The Orange Goes Sour

THERE probably aren't too many counties out there quite like Orange County, Calif., which last week filed for bankruptcy after its high-risk investments turned sour. But local governments across the country should be heeding the lessons of Orange County's experience.

The county treasurer, Robert Citron, who has resigned, took advantage of a California law - which he had written - allowing him to put public funds into a broader range of financial instruments, including derivative securities, than many state laws allow. He in effect gambled that interest rates would stay down when in fact they are going up.

Many public funds managers follow the sensible rule that they don't invest in any instrument they don't fully understand. But California and Texas, among other states, have allowed local jurisdictions to diversify into more esoteric investments. Peer pressure among finance managers has enticed some into risky deals, and Wall Street firms have leaned pretty hard on local finance chiefs too.

As a result, a number of them, notably Merrill Lynch, the lead investment firm in the Orange County deal, have seen their own share prices take a hit in recent days.

The bankruptcy set the market for public borrowing reeling; the Securities and Exchange Commission is investigating.

It is a paradox of investing that to be too conservative can be reckless. It would be irresponsible of fund managers to practice the municpal-finance equivalent of putting money under the mattress. Businesslike management of public funds is in keeping with the notion of ``reinvented government,'' which resonates well within the electorate.

But on Wall Street as elsewhere, there is no such thing as a free lunch. The investment of public funds - the money that pays firefighters and schoolteachers - is different from the investment of spare cash within a corporation.

How ironic that a place as wealthy as Orange County should get into the kind of portfolio that would keep any conscientious investment manager awake at night.

California's Proposition 13, passed in 1978, has made it hard for localities to pass property-tax increases, a situation that is repeated in many tax-wary jurisdictions across the country. But the people should expect to pay for the government services they really need with tax revenues, not the anticipated proceeds of some high-flying securities portfolio.