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Advisory Group Calls for Limits on Treasurers


SACRAMENTO — Concluding that Orange County's financial fall resulted from a "reckless abuse" of the public trust, a private sector panel Thursday recommended that the Legislature conduct a wholesale revision of state laws governing municipal treasurers.

The 12-member group, which is advising a special Senate committee investigating Orange County's bankruptcy, called for prohibitions on excessive borrowing for investment purposes, criminal penalties for violators and a restriction on the use of derivatives, the complex financial instruments that got former Orange County Treasurer Robert L. Citron into trouble when interest rates climbed last year.

The advisory group--composed of leaders in business, education, labor and finance--suggested that local agencies be considered "unsophisticated investors" in dealing with brokers, putting the onus on Wall Street to make sure municipal investments are sound.

The panel also called for annual audits of county investment funds and the establishment of three-member review committees to help shepherd county investment decisions.

"We do not believe the losses should have occurred or would have occurred if there was appropriate legislation and all parties acted in a responsible manner," said Eli Broad, the advisory board chairman and chief executive of SunAmerica Inc., a Los Angeles-based financial services firm.

The recommendations come as some officials are calling on local agencies to guard against financial disasters by limiting the amount of funds that they borrow for investment purposes and being more vigilant about disclosing risks to investors in municipal securities.

At the same time, various regulatory bodies are weighing whether to place controls on the sales practices of brokers and bankers who market the kind of complex financial packages that have proved troublesome to Orange County and other local governments.

Lawmakers generally applauded the advisory committee's findings, with Senate President Pro Tem Bill Lockyer (D-Hayward) calling the proposals "good ideas presented by credible people."

Sen. Lucy Killea (I-San Diego), who co-chairs the Senate Special Committee on Local Government Investments, said the private sector panel had provided a balanced view that was "very ambitious in scope."

The advisory group unveiled its blueprint shortly before the Senate committee convened its third hearing Thursday to examine the problems that led to the largest municipal bankruptcy filing in U.S. history.

During their morning session, lawmakers grilled representatives of Merrill Lynch, the giant brokerage house that sold Citron many of the interest-sensitive securities that caused the investment fund to collapse in December amid investment losses of $1.69 billion.


The brokerage, which earned $62.4 million in 1993 and 1994 on its dealings with Orange County, continued to defend itself against allegations that it kept selling Citron inappropriate securities while warning him that the county's investment pool was getting into deeper trouble.

Of particular concern to the Senate committee was Merrill's failure to inform the Orange County Board of Supervisors of the risks, despite warning Citron at least nine times since 1992 and once offering to buy the county's portfolio outright.

Richard M. Fuscone, 43, director of Merrill's fixed income securities group, defended the firm's disclosures in bond offerings for the county and said Merrill encouraged Citron to be more forthcoming with the board about the pool and its exposure to interest rate swings.

"We did persist," Fuscone said in the face of intense questioning. "We had advised the county treasurer that he should disclose more fully or more comprehensively about his strategy, the current market, the risks and rewards of the strategy. And we had suggested that one opportunity to accomplish this was to meet with the board, and we offered our willingness to meet with him (and) with the board to explain the current market environment.

"Mr. Citron declined and had offered to send us a letter verifying his authorization to carry on the business that he was (doing) and the fact that there had been sufficient disclosure to the Board of Supervisors," Fuscone said.

At Merrill's urging, Fuscone said, Citron rewrote parts of his 1993 annual report to the board that described the risks of the investment fund.

Appearing with Fuscone were two bankers who helped underwrite a $600-million bond sale by the county in July: Timothy Romer, an investment banker who joined Merrill Lynch in July, 1989, and who is the son of Colorado Gov. Roy Romer, and Elke Cheveney, a vice president at Merrill Lynch.

Lawmakers grilled the group about whether there had been sufficient disclosure of the condition of the county's investment pool when Merrill underwrote the offering of taxable notes issued solely to reinvest the proceeds in the pool.

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