SANTA ANA, Calif. -- The largest discretionary depositors in the troubled Orange County investment pool have so far agreed to stay in the fund, despite last week's dramatic report of a potentially crippling $1.5 billion loss.

A final decision from all 187 members of the $7.8 billion pool is expected by tomorrow. In the meantime, county officials are working feverishly to head off a panic that could turn the "paper loss" into an actual loss.

The Orange County Transportation Authority and the Orange County Sanitation Districts, with a combined investment of $1.45 billion in the fund, have pledged not to make any unscheduled withdrawals.

A Transportation Authority statement released Friday said bondholders can be assured "there is no risk of delayed payment or nonpayment on any of its outstanding debt service obligations." The authority has $1 billion in the pool and is its largest investor.

Late Friday, Standard & Poor's Corp. placed Orange County on Cred-itWatch with negative implications. The move affects $1.58 billion of the county's direct debt. The agency will be meeting Thursday with county officials.

Moody's Investors Service also plans to meet with the county, Karen S. Krop, a Moody's assistant vice president, said Friday.

Analysts believe the $1.5 billion value decline is the largest municipal fund loss ever disclosed. County officials blame the decline on rising interest rates.

In a statement released to The Bond Buyer on Friday, Matt Raabe, Orange County's assistant treasurer, said fund participants have been told "if they did pull out of the fund, it would be a 20% loss" on the original investment.

"There has not been an announcement of any freeze," Raabe said, meaning participants can withdraw funds if they are willing to take the loss.

In a heavily covered press conference last Thursday afternoon, Raabe said the county desperately needs cooperation from its depositors and creditors.

"At this point in time, the only danger is that people will decide not to work with us, and we will have to sell securities" at market value, said Raabe. "Our team is trying to avoid that."

Peer Swan, president of the Irvine Ranch Water District, said Friday that he has asked the county to set up an investor oversight committee as soon as possible composed of the top four or five pool participants.

"I believe that they have a responsibility to accommodate that" request, said Swan, whose district has invested $300 million in the pool. If the county declines, "I would have to reevaluate our situation," he said, with the possibility of withdrawing funds from the pool.

In the short-term, Swan said the water district has no plans to withdraw money because of the county's threat to withhold 20%.

"Whether that is legal or not, it won't be determined until after some court battle," Swan said.

Walter D. Kreutzen, executive vice president for finance and administration with the Santa Ana, Calif.-based Transportation Corridor Agencies, said he would support an external committee review of county investment decisions.

The agencies are building several toll roads in Orange County, and have $306 million of discretionary funds invested with the county.

"We are going to ride this market out," he said. He also said the county "knows our liquidity needs," and it has pledged to let the agencies withdraw $20 million a month as was previously scheduled.

Regarding credit implications for the corridor agencies' outstanding bonds, Kreutzen said he would have no comment until he received answers from the county to "a number of our own questions."

In a worst-case scenario -- with a large number of depositors pulling out, or a severe rise in interest rates -- county officials said they would be forced to liquidate the fund and all 187 members would have to share in the $1.5 billion loss.

County administrative officer Ernie Schneider said it is too soon to tell whether that would bankrupt the county. But he said he is confident that a liquidation will not be necessary.

The investment pool includes all county agencies and school districts, and all but two Orange County cities.

Orange County Treasurer Robert Citron, once widely praised for his successful but risky investment strategies, briefly defended himself at the televised press conference after a reporter asked if he had "gone too far."

In a terse statement, Citron stepped up to the podium and said, "For 15 years I have been managing the portfolio this way ... What I did was not irresponsible in any manner, shape, or form."

Citron answered no other questions, but assistant treasurer Raabe said the county is standing behind Citron's investment decisions.

"Those of us who are in government are used to being second-guessed, and we know that we will be secondguessed" said Raabe.

"Certainly as we go forward in evaluating the strategy, we'll take these kinds of circumstances into account," he added. "But we're really not at the point of second-guessing ourselves."

For more than a decade, the fund's returns have consistently outpaced the market, averaging more than 9% annually.

Citron's investment strategy relies heavily on the use of derivatives and reverse repurchase agreements. The strategy allows the pool to borrow money against the market value of its securities.

That leveraging raised the fund's value to $20 billion at the beginning of 1994.

But starting last February, rising interest rates drastically reduced the fund's earnings and forced the county to put up additional collateral for the first time in years.

On Thursday, Citron announced that the fund's value had declined to $18.5 billion.

Orange County Assemblyman Mickey Conroy called last Thursday for Citron's resignation, but treasury officials say he has no plans to leave office.

The 69-year-old treasurer is the only elected Democrat in Orange County -- an overwhelmingly conservative, Republican stronghold located south of Los Angeles County.

During the campaign leading up to Citron's June 7 reelection, Republican candidate John Moorlach heavily criticized the treasurer for taking too much risk with public funds.

Moorlach, a certified public accountant and financial planner, lost with 40% of the vote.

"I feel vindicated," Moorlach said Friday, "but I'm not going to gloat. I live here and this is a real crisis for the residents of Orange County."

Moorlach said he would not join others in calling for Citron's resignation. Nor would he speculate on the future of the fund because, he said, its complexity makes the future difficult to predict.

"That's the problem with this kind of portfolio," Moorlach said. "When it's going right, you're a king, but when it's going wrong, you're a goat. And if you're doing that with your own money, hey, fine. But with public dollars, it's a tragedy."

Brad Altman in Los Angeles contributed to this report.

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