PLAYING THE MARKET

MARICOPA COUNTY CONTINUES TO STRUGGLE WITH A FINANCIAL CRISIS OF ITS OWN MAKING. WE ALREADY KNOW THAT TOP COUNTY OFFICIALS--NOTABLY THE BOARD OF SUPERVISORS--LIED TO TAXPAYERS ABOUT THE ENORMITY OF THE PROBLEM. NOW NEW TIMES HAS LEARNED THAT THE COUNTY AL

After meeting with other county finance officials, Todd says, the bond raters never quite made it by his office. "We were expecting a visit from them, and they never got here," Todd says.

Chris Mushell, Moody's assistant vice president for the Southwest region, says he remembers that he and others were scheduled to meet with Todd, but does not recall why the meeting was canceled.

Mushell, whose job is to take the financial pulse of Maricopa County, says he is not concerned about the Official Statement that was issued in 1993. The money will eventually be spent for capital projects, he says, and the bondholders will be paid off in time.

He describes the situation, effectively, as no harm, no foul.
But Mushell's counterpart at Standard & Poor's, David Hitchcock, is not as sanguine about the 1993 statement. Although he would not pass judgment on whether the bond issue was fraudulent, Hitchcock says it doesn't look good in retrospect.

"An Official Statement should say if money from the bond proceeds is going to ultimately end up in operations," Hitchcock says. "If the ultimate goal is to use deficit financing for operations, that should be disclosed. And the [county's] financial condition should always be adequately disclosed in the Official Statement."
If the Official Statement were deemed to be misleading, the Securities and Exchange Commission has the authority to halt trading of the bonds. The federal government could pursue civil or criminal charges against the county, although SEC officials would not discuss the likelihood of such a prosecution.

The county could also be sued by investors who purchased the bonds, and who now feel the county's deception cost them money.

And the county's failure to disclose the truth in 1993 may well have caused some financial damage. Although no one doubts that the bonds will be paid back eventually, bondholders might have lost money in two ways.

First, bonds typically must pay higher interest rates to attract investors if they receive a low bond rating. People who bought the 1993 bonds bought them at the going interest rates for double-A-rated bonds.

Now, however, the bonds are rated single-A. Had they known the rating might drop because of the county's ongoing financial problems, investors could have demanded higher rates in 1993 or stayed away from the bonds altogether.

Second, a drop in bond ratings causes the actual value of the bonds to go down. Investors who wish to resell the county bonds might not get the price they paid for them.

Lawyers and experts would have to determine the possible damages caused by the incomplete Official Statement.

What is more clear are the county's moves to avoid repeating the deception.

The next time you drive by the Estrella Jail on West Durango Street, or the county's juvenile court and jail in Mesa, appreciate them.

Maricopa County taxpayers will pay for the buildings twice.
As the county tries to work its way out of the hole, it must continue to juggle debt against immediate cash, and also must continue to turn to capital-bond funds and other credit tricks for help.

Because the county's financial problems are so well-known, however, the financial shell games are now being conducted in the open.

This week, for instance, the county was scheduled to raise $30 million in cash by taking out the equivalent of second mortgages on the two jails. The loans will be paid back over ten years, with interest.

At the same time, taxpayers will continue to pay off, with interest, the general obligation bonds that were issued to build the two facilities in the first place.

The board initially considered selling the County Administration Building to raise money, but mortgaging the jails proved to be a more attractive option, says Deborah Larson, the new finance czarina brought in to clean up the county's fiscal mess.

By borrowing money elsewhere, Larson says, the county should be able to free up the $25 million in bond money that was siphoned off in 1993, so that the capital-improvement projects the money was supposed to pay for can finally get under way.

In early June, the county again had to monkey with outstanding general obligation bonds to ease its cash-flow problems.

This time, the board refinanced $26.4 million worth of bonds that had already been sold. Some of the notes were coming due for payment, and the refinancing will allow the county to put off paying principal on the notes for two years.

The money saved can then be used in the ongoing efforts to float the county's budget off the rocks.

Like all bond sales or refinancings, the June 1994 refinancing required the county to issue an Official Statement for possible investors to read.

It is a strikingly different document from the Official Statement written in 1993, before the departures of Bruner, Pederson and Smith.

First, it clearly states that the purpose of the refinancing is to help out with debt problems. One section, titled "The County's Operating Deficit," clearly outlines the budget problems and explains how the new county finance staff hopes to work its way out of them.

An accompanying chart details operating budgets dating back to 1992, long before the potentially fraudulent 1993 bond issue was approved.

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