benefits of the pooled financing.

A federal judge dismissed the suit for lack of jurisdiction, but an appeal has been filed and related litigation is pending in state court.

The grand jury noted that county supervisors had placed certain conditions on a borrowing through the state authority, including a provision that the county receive sufficient arbitrage earnings to ensure that it does not have any losses on invested bond proceeds for three years.

But the jurors contend the county failed to include this provision in its documents with the state, leading to a situation where the county was placed in a negative arbitrate position when the pooled bonds converted to a fixed rate.

The grand jury said county officials connected with the health facilities project failed to review a supplemental indenture that permitted the state authority to retain certain arbitrage profits. The fact that certain arbitrage provisions were excluded from the borrowing documents -- even though the county board had requested them -- was the fault of the county's inhouse counsel and staff in the the chief administrator's office, according to the grand jury.

Stanislaus County's Board of Supervisors is required to respond to recommendations in the grand jury report that call for improved county policies regarding borrowings for capital projects.

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