Free Essay Sample on the Causes and Effects of the Orange County Bankruptcy

Orange County was ranked the largest municipality in the history of America to be bankrupt in 1994 (Halstead, Hegde and Klein 305). The declaration came after the county treasurer; Bob Citron had lost approximately $1.7 billion of taxpayer's money by engaging in risky investments in Wall Street securities (Miller and Ross 60). According to Baldassare (213), Orange County may have given enough warning on the risks of Citron's investment strategy to prevent others from following the treasurer's footsteps. Even though Baldassare (213) demonstrates the causes and the effects of Orange bankruptcy, it is worth noting that the situations that plunged the county into the wager with public funds remain. With the increasing zeal for tax limits, smaller governments, and local autonomy, many municipalities in the county may phase the danger of financial collapse especially when the economy is flopping.

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Causes of the Orange County Bankruptcy

Baldassare (213) holds the opinion that Citron's mismanagement of the Orange County investment pool was the immediate cause of bankruptcy. Had he known the ramifications of his decisions, he would neither have invested as he did nor strived for high rates of return on the pool. Another cause is that the treasurer oversaw tax collection and the investment pool of the Orange County that amounted to about $7.5 billion (Tung 885). This amount included funds from cities, water and sewers authorities, school districts, and pensions.

According to Pontell (320), Citron expanded the size of investment pool to about $20 billion by borrowing two dollars for every deposit of one dollar. Unfortunately, the interest rates began to increase, but Citron kept buying hoping that it would decline. His investment activities, therefore, made him lose about $1.7 billion.

Another cause is that the financial reporting of the county was not well-regulated. In this case, there was a high possibility that errors and fraud could have occurred in the financial statements of the county. Since the financial reporting was not well controlled, detecting and correcting the frauds and errors in the books of accounts could not be easy. Lack of regulation could have also given the auditors a leeway of not reporting the mismanagement of county funds in time. Another cause is that investment securities were strange, leverage unregulated, and not explicitly articulated (Halstead, Hegde and Klein 305).

Effects of the Orange County Bankruptcy

One impact of Orange County bankruptcy was the resignation of the treasurer. He was forced to resign due to pressure from the creditors who wanted the company to pay all its debts in a lump sum. Another impact was the reduction of the city budget by around 41% (Tung 885). The Orange County bankruptcy also led to the loss of employment by eliminating more than 3400 jobs (Miller and Ross 60). Another effect is the navigation of chapter 9 bankruptcy filing that aimed at addressing the issues of bankruptcy in the country. It allowed the municipal government to readjust and repay its debts over a given period. The first plan under this chapter was to increase taxes although it was rejected by the Republican Orange County voters (Tung 885). Chapter 9 also resulted in the impeachment of the mayor and dismissal of some council members who were associated with the Orange County bankruptcy.

Another effect was reduced salaries of the employees and shortening of workweeks. It was because the county had no enough money to pay the workers. Due to the shortening of the workweek, the bulk of work reduced, therefore, the Orange County saw it necessary to minimize the workforce. Another effect is that construction projects were put on hold because the county had limited capital to complete its development plans (Miller and Ross 60). Another result is that the County was forced to pay high-interest rates to borrow money due to its bad reputation concerning credit referencing.

Work Cited

Baldassare, Mark. When government fails: The Orange County Bankruptcy. California: University of California Press, 1998.

Halstead, John M, Shantaram Hegde and Linda Schmid Klein. "Orange county bankruptcy: Financial contagion in the municipal bond and bank equity markets." Financial Review 39.2 (2004): 305.

Miller, Merton H and David J. Ross. "The orange county bankruptcy and its aftermath: some new evidence." Journal of Derivatives 4.4 (1997): 60.

Pontell, Henry N. "White-collar crime or just risky business? The role of fraud in major financial debacles." Crime, law and social change 42.5 (2005): 320.

Tung, Frederick. "After Orange County: Reforming California Municipal Bankruptcy Law." Hastings LJ 53.1 (2001): 885.