CHICAGO -- Cuyahoga County, Ohio, has begun selling off a large portion of its investment portfolio and is contemplating issuing debt in conjunction with the restructuring of the remainder of the portfolio, a county official said last week.

County commissioners, acting on advice from Banc One Investment Advisors, agreed on Thursday to sell securities with a market value of about $544 million in the so-called leveraged portfolio, according to Dennis Roche, a county spokesman.

Roche said the transactions, which are expected to result in a loss of about $97 million, should be completed by early this week.

In addition, commissioners are considering issuing about $138 million of - five-year, fixed-rate special obligation bonds and using the proceeds to delease outstanding loans that resulted from reverse repurchase agreements entered into by the defunct Secured Assets Fund Earnings, or SAFE, program, Roche said.

"By doing this, we will eliminate the market risk associated with those loans," he said.

Last month, the county commissioners shut down the program, run by county Treasurer Francis Gaul, after learning about some of its investment strategies, including the reverse repurchase agreements, and in the face of huge paper losses.

While principal was returned to about 75 local Ohio governments that had invested in the program, Cuyahoga County, which was the biggest investor in the program, was left with a large, devalued portfolio of various fixed-income securities.

The county has already sold $265 million of short-term securities at a loss of $14.5 million, in addition to the $544 million of securities it is in the process of selling.

Roche said the proceeds from the bond issue would be used in the restructuring of the remainder of the portfolio. The restructuring would ultimately place the remaining securities, which have a marked-to-market value of just under $250 million, into a separate accounting fund, he said.

However, he said the county will not issue the bonds unless three conditions are met. He said bond counsel at Squire, Sanders & Dempsey must determine that the bonds are tax-exempt, and the county must have definitive cash-flow numbers and "an understanding" of the impact of the investment problems on the county's financial statements.

"If all three are not positive, we will not do that bond sale, and we will just sell the remainder of the portfolio," Roche said.

The bonds would be sold as revenue anticipation debt against the county's new health and human service levy," which is funded through property taxes that take effect Jan. 1, according to Roche. The bonds, which could be issued as soon as this month, may be sold competitively and could carry insurance, he added.

Officials at Moody's Investors Service and Standard & Poor's Corp. said they were not familiar with specifics of the bonding plan.

Moody's has placed the county's Aa long-term rating on review and is in the process of completing a review of its MIG-1 short-term rating on $246 million of the county's notes that are due to mature Dec. 30.

Last week, Standard & Poor's affirmed a SP1-plus short-term debt rating on the notes after the county executed escrow agreements with National City Bank to act as trustee for the funds needed to pay off the notes.

The county came up with most of the funds for the note repayment when it sold $265 million of short4erm securities from the SAFE program at a $14.5 million loss.

Meanwhile, none of the brokerage firms that were involved in selling investment vehicles, including the reverse repurchase agreements, responded affirmatively to the county's request to repurchase those investments, Roche said.

Letters were sent to a number of firms last week, giving them 24 hours to respond to the county's offer. As part of a criminal and civil investigation, the Cuyahoga County's prosecutor's office has also been sending subpoenas and taking depositions from brokers in the Cleveland offices of McDonald & Co. Securities Inc.; Dean Witter Reynolds; Kidder, Peabody & Co.; National City Investments; and Society Bank.

While county investments are normally directed by the treasurer's office, Roche said that county commissioners have an agreement with Gaul that expires at yearend to work under the advice of Banc One and other consultants. Gaul, a Democrat, lost his bid last Tuesday to become a U.S. representative, but still has two years left on his term as county treasurer.

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