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SEC recommends more disclosure to avoid another Orange County debacle.

Paul S. Maco, director of the Securities and Exchange Commission's Office of Municipal Securities, told members of the House Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises that approximately $1.7 billion of public money was lost on investment strategies of over 190 local government entities, including Orange County, California. "These investment losses draw attention to the need for accurate and adequate disclosure in the municipal securities markets and for effective, modern safeguards for the investment of public funds," said Maco.

Avoiding bankruptcy

Maco said state and local governments should maintain the authority to manage their own money. However, he said there were three important steps municipal money managers should take to help assure safety: a written investment policy, sound internal controls and independent oversight. "A written and publicly available investment policy, coupled with current internal portfolio information would reinforce accountability." But, said the director, without an independent review of actual performance on a frequent basis, a written investment policy could quickly be reduced to words without substance.

A continuing problem

Maco said that as recently as March 31, 1995, a post-Orange County bankruptcy review by the California state auditor found several counties continued to hold concentrations of structured notes in excess of 30% of their respective portfolios. In addition, four counties leveraged their portfolios by more than 40% in 1994, with one county leveraging as much as 80%, and the average maturity for one county's investments was an astounding 27.9 years. Maco told members of the House subcommittee that in the complex markets of the 1990s, assuring safety is no longer as simple as examining credit quality. "When investment terms and liquidity needs are mismatched, a volatile market can quickly eviscerate investments with even the most impeccable credit rating," said Maco.

"The public has a right to expect that money will be available when needed to meet the civic needs for which they paid their taxes," said Maco. He said when municipal funds can generate additional revenue in the interim, so much the better. "However, a budget balanced on anticipated high investment returns may prove troublesome." Maco said using the treasury function as a profit center is as risky for public officials as it is for corporate managers.

Disclosure advantages

Maco said improved disclosure would not prevent municipal defaults or all market disruptions, because even public reporting companies can become insolvent due to poor management or adverse market conditions. "However," he concluded, "the increased market efficiency derived from improved issuer disclosure would benefit not only investors by alerting them to potential problems earlier, but also municipal issuers and their taxpayers, who would have lower financing cost."
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Oct 1, 1995
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