Gambling in Charles County

August 14, 1994

No, slot machines haven't suddenly resurfaced in Charles County. Our headline refers to a different form of risk-taking, one that should infuriate every voter of that Southern Maryland county. Public officials used government money to invest in highly speculative securities -- and lost at least $1.3 million. As a result, Charles County is temporarily broke.

The county has no money to meet immediate obligations. It is trying to get the brokerage firms involved in these transactions to give the money back. That could take years -- if it ever happens. In the meantime, the county's elected commissioners will have to scramble to pay the bills.

How did the county get in this mess?

By state law, county revenues that are collected are supposed to be invested in safe, conservative short-term U.S. government securities. Instead, an official in the Charles County treasurer's office unwisely plunged into the "derivatives" market, the latest Wall Street fad for those seeking extra-high yields and big returns.

But like any high-risk venture, derivatives aren't for amateurs. Fortune 500 companies have even been burned. In this case, Charles County's derivatives were pegged to the value of mortgages. Officials were betting that interest rates on mortgages would drop. It was a gamble that backfired.

As interest rates rose this year, the value of the county's derivatives plunged. The size of the ultimate loss isn't yet known. For now, the deputy treasurer -- who's on the September ballot running for his boss' job -- has been fired, the elected treasurer has retired and investing power has been temporarily delegated to the commissioners.

By delaying payments to local agencies, Charles County hopes to weather this unexpected fiscal storm. In an election year, this is an especially sensitive matter. At least $1.3 million in local tax dollars have been lost and $27 million in county funds tied up in shaky long-term investments. Don't be surprised if angry voters take their wrath out on those incumbents running for re-election -- and the ex-deputy treasurer.

Steps should be taken to ensure that Charles County -- and other local jurisdictions -- handle taxpayer funds with extreme caution. One approach: Requiring periodic, public reports on county investments at meetings of the commissioners. Speculating with public funds is supposed to be illegal. It certainly is unprofessional. It destroys public trust in government.

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