Pool Investors Express Shock at Special Fund

Investors in Orange County’s collapsed pool reacted with shock and a measure of outrage Saturday when they learned that millions of dollars in interest income due them was apparently improperly funneled into special accounts in the county treasurer’s office.

At the same time, though, representatives of several of the 186 cities, school systems and special districts in the county fund noted the silver lining in Saturday’s announcement: that they may yet receive 1% to 2% in interest earnings they never knew they had.

“The emotional response is all over the map,” said Tom Burnham, board president of the Irvine Unified School District. “We’ve all been on this roller coaster of good news and bad news (since the county’s Dec. 6 bankruptcy declaration). In the next 30 days, I just hope we can get everything out in the open.”

James A. Fleming, superintendent of the Capistrano Unified School District, which had $73.9 million in the collapsed fund, said he was delighted at the prospect of the district receiving additional interest on its investment.

But Fleming said the revelations also made him “wonder what other secrets have yet to be discovered” in the fiscal debacle, and further convinced him that changes are needed in the California laws that now require school districts to invest in funds managed by their county treasurers.

“I think this is the straw that will break the camel’s back,” Fleming said. “The state of California needs to examine the way it requires educational agencies to invest with the counties. They must give us control of our own destinies and our own funds.”

Huntington Beach Councilman Ralph Bauer expressed outrage that a portion of the city’s interest money was diverted to accounts city officials were not told about.

“I feel angry about this whole thing from top to bottom,” he said. “The county is guilty of mismanagement. This doesn’t surprise me.”

Edward H. Decker, president of the Newport-Mesa Unified School District, also was angry, saying Saturday’s announcement only underscored his distrust for those who ran the county pool.

“How do I feel? I feel cheated,” Decker said. “It is just disheartening that public officials would execute a maneuver that would deprive a school district of valuable funds. It’s very demoralizing.”

But others tried to focus on the positive. Irvine Unified School District Trustee Hank Adler, whose district invested more than $105 million in the ill-fated pool, noted that an additional 1% return could amount to $1 million.

“That’s real money. If it happens, that would be wonderful news,” Adler said. For his district alone, he noted, the extra funds could mean the hiring of 28 teachers at an average annual salary of $35,000.

Burnham, the Irvine school board president, also applauded the decision by county officials to publicize the latest discovery. Such openness from the county has been far too rare since the bankruptcy declaration, Burnham said.

The decision by Board of Supervisors Chairman Gaddi H. Vasquez to “come forward and get this out in the public is exactly the sort of leadership that’s required right now,” Burnham said.

Meanwhile, representatives of two of the agencies with the largest amounts in the pool said Saturday that they were aware of the existence of a fund that served as a catch basin of sorts for excess revenues flowing into county coffers, but did not know it had been used to hold a portion of the interest earnings from the investment pool.

Stan Oftelie, chief executive of the Orange County Transportation Agency, said county Chief Administrative Officer Ernie Schneider referred to the economic uncertainty fund as recently as Friday at a meeting of community and business leaders in Irvine.

“The idea that the (other) funds existed is not startling to me,” Oftelie said. “If they exist as Arthur Andersen described it, as a place to skim money off that was due the investors, that’s a tragic turn in this discussion.”

Peer Swan, the Irvine Ranch Water District chairman credited with prompting revelations about the bond pool’s $1.69-billion loss, said he, too, knew of the fund, and reacted cautiously to the county’s revelations Saturday.

“If because they were in a leveraged position, they took some of the earnings and held onto them, I could understand that as long as they eventually distributed those evenly to the various investors,” Swan said. “But if they pulled those out and just gave them to the county, I would have a problem with that.”

Another worry, OCTA’s Oftelie said, is that the latest wrinkle in the county’s financial crisis may slow the distribution of funds from the collapsed pool, causing further trauma to the pool participants. Many of the agencies have said they are in desperate need of money that remains frozen.

“I can’t see how this will help if we don’t know now how much money was really in that pool, or should have been,” Oftelie said. “It slows down the resolution of this very difficult issue,” which he said many investors had hoped to have completed within 30 to 60 days.

Of even greater potential significance, Oftelie said, is the possibility of illegality. “If a criminal aspect has now entered into the discussion, the problem has moved into a whole new dimension,” he said.

Orange Mayor Joanne Coontz said the county announcement did not surprise her, calling it further testimony that the bond fund was poorly managed.

“Another revelation,” Coontz said wearily. “What’s next?”

Correspondent Shelby Grad contributed to this report.