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U.S. Municipalities That Went Bankrupt

Year of filing: 1994

One of the California’s most populous and wealthy counties is a prime example of how poor investment management, not just poor investments, can bring a government’s finances to its knees. At the center of the bankruptcy was former County Treasurer Bob Citron, who managed $7.6 billion in county investments from nearly 200 local agencies, including schools, cities and special districts. These entities were attracted by high rates of return promised and aggressively advertised by Citron.

Citron used and borrowed against the funds at his disposal to invest in derivatives, inverse floaters, reverse purchase agreements and long-term high yield bonds. According to the Public Policy Institute of California, interest income for Orange County amounted to 12 percent, versus 3 percent for other California counties, with the promise that in 1995 these investments would generate 35 percent of general fund revenues.

At the time, the fund borrowed $2 for every $1 invested, swelling to over $20 billion with leveraged bets on a low interest rate environment. However, when interest rates rose through 1994, the fund’s investments began to rapidly lose value, and Wall Street lenders grew nervous about the county’s ability to pay, denying $1.2 billion in short term loans. Fearing a run on the fund by public agency depositors and banks that held the deposits as collateral, the county declared Chapter 9 bankruptcy in December 1994 in order to solve its fiscal problems “in an orderly manner.”

Citron resigned in December 1994, days before the bankruptcy filing. He later pleaded guilty to misappropriating funds.