Orange County's high-flying plunge into financial disaster should be a cautionary tale for local governments and public agencies all over the country, including Maryland. By investing heavily in derivatives, the latest Wall Street sucker bait for big-risk, low-knowledge speculators, the affluent California subdivision has already lost $1.5 billion in taxpayers' money, a sum that may double before the catastrophe subsides.
Earlier this year, there was a minor Maryland version of the Orange County debacle: Charles County lost $2.8 million this summer by playing the derivatives game with $30 million of operating funds. But for the most part, Maryland authorities have adhered to prudent, conservative investments in handling the public's money if high bond ratings are any indication.
Even so, the Orange County story should impel the General Assembly to tighten Maryland regulation of local government investment practices at its 1995 session. State Treasurer Lucille Maurer has been working with the Joint Committee on Management of Public Funds to draft provisions that would require the chief executive officers of all public agencies to sign off on investments made under their aegis and to submit quarterly reports to the State Treasurer's office.
The object, says Ms. Maurer, is "to make sure someone is watching the store and understands the risks involved in various investments." She said care would be taken not to intrude on local authority or to overreact and thus preclude investment in what she called "good derivatives." Passage of the Maurer legislation should be a "no brainer," according to House Speaker Casper Taylor.
Fallout from Orange County's troubles is already depressing the value of municipal bonds nationwide, thus increasing costs for state and local government. In many parts of the country, securities salesmen were able to talk gullible public officials into making derivative investments which promised huge profits that theoretically would offset the need for higher taxes. The system worked so long as interest rates remained low. But when rates began to climb as the Federal Reserve Board acted to head off inflation, the huge profits turned quickly into huge losses that could not be sustained.
Public agencies in Texas, Florida, Minnesota and Illinois, among others, were caught in the trap as were some supposedly savvy corporations, including Procter and Gamble. But in gambling recklessly with other people's money, none approached in magnitude the spectacle of Orange County turning into a lemon.