CHICAGO -- The investment scandal involving local governments in Ohio has prompted state lawmakers to hold hearings on whether to change state investment laws.

Both this week and last, the House Finance and Appropriations Committee held hearings to determine if state action is warranted to prevent future poor investments on the part of local governments, according to Jim Cundiff, the committee's financial analyst.

"We're trying to find out what's going on, how the bad investments came about, was it due to questionable sales or investment practices, and does the Ohio revised code adequately address this," Cundiff said.

He said there will probably be more hearings in the future.

The hearings were originally to be held on a bill that would set up a fiscal monitoring process and a fiscal emergency loan fund for counties. That bill was tailored for Columbiana County, which is being investigated for possible illegal stock-related investments.

However, the news that several counties, school districts, and towns in Ohio have lost millions of dollars in mortgage-related investments expanded the hearing process, Cundiff said.

He said the county fiscal emergency bill could be amended to include revisions to the current investment laws for local governments. Or, Cundiff said, a separate bill might be introduced.

Last month, the state auditor's office warned that scores of local governments had invested in high-risk instruments that may violate state law. State officials said the investments were mainly interest-only stripped mortgage-backed securities.

"We don't want to create an environment of hysteria, but we want to point out that these investments could be a problem," Cundiff said.

According to the state auditor's office, current state law allows for investments that mature or are redeemable within two years from the date of purchase or are obligations of or guaranteed by the United States or carry the pledge of the United States.

Some county officials are concerned that the legislature may move too quickly and too forcibly to tame investment practices. Tom Steenrod, treasurer of Athens County and president of the County Treasurers Association of Ohio, said restrictive legislation could hurt larger counties that have more sophisticated investment practices.

However, Steenrod said his group is in favor of clarifying the existing investment law, pointing out that it is vague and can vary in its interpretation by different treasurers.

Francis Gaul, Cuyahoga County's treasurer, said he believes the interest-only securities are illegal in Ohio. He suggested that the state should refine its licensing laws of securities firms to make sure that those firms are not peddling "illegal" securities to governments.

Gaul's office runs an investment program for about 80 local governments, including other Ohio counties, that invests solely in U.S. government securities.

Paolo De Maria, assistant director of Ohio's Office of Budget and Management, said the administration of Gov. George Voinovich does not want to see immediate, major changes in investment laws.

"We don't want to rush in with over-restrictive legislation," De Maria said. "We're right now in the information-gathering mode, trying to understand what is going on."

John Conley, a spokesman for the state auditor's office, said yesterday that the auditor should be releasing audits of some of the governments later this month. He declined to name the affected governments.

Steenrod said that a recent survey conducted by the treasurers' association found that only five of Ohio's 88 counties have investment problems, although he added that a few more counties may have had problems they are not reporting. The identified counties are Portage, Sandusky, Treble, Seneca, and Van Wert, with losses that range from $300,000 to $2 million, he said.

From the results of the survey, most of the treasurers are [investing] in Treasury bills, bonds, or notes or have invested in their own countries," Steenrod said. "We don't feel that, county-wise, the problem is large in number."

In Columbiana County, an unrelated investment problem involving the disappearance of county investment funds is unfolding. Robert Horowitz, a special prosecutor for the case, said he is investigating the loss of $6.5 million to $7 million of county money in trading stock, stock options, and options on the Standard & Poor's 100 stock index.

Horowitz said he and federal authorities including the Federal Bureau of Investigation are looking into the roles of county Treasurer Ardel Strabala and his son Stephen, who allegedly invested the money in the possibly illegal trades.

The county fiscal emergency bill pending in the house would set up a state loan system, similar to the one put in place in the late 1970s for Cleveland, to bail out counties, according to Steve Findley, an aide to State Rep. Sean Logan, D-Lisbon, the bill's sponsor. Findley estimated that the losses in Columbiana County represent 15% to 20% of the county's annual revenues.

Officials from Standard & Poor's Corp. and Moody's Investors Service said this week they are continuing to gather information on local governments involved in the investment scandal.

One government, Sandusky County, last month filed suit in federal court in Toledo against Government Securities Corp. of Texas, charging the firm with state and federal securities fraud in connection with investments the firm sold to the county, including interest-only securities. The firm on Sept. 29 filed suit in federal court in Houston against the county, asking for a declaratory judgment clearing the firm of any wrongdoing.

Meanwhile, the Ohio attorney general's office issued an opinion last week interpreting the investment law specifically for school districts and non-charter local governments. The opinion states that those governments are not authorized to invest in instruments issued by the Federal National Mortgage Association.

David Spialter, business counsel in the attorney general's office, said the opinion was made in response to an earlier request by the state auditor and was not a result of recent investment problems.

Spialter also said that in light of the problems, his office is expecting to be asked about the legality of interest-only securities as a specific investment for local governments.

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.