In 1994, Orange County, Califomia’s financial world came crashing down around its ears. In an effort to produce badly needed investment income for the County and the other government’s participating in the County’s investment pool, County treasurer Robert Citron had leveraged the pool so highly with repurchase agreements and floating rate notes that the County filed for bankruptcy. There was plenty of blame to go around:
Some blamed Citron, saying he was in over his head. Some blamed the investment firms that were parties to Citron’s transactions, saying they turned a blind eye to the County’s situation in order to make a profit. Some blamed the County Board of Supervisors (and the officials of the other govemments participating in the pool) for not questioning how Citron could continue to earn such enormous returns when other governments were losing money. Some states (though not California) strictly limit the kinds of investments that local governments can enter into; often, nothing more than US Treasury instruments and money market funds.
Identify and explain one pro and one con (from the perspective of a governments financial health) to such strict limitations of local government investing activities.