CHICAGO -- Commissioners in Cuyahoga County, Ohio, have shut down the county's local government investment fund in light of revelations about undisclosed investment practices and concern over losses in the fund.

Yesterday, the county began to return principal invested in its Secured Assets Fund Earnings, or SAFE, Fund to its approximately 75 local government investors. The county also hired financial and legal experts to help determine expected financial losses to the county as a result of its exposure in the fund.

Roger Deike, the county's controller. said that the SAFE Fund was terminated for several reasons, including a local newspaper report that the fund had concealed entering into a reverse repurchase agreement as well as borrowing money at low interest rates to buy intermediate and long-term bonds with higher rates in an effort to bolster falling rates of return for investors.

The newspaper report, which indicated the fund's paper losses had reached $122 million, caused some local government investors to pull their money out of the fund, Deike said.

As of the middle of September, the fund was investing about $1.1 billion of public funds for Cuyahoga County and for about 75 cities, villages, school districts, and other counties in Ohio.

At that time, fund officials told The Bond Buyer that despite the bear market in bonds, the fund had been able to offer governments a return of about 6.6% through investment techniques such as repurchase agreements with dealers and through the arbitrage of proceeds from a taxable note issue sold last year by the county.

County funds make up 35% to 40% of the money invested in the SAFE Fund.

Cuyahoga County commissioner Mary Boyle said yesterday that commissioners took exception to the fund's investment strategy. The fund is run by courtly treasurer Francis Gaul, who agreed to relinquish control of the fund to the commission.

"We sensed that it was sell short and buy long, which was not a good strategy in this market," Boyle said.

In a press release, the county commission said it would honor its guarantee of principal by returning "every dollar of the amount each [government] has on deposit in the SAFE program."

Yesterday, the county hired Banc One Investment Advisors Corp. to manage the county's investments, Coopers & Lybrand to audit the SAFE Fund, and the law firm of Squires, Sanders & Dempsey to provide legal advice.

Bruce Jones, a partner at Squires, said the financial experts will be working to reduce the interest rate risk incurred by the fund's investment strategy and to determine the degree of losses for the county.

"The county expects there will be significant losses, but we're not in the position to quantify that at this time," Jones said.

Despite anticipated losses, the county believes it can meet its financial obligations, he said.

Rating agency officials expressed concern for the county in light of the investment trouble.

Jeanne Wilson, a senior analyst at Moody's Investors Service, said the agency will be monitoring the situation "very closely." While the immediate concern is the county's financial standing, the agency will have to see if any of the local government investors in the fund will face any financial problems as a result of their investments, Wilson said.

Moody's rates about $250 million of Cuyahoga County's general obligation debt An.

Officials at Standard & Poor's Corp., which gave an SP-1-plus rating earlier this year to $246 million of tax anticipation notes sold by the county, said they were waiting to receive cash flow projections from the county to determine the extent of losses.

County Treasurer Gaul, who ran the fund, and Tim Simmerly, the fund's chief investment officer, did not return phone calls.

Cuyahoga County's investment troubles come on the heels of a statewide investment scandal. Since last year, the Ohio auditor's office has uncovered millions of dollars of losses incurred by local governments in Ohio, mainly due to investments in interest-only stripped mortgage-backed securities.

A 1993 audit of Cuyahoga County released last week by the state auditor cited the county for not providing documentation showing the money invested by the SAFE Fund, for inadequate documentation of investments for some of its government investors, and for the apparent lack of statutory authority to guarantee principal.

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