Voters need to understand intergovernmental pools better. They also should understand that risk involves the possibility of loss.

In an election in early June, Robert Citron, 69-year-old treasurer of upscale Orange County in southern California, trounced his challenger, John Moorlach, a certified public accountant, by a 61-to-39 margin. Moorlach told voters that Citron's use of derivatives to increase the rate of return on the county's $7.5 billion investment pool was too risky, but the voters obviously disagreed.

Last week, the county announced that the value of its fund, which used derivatives actively, had dropped $1.5 billion, at least on paper, and the municipal securities market took notice.

Citron is the lone Democrat official in a solidly Republican county, the home of Richard Nixon, Disneyland, Knott's Berry Farm, and John Wayne Airport. His investment pool had outperformed the market for nearly a quarter of a century. The county itself and about 180 other local governments put money into the fund to earn income until they need it to pay teachers' salaries and other predictable expenses. With Citron's active management, the pool had earned an average rate of return of more than 10% a year for 15 years, a period of mostly declining interest rates. This year as interest rates climbed, it ran into difficulty.

Short-term intergovernmental pools, unlike corporate money funds, may be evaluated at the cost of their securities and not marked to market. If investment maturities are timed to match participants' needs, everything works out okay, assuming no defaults. But if participants get skittish and all want their funds unexpectedly, they could face losses. The culprit in this case is the introduction of leverage because pool participants and lenders to the pool can all get nervous when prices of pool securities decline.

Citron borrowed money, increased the size of the pool to $20 billion, and invested in fixed-income securities that dropped in value as interest rates rose this year. If the fund had been marked to market, he would not have been able to mask reality so long.

But Citron's pool-management practices have been well known all along, and they were part of a an election campaign, so there's no surprise here other than the revelation of the extent of paper losses. If voters favor taking on more risk, they are going to have to accept the possibility of loss.

We think, however, that high-risk intergovernmental pools are bad policy. Their success depends on correct predictions of interest rates, and we have never found anyone who can make such predictions accurately even most of the time. Marking to market would help keep pool managers honest. Curbing leverage would preserve the sanctity and safety of intergovernmental pools. Finally, if any legislative or regulatory change is needed, it can be handled at the county or state level.

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