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New Warning Issued on Investments After Second Firm Collapses

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The New York State Comptroller's Office has again warned local school districts and municipalities not to invest in so-called repurchase agreements, a type of investment that can be threatened by difficulties in the bond market.

The warning was issued last week after a second government-securities firm declared bankruptcy this month, tying up nearly $7 million in investment capital for localities and school districts in New York State.

Earlier this month, a declaration of bankruptcy by a New York-based securities firm tied up some $45 million invested through the firm in repurchase agreements by 30 districts in New York and Florida. The collapse, which is being investigated by the state attorney general and lawyers for the school districts that are involved in the bankruptcy proceedings, has raised questions about school-district investment programs. (See Education Week, May 23, 1984.)

Double Jeopardy

A few of the New York State school districts listed as among the largest creditors of the second firm that declared bankruptcy, rtd Securities Inc., also have investments tied up with the Lion Capital Group, the government-securities firm that went bankrupt earlier this month.

The Lindenhurst Central School District has $1.3 million exposed. Sweethome Central School District in Amherst, which has $1.8 million tied up with Lion Capital, is owed $1.18 million by rtd Other districts with significant amounts of money at risk include: Connequet Central School District in Bohemia ($800,000), Amityville Union Free School District ($750,000), and Greenberg Central School District 7 in Hartsdale ($588,000).

Some of the districts invested in National Money Market Securities Inc., an Irvine, Calif.-based securities firm, through both Lion and RTD.

State's Warning

New York State Comptroller Edward V. Regan warned municipalities and school districts to "stay away from repurchase agreements and other complex investments which promise higher rates of interest but have greater risks associated with them."

"We urge in the strongest possible terms that you review all investments to ensure compliance with general municipal law and local finance law in terms of ownership and collateralization," the warning said.

Legislative Hearings

Hearings were conducted last week in the New York State Assembly's Ways and Means Committee to deal with the problems facing school districts as a result of the Lion Capital bankruptcy, according to Dean A. Fuleihan, deputy secretary of the committee. He said the hearings were called before the rtd bankruptcy but that it was often discussed.

"The goal was primarily fact finding, but we also wanted to see if there is a flaw in existing statutes," Mr. Fuleihan said.

"One of the bills proposed by the committee's chairman, Arthur J. Kremer, was an investment-guideline bill. The guidelines would be promulgated by the state comptrol-ler," he continued.

"They would set specific standards for repurchase agreements, including requiring a written contract and stipulating that the depositor be an independent bank that cannot be an agent of the government-securities firm."

'Approved' List

In addition, Mr. Fuleihan said, Mr. Kremer has proposed legislation requiring the comptroller's of-fice to develop a list of approved firms to handle local investments.

Another measure under consideration would allow school districts to borrow against next year's funds to cover their potential losses and make up for the cash-flow problems they are currently experiencing, Mr. Fuleihan said.

As with the bankruptcy of the Lion Capital Group, bankruptcy hearings for rtd Securities are being held in the U.S. Bankruptcy Court for the Southern District of New York.

The Florida legislature has not taken up the issue of establishing stricter guidelines on investments, according to Lewis L. Givens, budget director for the Duval County School District in Jacksonville. The Duval County district has $4 million tied up with the Lion Capital Group.

The county's school superintendent, Herb A. Sang, has recommended that the local school board set up an advisory committee of five bank presidents to scrutinize the district's investment programs in the future.

The district will also rewrite its investment policy and will include a provision restricting investments in other states and channeling the district's investment of idle funds through the Florida State Board Administration, a state agency that invests funds for government agencies that have idle cash, Mr. Givens said.

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