MOORLACH UPDATE — Measure EE Parcel Tax Rebuff — June 16, 2019

Happy Father’s Day!

Fathers are great about teaching us independence, allowing us to fail in order to learn valuable life lessons, and encouraging us to tough it out and see the task through to completion. Maybe that’s why my father took me backpacking. You learn to carry weight and to press on to the peak. No easy solutions. No pain, no gain.

In Sacramento, however, the solution to every concern seems to be a tax increase. Do you want to give better health care to undocumented immigrants? Then tax Californians who either can’t afford health care, or chose to be “naked,” with a mandate penalty. Want to give a larger earned income tax credit to the poor? Then make selected income tax conformity changes that raise enough in new income tax revenues from the hard working, sacrificial producers. Don’t worry that 17 percent of Californians pay 87 percent of the personal income tax.

For Los Angeles Unified School District, if you want to give a long overdue raise to the teachers, then ask the residents to vote themselves a tax increase. After all, renters wouldn’t be affected by a real estate parcel tax, right? Wrong.

You cannot have a combination of high salaries, excellent medical benefits, an attractive defined benefit pension plan, and lifetime health benefits (retiree medical). The math doesn’t work.

The teachers union needs to go to the bargaining table and make major modifications to the retiree medical plan. Orange County did in 2006 and reduced its unfunded liability by 71 percent. Following this approach would reduce LAUSD’s Other Post Employment Benefits by more than $10 billion. That would give some room for pay increases.

Modifying the defined benefit pension plan prospectively with the provision of a defined contribution plan option, or a blend of both, would also provide some funding for a pay raise.

Someone at LAUSD needs to do the heavy lifting, tough it out, and solve the math problem that was self created by the district. Going to the taxpayers only earns a failing grade.

The Los Angeles Daily News and the OC Register provide my perspective in the editorial submission below.

Measure EE’s defeat gives hope to California’s taxpayers


Howard Jarvis lives! The spirit of his Proposition 13 tax revolt in 1978 animated the June 4 demise of Measure EE in Los Angeles. Needing a two-thirds majority vote to win, it fell short by 21 points to garner only 46 percent.

“We’re mad as hell and we’re not going to take it anymore!” voters effectively shouted, echoing Jarvis’ signature phrase of rage.

Measure EE would have imposed a tax of $500 million a year on real-estate parcels. Voters rejected the contention the money was needed to patch up the failing Los Angeles Unified School District.

In January, the United Teachers of Los Angeles went out on strike for six days. The strike ended when the LAUSD agreed to a new contract with a 6 percent raise for teachers and a promise to support Measure EE and a statewide “split roll” property tax increase on the 2020 ballot that would sharply alter Proposition 13, the 1978 property tax limitation initiative.

But the money just would have gone to underfunded teacher pension plans.

The desperateness of Measure EE reminded me of the Measure R campaign in Orange County, a half-cent sales tax to fund a bailout. In 1994, as a candidate for county treasurer-tax collector, I warned incumbent Bob Citron’s risky investments were driving the county off a cliff. I also campaigned for a more prudent government and against tax increases.

Bankruptcy struck that December. Citron resigned. And the board of supervisors appointed me to the post.

Some county political and business leaders insisted tax increases were needed to “save” the county. They scheduled an election for June 27, 1995 on Measure R, a half-cent sales tax to fund a bailout.

I opposed the tax increase, which got just 39 percent of the vote, to 61 percent opposed. Similar to Measure EE, it fell short by 12 points of the majority needed.

The County of Orange and the cities and school districts slammed by the bankruptcy laid off hundreds of workers and tightened their belts in other ways. The county not only survived, it thrived.

Measure R’s defeat sent a hopeful message to businesses: Government mistakes will not result in slamming the private sector. Consequently, the OC remains the most business-friendly place in California. Measure EE’s demise is good news for taxpayers.

In 2020, state voters will get to decide whether to alter Proposition 13, the 1978 initiative that capped annual tax increases at 2 percent of assessed value on real property, until the property was sold. The proposed “split roll” ballot measure would allow steeper increases for commercial real property, although the residential taxation methodology would remain the same — for now. It’s projected about $10 billion more in taxes would be raised.

Unless homeowners bought before the gigantic price increases of recent years, it’s a myth Prop. 13 has kept property taxes low. Voters have approved numerous bonds and parcel taxes above and beyond the maximum 1 percent of the assessed value at acquisition allowed by Prop. 13 (compared to a state average of 2.6 percent before Prop. 13 passed).

Because of soaring property values, California also now ranks a high 17th among the states in per capita property tax payments, at $1,559 per capita. That’s up from a rank of 31st in 1996.

And let’s remember the main benefit of Prop. 13: tax stability. You know when you buy your home what property taxes will be five, 15 or 30 years down the road. There’s no surprise jump in the tax that drove many homeowners into foreclosures in the years before 1978. Business owners — employers — should continue enjoying the same stability.

It’s possible other tax increases could be put on the 2020 ballot, such as an estate tax. So let’s review what we already must put up with.

California’s top marginal tax rate of 13.3 percent is by far the highest of any state. Even the middle-class rate, beginning at about $55,000 of income, hits at a staggering 9.3 percent. Yet in the Bay Area now, the San Jose Mercury-News reported, even $400,000 in income leaves families “feeling strapped” because of high taxes, housing and other costs. Should they pay more taxes?

Taxes are not the solution, but the problem. You should vote against a “split roll” or any other tax on the ballot. Like abolitionist Wendell Phillips urged before the Civil War, “Eternal vigilance is the price of liberty.” Never take a tax increase proposal lightly. Your prosperity may depend on it.

John M. W. Moorlach, R-Costa Mesa, represents the 37th District in the California Senate.



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MOORLACH UPDATE — A Seriously Taxing Budget — June 14, 2019

Allow me to wish you a happy Flag Day!

I sit on the Senate Energy, Utilities and Communications Committee as Vice Chair, and the Senate Select Committee on Wildfires (my paraphrase). I also sit on the Senate Budget & Fiscal Review Committee and just concluded serving on the Budget Conference Committee. I not only sit on these important bodies, but I attend the meetings and I review the materials beforehand and come prepared with questions.

With all the activity of meeting the house of origin and budget deadlines, we also squeezed in a SB 901 Commission Report Hearing (my paraphrase). The Commission on Catastrophic Wildfire Cost and Recovery prepared a report last Friday that was presented on Monday afternoon (see the Executive Summary at

Here is recommendation 4 (page 9):

Absent changes to the strict liability application of inverse condemnation, the legislature should consider establishing a large and broadly sourced Wildfire Victims Fund, to more quickly and equitably socialize wildfire costs, and maintain the heath of the state’s utilities.

What funding levels does this commission have in mind? Well, numbers like $30 billion, $40 billion and $50 billion were tossed around.

Was there anything remotely close to this in the Governor’s proposed budget? Perhaps starting with staff funding and some seed money? No. Not one dollar. If there was something of this nature, I didn’t see it. So, I mentioned it during the Wildfire Committee meeting. Call it my version of “where’s the beef?” The Sacramento Bee picks up the theme in the first piece below.

Personally, I’ve been working on efforts to mitigate the occurrence of wildfires for several years now. I’ll spare you the links, but this year’s effort was derailed by the Democrat leadership, as the Senate Committee on Appropriations put my Senate Bill 584 in suspense, thus killing it for this year (see MOORLACH UPDATE — Undergrounding In Paradise — May 28, 2019). It would have required the Public Utilities Commission “to direct electrical corporations to reallocate credits provided to a jurisdiction under the Rule 20A program for purposes” of undergrounding power lines (see It’s difficult to see the resolve from the Democrats when they scuttle an easy modification like this.

Politico, in the second piece below, provides its perspective on how difficult it was for the Democrats to raise taxes. With the enthusiasm they had for AB 74 yesterday morning, it sure did not seem like an agonizing vote for the majority party to pile on new taxes now. Like the cell phone tax and cherry-picking income tax conformity to have the middle class pay for a larger earned income tax credit.

Moreover, the Senate Governance and Finance Committee, another committee I serve on as Vice Chair, has not seen the tax conformity legislation that potentially raises more than $1.3 billion in taxes. Democrats plan to approve major tax legislation through a budget trailer bill without any input from a committee and an engaged public. This is outrageous.

Speaking of outrageous, I’m the legislator who asked the proverbial question Sunday evening, “What is the nexus between safe drinking water and cap and trade?” The answer has become fodder for pundits and editorial writers around the state this week. However, it was one way for the Democrats to avoid yet another special, but extremely regressive, tax on Californians.

Ponder this, because recent legislation to perpetuate cap and trade into the future was passed with a 2/3 vote, it’s an open question whether greenhouse gas reduction fund spending even has to be related to the intended programs it was designed for. The Democrats may have started down the slippery slope of using cap and trade tax revenues for anything in the future, seeing it as a new goose that is laying golden eggs to use with impunity.

A portion of my Floor speech yesterday morning closes the second piece, as I reminded my Democratic colleagues that voters soundly rejected a proposed parcel tax for Los Angeles Unified School District. The budget passed along party lines (see MOORLACH UPDATE — $214.8 Billion Budget Approved — June 13, 2019).

What’s the California Legislature doing about wildfires? Not much yet


When the Camp Fire destroyed the town of Paradise and killed 85 people last year, California legislative leaders vowed to make wildfires their top priority when they returned to work in December 2018.

Senate leader Toni Atkins, D-San Diego, told The Sacramento Bee wildfire issues would be “front and center” because “communities are being devastated,” while Assembly Speaker Anthony Rendon cited the state’s housing crisis and wildfires as the two biggest problems lawmakers would focus on going into the legislative session.

But midway through 2019, California lacks a comprehensive plan to deal with the growing threat. It is still grappling with how to address an estimated $30 billion in liability costs incurred by PG&E in the Camp Fire and wine country fires of 2017.

A few dozen bills are under consideration, but few have been signed, as lawmakers seek to juggle the interests of ratepayers, utilities and insurance companies.

Experts warn of major consequences if the state doesn’t act quickly to update wildfire liability standards, stabilize homeowner insurance costs, encourage residents to make their homes more fire resistant and create a fund that balances the needs of ratepayers, utility companies and wildfire victims.

Michael Wara, director of Stanford University’s climate and energy policy program, has briefed lawmakers on their options. He said the state could end up owning electric power lines and exposed to liabilities if it doesn’t act soon.

“People are rightfully very angry at the utilities, so you’re working to stabilize these companies that have done wrong. It’s a really difficult political situation to resolve,” Wara said. “In order to not have this situation spin even further out of control, the folks in Sacramento are going to have to spend some political capital on this. This is about solving the problems that are complex and not always a win.”


State Sen. Bill Dodd, D-Napa, has been a leading voice on the issue of wildfires in the last couple years. He authored a law last year to make it easier for utilities to pass on liability costs to ratepayers – a measure that left PG&E wanting more. Dodd also introduced a bill this year to create a statewide wildfire warning center that has yet to reach the governor’s desk. He called the pace of addressing the wildfires “frustrating.”

“Why it’s taken maybe a little bit longer is we’re really resolute on trying to make sure that ratepayers and victims don’t get raked over the coals,” Dodd said. “If we were OK with just putting this all on ratepayers, we’d be done by now. We really would. It is critically important that we find a way through this with most of the liability being paid by the shareholders, and not ratepayers.”

PG&E’s decision to file for bankruptcy in January has made it more difficult for California lawmakers to recover damages for victims, said Sen. Jerry Hill, D-San Mateo.

“We’re struggling with the bankruptcy,” he said. “We have been victimized by the system in a lot of ways, and PG&E has continued to take that easy road and not stand up to their liability.”

PG&E spokesman James Noonan said in a statement that the company “remains focused on resolving wildfire victims’ claims fairly and expeditiously.”

Behind the scenes, Newsom is working with lawmakers to get a bill onto his desk by July 12 — the final day before the Legislature takes a month-long summer recess. Newsom outlined this timeline during an April 12 news conference, saying he wanted to “get something big done” before the break.

In response, ratings agencies are pressuring the state to reduce risks for utility companies like Sempra within the next month. In a seven-page report circulated to lawmakers last week, S&P Global warned it would likely downgrade ratings of electric utilities, unless California took steps to reduce companies’ credit risks.

“Unless legislation passes that reduces the credit risks to California’s electric utilities, our current expectation would be to downgrade the utilities at or around July 12,” analyst Gabe Grosberg wrote in the report.

Sen. John Moorlach, R-Costa Mesa, called the July 12 deadline “arbitrary” and criticized the ratings agency for being “aggressive in what they think can be done by a state government.”

Still, he was disappointed by what he saw as a limited focus on wildfires in recent budget negotiations.

“Where’s the seriousness of it all?” Moorlach said. “I know the governor wants to get something done, but I’m not finding it. … The Democrats aren’t showing a real priority to dealing with wildfires.”


So far, Newsom has created a strike force that outlined three major options for handling utilities’ liability costs.

He issued a March executive order to expedite wildfire prevention efforts. The budget he will soon sign has $127 million for federal air tankers and helicopter replacement and $236 million for wildfire prevention and recovery efforts. It also includes $10 million for Camp Fire recovery and $32 million to support local governments who lost property tax revenue.

“The governor has made expanding the state’s wildfire prevention, safety and mitigation capacity a top priority,” said a statement from Brian Ferguson, a spokesman for Newsom. “The administration is committed to working expeditiously to forge a path toward a safe, reliable and affordable clean energy future.”

Though Newsom has taken some concrete steps, he hasn’t promoted aggressive legislative proposals. Assemblyman Jim Wood, D-Santa Rosa, authored a bill that would’ve established a $1 billion fund for eligible homeowners to retrofit their houses to make them more fireproof.

When Newsom unveiled his revised budget in May, he acknowledged the importance of making homes more fire resistant but questioned how to pay for it. Asked if he anticipated getting something done this year, he punted the issue to top Democratic lawmakers.

“We’ll see what we can do, and I look forward to seeing where the leadership is and what their other priorities are,” Newsom said.

Wood’s proposal was amended last month to remove all of the money.

Patrick McCallum, a veteran lobbyist who lost his home and nearly lost his life to the 2017 Tubbs Fire, now serves as co-president of Up from the Ashes — an advocacy group representing wildfire victims. While he acknowledges that PG&E’s bankruptcy has created some complications, he wants utility companies and lawmakers to act more quickly.

“There are victims suffering now,” McCallum said. “PG&E and Edison need to step up, and the state needs to step up.”

A strong majority of Californians are also concerned. A recent poll from the Public Policy Institute of California found that 78% of residents worry about more expensive electricity bills due to utilities’ responsibilities for wildfire damage costs.

Californians are more divided on Newsom’s handling of the PG&E bankruptcy and utilities’ responsibilities, with 32% of adults approving of his performance on the issue, 30% disapproving and 38% unsure. The margin of error was 3.3 percentage points.

Mark Baldassare, president of PPIC, said the numbers reflect a desire from the public for lawmakers to stabilize utility rates and for the governor to more clearly explain what he’s doing to address the issue.

“The poll suggests it’s a topic which people feel may literally hit home,” Baldassare said. “It’s definitely something that speaks to the fact that the Legislature will need to act on this issue but tread lightly because it could have personal and political consequences. It also shows a lack of communication on the part of the governor at this point.”


Over the next month, lawmakers will seriously consider three recommendations from Newsom’s strike force that address California’s imminent wildfire liability threats.

One action the state could take is creating a “liquidity-only fund.” The fund would offer utilities a way to pay out wildfire damage claims while awaiting a determination from the state’s public utilities commission on cost recovery.

Another option for the state is to adopt a fault-based standard that would shift the risk of property loss to insurance companies and homeowners who are either under-insured or without insurance. But some worry this change would do less to hold utility companies accountable.

Finally, the state could create a catastrophic wildfire fund to spread liability costs more broadly among ratepayers, insurance companies and utilities.

Dodd said “it’s a little too early to tell right now” which, if any, of these options the state will choose.

“We’re getting continued analysis on each,” he added.

Newsom signaled last month that he’s reluctant to lower PG&E’s liability standard. Atkins, Rendon and Newsom wrote in a joint statement that it would instead pursue the liquidity fund option and allow cost recovery for electricity providers that “act responsibly and in the public’s best interest.”

Wara said it’s essential for lawmakers to act quickly.

“Next week, it’ll be go time…,” Wara said. “This month is going to be incredibly important. Ultimately, it’s really hard to have a state function effectively in the 21st century without affordable, reliable electricity. That is in jeopardy for the state right now. Make no mistake: We need to solve this problem or much worse things are going to happen.”

Taxes no slam dunk for California Democrats despite supermajority control


Six months and one budget into California’s experiment with single-party dominance, legislative Democrats are casting a wary eye at new taxes and fees.

They wield supermajorities in both houses of the Legislature that allow them to pass taxes without Republican input. But if the reflexive expectation from this era of Democratic hegemony was a flurry of new taxes and fees, the reality so far has been more restrained as calls for new revenue sources have been tempered by fear of political fallout.

Legislative Democrats pushed back on Gov. Gavin Newsom’s signature push to fund clean drinking water with a new tax on users, instead coalescing around a proposalto rely on greenhouse gas funds. Newsom’s call to pay for an expanded earned income tax credit by conforming California taxes to federal law also met resistance, as it would increase taxes on some business activities. The latter issue is the biggest remaining barrier to finishing the budget before the fiscal year starts July 1.

Legislators, staffers and political operatives all pointed to a prevailing wariness among legislative Democrats — many of them first-term members who rode a blue wave to claim formerly Republican districts — to compromise their reelection chances by playing into a ready-made narrative of an overreaching supermajority piling on new taxes.

The specter of former state Sen. Josh Newman hangs over the Legislature. A Democrat in a battleground district, Newman was ousted in a recall election after he voted for a gas tax increase pushed by legislative leaders and then-Gov. Jerry Brown. It was the first time in a generation that a sitting legislator had been recalled, and Democrats are not eager to see a repeat.

“You have members who are in districts that are not traditionally Democratic districts. You have some new members representing areas that aren’t quite tax-friendly — those members look at someone like Josh Newman and say, ‘I don’t want that to happen to me,’” said Republican political consultant Matt Rexroad. “It is a reminder that tax increases can be a serious, serious issue for voters in certain parts of the state.”

It hasn’t exclusively been a matter of legislative caution. Lawmakers wanted to go further than Newsom on expanding Medi-Cal to undocumented immigrants, pushed for more generous health insurance subsidies and backed a fee on phone bills to pay for a 911 system revamp.

Newsom himself has demonstrated he’s keenly aware of the political peril in overzealous budgeting, emphasizing a message of caution and warning against too much ongoing spending. He told POLITICO that legislators have been on board.

“I have got to give the Legislature a lot of credit. Their parameters were similar to mine: we’re going to hold the line. We get it. A lot of these folks lived through the last recession,” Newsom said, adding that “we’re proving a different governing paradigm. It used to be ‘tax and spend liberal.’ It no longer is.”

But the governor did want to tax water customers and spend the proceeds on cleaning up contaminated drinking water systems, framing the issue as a moral imperative. The result was perhaps the most prominent source of early friction between the governor’s office and Legislature.

While Assembly leadership embraced the governor’s proposal, a moderate Assembly Democrat floated an alternate idea to eliminate a tax deduction for gamblers.It became clear early on that the Senate would struggle to musterthe votes, and in the end the Senate’s proposal to use money from California’s cap-and-trade fund rather than tax users prevailed — a decision that drew criticism from legislative Democrats who complained of misusing the climate fund.

“This body’s very mindful about fee increases and tax increases,” Senate President Pro Tem Toni Atkins said on the Senate floor. “It’s why we approached the water issue in the way that we did.”

Newsom has said he was ultimately agnostic about how to pay for clean water, but the outcome illuminated the dynamics in the Legislature. Several members are in the first months of new terms after winning formerly Republican seats or defeating more-liberal Democrats in intraparty contests.

Assemblyman Jim Cooper (D-Elk Grove), a moderate Democrat, said “some members are a little skittish” about raising taxes despite a surplus, saying fears about inflicting additional harm on low-income people extend beyond the water tax.

“I think there are quite a few — not to single out any one tax in particular,” he said. “People are leery about raising taxes because some people are still struggling. They never recovered from the economic meltdown.”

Assembly Democrats further demonstrated their resistanceto new tax measures when Newsom’s chief of staff Ann O’Leary attended a closed-door caucus meeting and promoted the governor’s plan to fortify a state earned income tax credit by aligning California’s tax code with federal changes, which could generate billions in new revenue.

Democrats balked, according to multiple attendees, voicing concerns that ranged from not wanting to deliver Trump a victory to questioning the tax pursuit when California enjoys a surplus. A common denominator, lawmakers said, was frustration at the governor’s office pushing vulnerable legislators into a tax vote.

“The optics aren’t good,” a moderate Assembly member told POLITICO after the meeting, asking to remain anonymous to discuss a closed-door meeting.

Even as the main budget bill passed easily on Thursday, legislators were still negotiating with Newsom’s office over the conformity issue. The fact that Democrats pushed back on conformity — an idea that has Republican support and that doesn’t produce the type of campaign sound bites as a water or gas tax — speaks to lingering nervousness about tax issues in general, said Democratic political consultant Andrew Acosta.

“I haven’t seen that direct connection where this has the same oomph as the gas tax did, especially in these swing districts,” Acosta said. “It’s not like the Howard Jarvis [Taxpayers Association] folks are going crazy beating up on people over tax conformity.”

Beyond the budget talks, Sacramento has repeatedly demonstrated the long odds facing tax proposals even with two-thirds majorities in both houses.

Perennial proposals to tax sugary drinks and impose an oil severance tax withered, as did bills to impose an excise tax on gun purchases and increase a fee on tire purchases.

A proposed constitutional amendment that would have lowered the threshold for voter-approved school parcel taxes stalled. Weeks after a state senator shelved the bill, voters underscored the political arduousnessof such levies by decisively rejecting a proposed Los Angeles parcel tax despite heavy support from school officials and Mayor Eric Garcetti.

“We’re just adding more taxes,” Republican state Sen. John Moorlach (R-Costa Mesa) warned on the Senate floor on Thursday, citing the phone surcharge, the health insurance penalty and a bump in income taxes from “cherry-picking tax conformity opportunities” to fund tax credits.

“And yet just earlier this month the residents of a district with more than 4 million residents, the LA Unified School District, voted down Measure EE, saying ‘we don’t want another tax if you’re not managing your money properly,’” he said.

Mackenzie Mays and Angela Hart contributed to this report.


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MOORLACH UPDATE — $214.8 Billion Budget Approved — June 13, 2019

Today the legislature approved the Budget Bill, AB 74, down party lines, 29-11. In anticipation of this budget vote, Techwire provides the details of items focused on information technology and is the first piece below.

In the second piece below, California Globe provides the pork in the proposed budget going to Democratic Districts. These items literally showed up last Sunday evening at the Budget Conference Committee meeting and the six Democrats provided the necessary votes on each item listed.

Associated Press sets up this morning’s budget vote in the third piece below.

The fourth and final piece below is hot-off-the-press from The Sacramento Bee and The Tribune of San Luis Obispo. Someone made a request for $1 million for Lions Park in Costa Mesa, but it was not me.

25th Anniversary Look Back

Derivatives Week announced the election results in their June 13, 1994 edition. Shortly after the Orange County debacle later that year, the Government Accounting Standards Board (GASB) issued Statement Number 31, requiring government investment pools to mark to market.

John Moorlach, a certified public accountant and financial planner from Costa Mesa, Calif., blamed his campaign failure to voter disinterest in the issue of derivatives.

“Talking about derivatives became a MEGO thing–my eyes glaze over,” Moorlach said. He said he tried to warn voters about the risks of having a highly leveraged portfolio, citing the example of Procter & Gamble’s recent $157 million loss, which was incurred closing out two highly leveraged swaps. Had Moorlach won, he would have unwound existing derivatives positions as quickly as possible and marked the portfolio to market, he said.

For the last Look Back, MOORLACH UPDATE — Clean Drinking Water Funding — June 11, 2019.

Innovation Office, DMV Do Well in Budget’s Final Days

The Legislature isn’t expected to approve the new state budget until later this week but so far, three areas of IT initiatives are getting a majority of the funding that leaders sought.


The state’s 2019-2020 budget should contain funding for several of Gov. Gavin Newsom’s key tech projects — but which projects and exactly how much money won’t be certain until the Legislature adopts it, by Saturday, as required by law.

The new fiscal year begins July 1 with, for state government, an emphasis on tech that’s undeniably more urgent than under Newsom’s predecessor, Jerry Brown. And Newsom, who wrote a book on tech, Citizenville: How to Take the Town Square Digital and Reinvent Government, and is considered by some to be the tech governor, is getting the funding and staffing he sought from the Legislature in at least three areas. Here’s what is known, following a budget adoption Sunday by the California Legislature’s Conference Committee on the Budget:

  • Newsom should largely get the Office of Digital Innovation (ODI) he proposed in January. The budget can still be amended, but committee members approved giving ODI 50 positions, 20 of which will be exempt. The budget in print also allocates more than $26.1 million to stand up ODI — although $10 million of that is provided in a revolving fund “to assist entities.” The fund could be tapped by ODI as needed for purchases, and replenished in turn by billing state agencies for its services. That’s a far cry from the $10 million and 10 people recommended last month by an Assembly subcommittee. Techwire should have more ODI specifics later this week.
  • The Department of Motor Vehicles’ (DMV) budget appears to have also fared well, according to committee documentation. Members approved $242.1 million in FY 2019-2020 and $199.8 million in FY 2020-2021 for Real ID compliance and DMV reform and improvement, both amounts sought by Newsom. The committee approved spending just under $17 million in FY 2019-2020 and around $8 million in FY 2020-2021 on IT improvements. It also approved spending around $14 million in FY 2019-2020 and around $10 million in FY 2020-2021 on expanding a customer relationship management (CRM) live-chat system.

But the budget calls on DMV to provide monthly reports on “any technology outages in field offices” and on its progress in hiring a permanent director. The budget requires monthly reports on any additional money needed to meet Real ID workload demands; the number of Real IDs processed; and a “projection of the number of Real IDs” DMV estimates will need to be processed by the Oct. 1, 2020, federal deadline — and through the end of calendar year 2020. In an interview with Techwire, state Sen. John Moorlach, R-Costa Mesa, a committee member, criticized DMV for having “failed to get in front of” the Real ID rollout, but suggested technology may show the way forward.

“Let’s take advantage of whatever IT technology opportunities we have,” Moorlach said. “Make it simple; make it fast. There’s no reason why we can’t do what the private sector’s doing. And we should be outsourcing more. How do we utilize the Auto Club more effectively, and how do we incentivize opportunities for others to be subcontracted?”

  • A new wildfire tech procurement tipped in February continues to have funding proposed in the budget’s May revision. The committee approved a one-time $15 million General Fund increase to “enable Cal Fire [the California Department of Forestry and Fire Protection] to procure innovative solutions to combat the state’s wildfire crisis.” The effort is guided by Newsom’s Jan. 8 executive order mandating “a new flexible approach to procurement called RFI2 or Request for Innovative Ideas.”

The funding targets “contracts for one or more Proof of Concept vendors,” and can be augmented by the state Department of Finance by up to $35 million. However, the budget in print indicates Cal Fire shall not enter into procurement contracts for the solutions with cumulative ongoing yearly costs of more than $10 million “until the necessary funding has been approved by the Legislature through the regular budget process.”

  • Sunday’s vote, by a 10-member bipartisan committee, melded Democratic and Republican thought, with certain areas referring to “Conference Compromise.” Following the committee’s vote, the budget went into print Monday morning. It must remain “in print” for three days, after which time — mid-morning on Thursday — the full Legislature will have until day’s end Saturday to approve the budget. Then, it will head to Newsom for a signature.

In a statement Sunday, Newsom said he appreciated the committee’s hard work in approving a budget that “is balanced, creates historic reserves and expands budget resiliency.”

“It also invests in emergency preparedness and response, provides sustainable funding for safe drinking water, and includes important funding augmentations to address the cost crisis in our state — tax cuts for small businesses and working families, expanded health care subsidies, historic funding for our schools and funding to serve more students at UC and CSU,” Newsom said. A representative of the governor’s office told Techwire via email that the agency had “nothing further to share.”

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Record Pork Barrel Projects in California’s Largest State Budget in Many Years

Part l: Pet projects by lawmakers to bring money home to the district

By Katy Grimes

Pork Barrel projects are a usual occurrence in the state budget, but California hasn’t see pork added on like this in years. To understand how government spending sprees occur every fiscal year, this is how spending takes place.

Pork barrel is the expression used to explain the appropriation of government spending for pet projects by lawmakers (some good, some not), secured solely to bring money to a lawmaker’s district.

California’s largest state budget ever — $214 billion — is larded with a record number of local pork-barrel projects injected by individual legislators, often in exchange for “horse trading”  votes on passage of certain pieces of legislation.

The Legislature has already passed the bulk of the budget, which is expected to be signed by Gov. Gavin Newsom. But it is filled with more pork than ever — those pet projects that lawmakers love — costing California taxpayers billions. The following lists show many projects in individual legislators’ districtsm approved by the Conference Committee on the Budget.

There is pork in every aspect of this budget: General Government Augmentations in 2019-20 Budget, Education, Resources and Transportation, Health and Human Services, and Public Safety.

This article will address the General Government Pork in 2019-20 Budget – nearly $150 million of extras:

TOTAL $149,270,000,000 million

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California lawmakers poised to approve $214.8 billion budget


California lawmakers are poised to approve a framework for a $214.8 billion operating budget on Thursday, the first step in a spending package that seeks to address the teacher shortage, expand health care to some adults living in the country illegally and bolster the state’s top firefighting agency following the most devastating wildfire season in state history.

State law requires lawmakers to pass the framework by midnight Saturday. If they don’t, they don’t get paid. Lawmakers reached an agreement on Sunday night and scheduled a vote for Thursday, days ahead of the deadline.

“I do think it’s a good budget,” said state Sen. Holly Mitchell, a Los Angeles Democrat and chairwoman of the Senate Budget and Fiscal Review Committee. “In every budget there is good and there is could be better.”

The massive bill, totaling more than 900 pages, directs tax dollars in the state’s most populous state. But lawmakers must still pass more than a dozen other bills to implement the budget. These “trailer bills” could contain important details, including implementing a monthly fee on cellphone bills to pay for upgrades to the 911 system.

The spending plan is the first under Democratic Gov. Gavin Newsom, who has positioned himself as resistor-in-chief to Republican President Donald Trump’s administration.

The Trump administration has sought to weaken former President Barack Obama’s health care law by eliminating a tax on people who refuse to purchase private health insurance. The budget under Newsom would bring that tax back, using part of the money to make California the first state in the country to help middle class families pay a portion of their monthly health insurance premiums.

While the Trump administration continues to crack down on illegal immigration, the budget lawmakers are set to vote on Thursday would make California the first state to give some adults living in the country illegally government-funded health insurance.

Health care for people living in the country illegally is part of Democrats’ plan to eventually get everyone in California to have health insurance. But the policy has angered Republican lawmakers, who argue it’s not fair to tax people in the country legally for not buying health insurance while making people living in the country illegally eligible for taxpayer-funded health insurance.

“I just don’t get the prioritization,” said Republican state Sen. John Moorlach of Costa Mesa, who noted he legally immigrated to the United States from the Netherlands in 1960.

The budget includes increases in public education, bringing the state spending to $12,018 for every student in K-12 public schools. It would give students studying to be teachers grants of up to $20,000 if they promise to teach subject matters impacted by the teacher shortage, including science, technology, math and engineering.

And following the states deadliest wildfire season in history, the spending plan includes $40.3 million for the California Department of Forestry and Fire Protection to buy 13 new fire engines and hire 131 people to operate them. It also includes $13.1 million to accept seven used C-130 air tankers from the federal government. The air tankers are free, but the state must pay to maintain and operate them.

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The Tribune

Dog parks, playgrounds and a theater: California budget loaded with earmarks


California lawmakers are set to send a nearly $215 billion budget to Gov. Gavin Newsom on Thursday, and Republicans in the minority are criticizing hundreds of millions dollars in earmarks for community projects around the state that include dog parks and a sculpture garden.

More than $40 million will go to projects in Senate leader Toni Atkins’s hometown, San Diego. The city stands to gain a wide range of projects, including $21 million for a downtown railroad crossing, $8.7 million for unnamed projects in Balboa Park, $7.3 million to demolish a building at a state historic park, $5 million to prevent suicides along a local bridge and $500,000 for a dog park.

“Years of responsible budgeting, wise decisions by the voters, and a strong economy powered by our small businesses have allowed us not only to significantly increase our budget reserves and strengthen vital state programs, but also to invest directly in our communities,” Atkins said in a statement. “Local governments and organizations have created projects that improve the quality of life in our region and the Legislature and the governor are proud to be able to partner with them.”

Assembly Speaker Anthony Rendon will get $700,000 in the budget for the city of Lakewood to invest in “community facilities, park, or recreational facilities construction, acquisition, or improvements.”

Rendon’s spokesman, Kevin Liao, said the funding was necessary because “these are all needed projects and help local communities who are thus gaining benefits from the taxes they pay.”

Republicans consider spending for such local projects largely unnecessary, and refer to the projects as “pork.” They’re highlighting a range from worth about $150 million to $425 million, depending on which items from the budget are included.

“I see a lot of money going to all kinds of district for pork,” said Sen. John Moorlach, R-Costa Mesa, whose district will benefit from a $1 million grant approved for a city park.

Regardless of the amount, the state party is more concerned about the process through which these proposals were included in the final budget.

“There needs to be more transparency in the process,” said a statement from Matt Fleming, spokesman for the California GOP. “This is not how effective governments are run.”

California projects that it will accumulate a nearly $22 billion surplus over the next year, and it anticipates building up its reserves to about $20 billion.

Assemblywoman Melissa Melendez, R-Lake Elsinore, mocked some of the earmarks in remarks on the Assembly floor, contending the money could be put to better uses.

“Maybe our homeless veterans can sleep in a sculpture garden, or a dog park,” she said.

Budgets have traditionally included plenty of money that Democrats and Republicans want to put back into their own districts for special projects. This year’s budget is no exception.

Lawmakers will vote to spend $3 milllon on a dog park in Rancho Cucamonga and $2.5 million on a new elevator at the California Science Center in Los Angeles. The budget also gives $2 million to the Latino Theater Company, $1.1 million to San Francisco for construction on two LGBTQ spaces and $950,000 to a pair of senior centers.

Sacramento is also the beneficiary of several earmarks, including $1.5 million to study the scope of sex-trafficking in the city, $750,000 for Pannell Center Summer Nights and $354,000 for a parking structure on R Street.


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MOORLACH UPDATE — Clean Drinking Water Funding — June 11, 2019

Interview requests regarding the state’s Budget Conference Committee and various components of the budget continue.

The Associated Press picked up on one short question that I asked Sunday evening when the compromise on the Cap and Trade spending was before us. “What is the nexus between Cap and Trade and drinking water?” The answer was very weak, as the amount of greenhouse gases that will be avoided is de minimis. But, this hair-brained approach solved the tension about the Governor wanting to impose a water tax, so I left well enough alone. It’s provided in the Miami Herald piece, which is the first one below.

When is a good time to ask for tax increases? During a recession? Probably not. During a bumper crop year? Maybe. I’ll have to assume that the Governor believes now is the time to take the virtual pedal to the metal. The next shoe to drop? Higher electricity rates to start and fill a fund for utility caused wildfire in order to provide for victim reimbursements. The Mercury News provides the first shoe in the second piece below. I did not see the 9-1-1 tax included in the final budget documents, so stay tuned.

The third piece below provides a good recap by the California Globe. The “tax conformity” proposal between the Federal tax bill and the state’s version looks like a cherry-picked proposal similar to heads I win, tails you lose. The state will take revenue enhancements in order to pay for the expanded earned income tax credit.

Hold on to your wallets. It looks like we will be voting on the budget on the Senate Floor after 10:18 a.m., thus meeting the 72-hour in print rule.

25th Anniversary Look Back

In the June 11, 1994 edition of the Daily Pilot, liberal columnist Fred Martin was back with his vitriol over campaign season. This time because I had purchased space on a Democrat slate mailer. That Martin received the mailer confirmed his party registration. And, it gave him another opportunity to throw a punch.

Slate mailers are just advertising opportunities. Candidates pay to be on them. And, I was encouraged to purchase onto a Democrat slate. The joys.

To reiterate, it was the incumbent who made an issue of partisanship, not me. I focused on the investment strategy. But, if you weren’t watching closely, you fell for this clever diversion by Mr. Citron. The irony is that I have wonderful relationships with my Democrat friends.

John Moorlach, who failed to oust county Treasurer-Tax Collector Bob Citron, kicked up a big fuss because Citron is a Democrat. [Getting] his name and mug shot in a “Democratic Voter Guide,” on the front of the mailer was a photo of John Kennedy and the paean, “Continue the Democratic Tradition.” Inside was a laundry list of candidates to vote for, led by such well-known conservatives as Kathleen Brown, Gray Davis, Michael Woo and David Roberti.

For the last Look Back, go to MOORLACH UPDATE — Biggest Budget, Biggest Deficit — June 10, 2019 .

California taps clean air money

to pay for drinking water


California legislative leaders agreed Sunday to spend $130 million a year to improve water systems in communities where people can’t drink from their taps, something Democratic leaders say amounts to a crisis in one of the nation’s wealthiest states.

To pay for it, the state would tap a fund dedicated to reducing greenhouse gas emissions, a move that alarmed some environmental activists who say its set up an unfair choice between clean air and water.

“What kind of choice is that?” said Kathryn Phillips, director of Sierra Club California. “People shouldn’t have to choose between clean water and clean air.”

The plan is part of the state’s $213 billion budget and is a compromise between legislative leaders and new Democratic Gov. Gavin Newsom. Newsom had originally proposed a 95-cent tax on most residential water bills to pay for the fund. But lawmakers rejected that proposal, fearing political consequences of creating a new tax in a year when officials estimate the state will have a $21.5 billion surplus.

Instead, legislative leaders on Sunday agreed to take the money from the state’s Greenhouse Gas Reduction Fund. Through its cap and trade program, California requires its big polluters, like oil refineries and farms, to buy credits that let them pollute.

Becky Quintana is glad lawmakers found a way to fund water improvements, regardless of where the money is coming from. She lives in Seville, a town of less than 500 people in California’s Central Valley where the local elementary school relies on a grant to bring in bottled water for the students. Some days, she said, the school has to cancel classes because they can’t flush the toilets.

“People chose water over air, right? I mean I would,” Quintana said Monday at the state Capitol in Sacramento, joining other activists in light blue “Thirsty for Justice” T-shirts as they held a rally to pressure lawmakers into approving the funding. “We need the money. We need water.”

To pay for the water improvements, budget writers are taking money away from the agricultural industry, which uses it for activities such as upgrading diesel engines and reducing methane pollution. Lawmakers voted to cut that funding from $284 to $127 million.

About $100 million of that would go to a new clean drinking water fund, according to a document provided by the state Assembly. Another $30 million would come from the state’s general fund.

The money would not build things, but it would help some distressed public water systems with their operating costs. The goal is to avoid situations like 2007, when officials in the rural Central Valley community of Lanare had to shut down a new water treatment plant because they could not afford to run it.

California’s cap-and-trade program is the backbone of the state’s efforts to reduce greenhouse gas emissions. The state has already achieved its goal of reducing emissions to 1990 levels and is attempting to go 40% below that level by 2030. The program has generated more than $9.5 billion since its inception, according to a 2019 annual report.

The state uses money from the program to pay for projects aimed at reducing greenhouse gas emissions or improving the environment and public health. Some of the money, for example, goes to the high-speed rail project that would run electric trains, ideally reducing transportation emissions. California law also requires 35% of the proceeds be spent on low-income and other disadvantaged communities.

Republican Sen. John Moorlach from Costa Mesa was skeptical about the connection between clean drinking water and reducing greenhouse gas emissions.

But Newsom’s administration said when communities with unsafe drinking water have to bring in lots of bottled water, it clogs the roads with big trucks that pollute the air.

Sen. Bill Monning, a Democrat from Carmel who authored a bill to direct how the money would be spent, said greenhouse gas emissions have caused climate change, which has caused an increase of naturally occurring contaminants in drinking water like arsenic and lead.

“It’s directly connected,” he said. “Without climate change, without greenhouse gas emissions, you don’t have this immediate public health crisis.”

But many drinking water problems are connected with pollution from the state’s massive agricultural industry, whose heavy use of fertilizers and other chemicals have seeped into the drinking water of nearby communities. That’s why lawmakers have tentatively agreed to take most of the money from the agriculture industry’s portion of the greenhouse gas fund.

Emily Rooney, president of the Agricultural Council of California, called it “a creative solution for the drinking water crisis.”

“Obviously we want to protect our ag programs in the greenhouse gas reduction fund, but this is also a serious commitment on behalf of the governor to resolve a problem that definitely needs to be addressed,” she said. “I’m not going to get in the way of that.”

California budget: More than $2 billion in new state taxes even with $21 billion surplus?

New hikes for health insurance mandate, 911 system upgrades

By John Woolfolk

Gov. Gavin Newsom is in an enviable position: a record surplus of $21.5 billion in his first proposed budget.

But as his plan moves toward the June 15 deadline for approval by a friendly Legislature dominated by his fellow Democrats, Republicans and taxpayer advocates are pushing back against what they say are more than $2 billion in new taxes and other levies tucked within the voluminous document.

“Despite a budget surplus of $22 billion,” the governor is asking for billions in new taxes, said Senate Republican Leader Shannon Grove, R-Bakersfield. “California is already unaffordable for too many people.”

The bulk of that revenue comes from $1.7 billion in “tax conformity” proposals to align California’s tax rules with the major changes made to the federal tax code by President Trump and Republicans in Congress in late 2017.

The budget also includes $300 million from a health insurance mandate — a tax penalty aimed at keeping insurance premiums in check by spurring the healthy who spurn coverage into buying a plan — and $200 million from a revised tax to bolster the 911 emergency system, Grove said.

Another Newsom proposal to raise $200 million from taxes on water bills, milk and fertilizer to fix contaminated drinking water systems in disadvantaged communities around the state died in a legislative committee over the weekend.

Kevin Liao, a spokesman for Assembly Speaker Anthony Rendon, countered that much of the surplus goes toward bolstering budget reserves and paying down debt and pension liabilities so the state can better weather an eventual economic downturn. He said the criticism is premature with the budget still in final negotiations over the next week.

“It’s not that there’s a ton of new ongoing spending being proposed,” Liao said. “A lot of it is one-time spending.”

Department of Finance spokesman H.D. Palmer quibbled with the characterization of some of those measures as taxes, which require a two-thirds vote for approval. He said the Legislative Counsel concluded a third of the dozen measures in the tax conformity package can be approved on a simple majority vote.

Palmer said he expects the Legislative Counsel to make a similar finding on the health insurance mandate, though he conceded the proposed 911 measure will require two-thirds votes.

The budget surplus and tax talk are in stark contrast to the situation former Gov. Jerry Brown confronted when he took office in 2011. Brown faced a $26.6 billion deficit. He resisted the Legislature’s call for new taxes, and the approved budget included some $15 billion in cuts. Brown later won voter approval for new taxes and, along with the improving economy, the state’s finances turned around.

Democrats now have enough votes to pass taxes over GOP opposition. Though Newsom cautioned about the threat of another recession, for now the state’s coffers are overflowing.

Newsom’s budget described the tax conformity package, which would include “flexibility for small businesses, capital gains deferrals and exclusions for Opportunity Zones and limitations on fringe benefit deductions,” among other measures, as “beneficial to California.” Those proposals have not been agreed on by the legislature and are expected to be debated in the coming days. The governor wants to use the revenue to pay for an expansion of tax credits for low-income Californians.

Some taxpayer advocates have withheld criticism on the conformity proposals for now, which they say offer potential benefits in simplification for taxpayers.

“The conformity package is intended to be tax neutral — meaning the overall effect is that it does not increase taxes or decrease taxes on taxpayers in the aggregate,” said California Taxpayers Association President Rob Gutierrez.

The proposed state health insurance mandate is modeled on the discontinued federal requirement under the Affordable Care Act. It would pay for raising and expanding subsidies through Covered California — the state’s insurance marketplace established under the ACA.

The proposed 911 tax would pay for improvements to the state’s 911 emergency reporting system, allowing the Office of Emergency Services to begin upgrading the California Public Safety Microwave Network to a digital system to enhance emergency response communications.

Newsom’s proposed budget said that a more stable funding structure will allow OES to fully implement a statewide Next Generation 911 system. Benefits would include faster call delivery, increased routing accuracy, call overflow and backup systems, updated geographic information capability and wireless location data, and incoming text capability.

Liao said the proposal merely modernizes a fee structure that has grown outdated as consumers abandon landlines for cell phones.

The Safe and Affordable Drinking Water Fund tax that Newsom had proposed would have put a levy on water bills — perhaps $1 a month — and on fertilizer and dairy to provide funding for the State Water Resources Control Board to help impoverished communities, mostly in the Central Valley, pay for water quality improvements.

The tax had been met with controversy and opposition from lawmakers of both parties, and was excluded from the budget agreement announced by a legislative conference committee Sunday. Instead, according to the compromise, much of the money for the water quality projects will come from the state’s cap-and-trade program.

“Even the poor (would have had) to pay that tax,” said Sen. John Moorlach, R-Costa Mesa, a member of the Budget Conference Committee. “I think everyone has communicated to Gov. Newsom that it would be a bad idea.”

California voters’ appetite for new taxes remains an open question. They overwhelmingly approved Brown’s call for higher sales and income taxes with Proposition 30 in 2012, and in 2016 endorsed keeping the higher income taxes another dozen years with Prop 55.

Southern California voters last June recalled Democratic state Senator Josh Newman over his support for a new gas tax, but voters statewide rejected November’s Proposition 6 to repeal that tax, which will add 5.6 cents to the price of a gallon starting in July.

Earlier this week, voters in the massive Los Angeles Unified School District panned a proposed parcel tax, with just 45 percent in favor of Measure EE, well short of the two-thirds margin needed for approval. Jon Coupal, with the Howard Jarvis Taxpayers Association, said that may give lawmakers pause as they ponder new tax hikes.

“We’ve got a $22 billion surplus, revenue remains strong, so the threshold question is why are we discussing any tax hikes,” said Coupal. “The state is pretty flush.”

Gavin Newsom’s California Budget: Undocumented Immigrants Will Get Health Care Coverage

Water tax abandoned, tax credit credit for low-income people

By Katy Grimes

California Democrats reached a budget deal late Sunday agreeing to pay for undocumented immigrants living in the country illegally to have full health benefits, while abandoning the $140 million water tax on residential customers.

Undocumented immigrants between the ages of 19 and 25 will be eligible for Medi-Cal, California’s health insurance program for the poor, disabled, and now for those living in the country and state illegally.

State officials estimate about 90,000 additional people will quality at a cost of $98 million per year, AP reported.

Gov. Gavin Newsom announced his plan in January to bring back the Affordable Care Act for Californians — Obama mandated health care — as well as cover the health care of young undocumented immigrants. “Newsom’s plan to reinstate the individual mandate to force healthy people to buy the state health insurance, is one way to fund this,” California Globe reported. The individual mandate imposes a hefty tax on those who choose not to buy health insurance.

Unresolved is Newsom’s plan to provide $800 million in tax refunds for low-income people – a state EITC – earned income tax credit, which provides an earnings subsidy to low income families with one child. To pay for this refund, Newsom proposed adopting some of the Trump federal tax code changes – and limiting deductions for business losses. Trump’s 2017 tax law cut the corporate tax rate, reduced personal rates across the board, and did away with the State-and-Local-Tax deduction known as the SALT deduction.

Public schools are always one of the state’s biggest budget slices. In Newsom’s budget California public schools will receive $102 billion next year. “When all funding sources are accounted for (federal, state and local), the budget package includes $97.2 billion for TK–12 education,” the California Department of Education reported last year.

Gov. Newsom proposed in his May Budget Revise $650 million in additional grants to homelessness agencies and local government to help fund emergency shelters, housing assistance, and new construction, adding up to $1 billion in spending on the homeless in the Golden State. This was approved by lawmakers in Sunday’s budget committee meeting.

The budget conference committee however, sent their approved budget bill package to the governor somewhat unfinished and with placeholder language, the way they do with spot bills.

“The Budget Conference Committee held lengthy meetings on Monday and Tuesday of last week to close out the differences the two houses had on the budget. Then the Governor’s office, through the Department of Finance, the Speaker of the Assembly and the President Pro Tem of the Senate spent the next few days hammering out various compromises with practically no input from the minority party,” wrote Sen. John Moorlach (R-Costa Mesa) Monday in his official blog.

California Globe understands there will be much negotiating and horse trading before the fiscal year end of June 30.

This is the new budget process that took on a life of its own once the majority vote budget and deadlines took place under Proposition 25 in 2010. Prop. 25 ended the requirement that two-thirds of the members of the California State Legislature had to vote in favor of the state’s budget in order for the budget to be enacted. Prop. 25 also requires state legislators to forfeit their pay in years where they have failed to pass a budget in a timely fashion, but this has never happened as lawmakers now send an unfinished budget to the governor, and negotiate until years’ end.

Once lawmakers realized that they could pass major state policy – not through the proper committee process which include public hearings, public oversight – but through a $1,000 appropriation in a trailer bill, too many of the big changes in the budget are now buried in massive quantities of text and decided behind closed doors.


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MOORLACH UPDATE — Biggest Budget, Biggest Deficit — June 10, 2019

The Budget Conference Committee held lengthy meetings on Monday and Tuesday of last week to close out the differences the two houses had on the budget. Then the Governor’s office, through the Department of Finance, the Speaker of the Assembly and the President Pro Tem of the Senate spent the next few days hammering out various compromises with practically no input from the minority party.

This process did not conclude on Wednesday or Thursday, as the negotiators had predicted. I was back to the Capitol on Friday, but informed late in the day, that the Committee would meet again late Sunday afternoon. The joys of this assignment.

The semi-completed list of preferred or modified choices between the Assembly and Senate were finally provided early Sunday morning. I arrived at the Capitol at noon to be briefed with my colleague Sen. Jim Nielsen for four and a half hours. Then we started our third and final meeting of the Budget Conference Committee at 4:30 and concluded around 9:30 p.m.

The Sacramento Bee‘s electronic version, the first piece below, provides the details. Near the conclusion of the meeting, I informed the members that earlier in the week, during one of our first two meetings, I had inquired about the status of the state’s Comprehensive Annual Financial Report (CAFR) and when would it be released. It would be appropriate to have the last year’s audited financial statements before we voted on the next year’s annual budget.

I then stated that it had been released between our second and last night’s meeting and it reported that the Unrestricted Net Deficit had grown to $213 billion (see MOORLACH UPDATE — Results Released — June 6). Consequently, my voting was predicated on a poor balance sheet and a reluctance to incur more spending. The Independent Journal Review also used my quote (see

The California Globe provides a shout out to my review of the state’s June 30, 2018 CAFR in the second piece below.

The Democrats turned the budget into a Christmas tree last night. They brought out long lists of district requests that we had not seen before yesterday. I believe California should be focused on reducing debts, not going on a spending spree. The last surprise budget adjustment of the night was a request to reduce deferred maintenance by $100 million, as the proposed budget now needed to be balanced.

Can you believe it? The state is flush with $21.5 billion and the Democrats are overspending. I stated that reducing deferred maintenance is something a municipality does in a recession. This one budget adjustment was an indictment that this was not a successful budget.

25th Anniversary Look Back

The June 8th edition of the OC Register found reporter Chris Knap back with “Citron likely to keep long-time hold on office — Tax Collector-Treasurer: Attacks on his reputation backfired, the incumbent said as he held the lead Tuesday.” It started a series of reflections on the campaign by media pundits that were harsh and brutal. Here are a few selected paragraphs:

“I believe the voters understood what this election was all about,” Citron said. “The partisan attacks, and the attacks on my reputation as an investor of public funds, were irresponsible and they have backfired.”

[Moorlach] decliend to apologize for his campaign style.

“I feel we dealt with the issues,” he said. “We ran a clean campaign. I have no regrets.”

The turning point for Moorlach may have come in late April, when his honorary campaign chairman, state Sen. Marian Bergeson, R – Newport Beach, pulled back her endorsement.

On June 9th, in the Daily Pilot, liberal columnist Fred Martin fired a nasty attack in his review of the election results:

There certainly was justice after the scuzzy campaign John Moorlach ran to get himself elected county treasurer-tax collector.

Moorlach’s strategy in this supposedly nonpartisan race was to (a) denigrate incumbent Robert L. Citron because he is a Democrat, and (b) terrify the citizens by alleging that Citron’s complex investment strategies are going to lose all the county’s money.

One Moorlach supporter went so far as to endanger Orange County’s unblemished credit record by repeatedly contacting New York bond-rating services and financial media, trying to get them to investigate Citron.

None of the smeary stuff worked and Moorlach got his butt kicked, big time. Maybe there’s hope for us after all.

The same day, The Wall Street Journal provided the results in “Voters Re-Elect Treasurer Who Used Derivatives.” Maybe this title is Bob Citron’s epithet? The false euphemisms were abundant.

Mr. Citron maintained that his approach was “aggressively within prudent limits.” Rising interest rates had hurt the portfolio on paper, Mr. Citron said, but he said that he could hold his securities until maturity, and that by using that strategy “we do not take losses.”

The last Look Back can be seen at MOORLACH UPDATE — City of Inglewood — June 8, 2019.

Undocumented immigrants to get health care in Gavin Newsom’s California budget deal



California Gov. Gavin Newsom’s first budget won’t look exactly like he wanted, but a deal lawmakers released late Sunday largely fulfills the objectives he set six months ago when he first outlined his spending plan.

Lawmakers want to use an “extraordinary” state budget surplus to expand health care options for undocumented people while stockpiling billions of dollars in reserves in anticipation of an economic downturn, according to documents the Legislature’s Budget Conference Committee released.

The agreement marks the end of months of negotiations between Newsom and the Legislature. Lawmakers face a June 15 deadline to pass the budget, which will take effect in July.

The agreement includes funding to let young undocumented young adults under age 26 enroll in Medi-Cal, the state’s health insurance program for low-income Californians. But it doesn’t extend that eligibility to undocumented seniors, as state senators had proposed.

The expansion will take effect Jan. 1, 2020 and cost $98 million in the upcoming fiscal year. It will make California the first state to allow undocumented adults to sign up for state-funded health coverage.

The budget includes a fine on people who don’t buy health insurance known as an individual mandate. The fines were initially implemented as part of the federal Affordable Care Act law known as Obamacare, but Republicans acted in 2017 to roll them back. Newsom and legislative leaders say re-imposing the penalty at the state level will shore up the state’s health insurance marketplace and keep premiums from rising dramatically.

Revenue from the mandate will fund insurance premium subsidies for middle income people. The budget agreement also includes an additional $450 million over three years to fund insurance subsidies after some lawmakers argued mandate revenue alone wouldn’t make health insurance affordable.

Anthony Wright, executive director of advocacy group Health Access, said the budget agreement will help hundreds of thousands of Californians access health care.

Wright applauded the Legislature for securing additional funding for insurance subsidies, which the governor’s office had initially resisted.

“While it’s not all we sought, it will provide a real tangible difference for people, especially for those around and below poverty and for middle income families who don’t get any help under the federal law,” he said.

Cynthia Buiza, executive director of the California Immigrant Policy Center, praised the deal for expanding state health care to undocumented young adults, but faulted the compromise for not including two other priorities for immigrant advocates. They wanted Newsom to offer health care for undocumented seniors and to extend the earned income tax credit to low-income undocumented immigrants.

“For California’s immigrant communities, today’s budget deal is bittersweet,” Buiza said in a statement “The exclusion of undocumented elders from the same health care their U.S. citizen neighbors are eligible for means beloved community members will suffer and die from treatable conditions. And the exclusion of many immigrants from the Earned Income Tax Credit will perpetuate the crisis of economic inequality in our state.”

Newsom in May proposed a $213 billion state budget. The budget committee on Sunday did not disclose the total cost of the agreement it’s recommending.

“The budget agreement we’re finalizing tonight builds on the strong budget proposal of the governor, while adding significant legislative priorities,” said Sen. Holly Mitchell, D-Los Angeles, who leads the joint legislative budget committee. “The budget agreement maintains our agreement to responsible budgeting, which includes the largest reserves in history – over $20 billion – finally paying off the remaining wall of debt from the Great Recession and making supplemental pension payments.”

Newsom won’t get the so-called water tax he proposed in January to pay for water system improvements for communities with unhealthy drinking water sources. But, lawmakers agreed to pay for the projects, anyway.

The compromise includes $130 million to start the work next year and commits to more funding through 2030.

“We are thrilled that the Legislature and Governor Newsom have committed stable funding to ensure that all Californians have access to safe and affordable drinking water this year and in the years to come,” a group of advocates known as the Safe Drinking Water Coalition said in a written statement.

The budget agreement includes billions of dollars supplemental pension payments to ease financial pressure on California school districts, which have been adjusting to higher rates from the California State Teachers’ Retirement System.

Newsom in January had proposed spending $7.8 billion beyond what was required by law on CalSTRS and the California Public Employees’ Retirement System. The budget compromise shows lawmakers want to spend even more.

The Legislative Analyst’s Office in April referred the state’s surplus as “extraordinary moment” that lawmakers could use to prepare for a recession. It urged more savings than Newsom recommended.

Democrats have supermajorities in both houses of the Legislature, so they don’t need Republican support to pass a budget.

Republicans on the budget committee voted against a number of spending proposals Sunday night, voicing worries about long-term debt.

“I’ve been voting no or abstaining on a lot of spending opportunities,” Sen. John Moorlach, R-Costa Mesa, said. “Some people think the glass is half full, I’m looking at it as half empty, so that will maybe explain my caution on a lot of these spending votes tonight.”

State Economy Rankings: California is a Real Dichotomy

Rankings show California’s economic health is not in the middle class

By Katy Grimes

California just ranked in the top 5 in the overall WalletHub 2019 State Economy Rankings, while ranking low in the Economic Health Ranking. WalletHub compared the 50 states and the District of Columbia across three key dimensions: 1) Economic Activity, 2) Economic Health and 3) Innovation Potential.

In October 2018, California ranked 5th worst in the nation based on most fiscally solvent states, in the WalletHub State Fiscal Rankings.

California has the highest poverty rate in the nation, but also ranked number #5 in the highest number of high-tech industry jobs.

California was ranked 47th in median annual household income, which dragged down its overall ranking.

California tied for a four-way-first with Massachusetts, Washington and Oregon in the number of independent investor patents.

These rankings show how California has driven out manufacturing and production, replaced with high tech and service jobs, and established a part time economy, with a massive welfare system.

Even the New York Times recognizes California’s issues: “California may be a symbol of liberal values, but it’s also a symbol of the failures of liberal policy. It has the highest poverty rate in the country, housing costs are out of reach for many, and squalor and deprivation plague the streets of the biggest cities.”

California’s Real Fiscal Health

Sen. John Moorlach (R-Costa Mesa) just took a dive head first into the latest release of California’s Comprehensive Annual Financial Report (CAFR) for June 30, 2018 by the State Controller, released June 3 – nearly one year after the close of the 2018 fiscal year:

“I focus on the Governmental Activities of a municipality, so let me start there,” Moorlach said. “First, the Unrestricted Net Deficit has grown by nearly $44 billion! That’s about $1,100 per resident. California’s Unrestricted Net Deficit for Governmental Activities is now $213.3 billion, up from last year’s $169.5 billion. Add in the Unrestricted Net Deficit for Business-type Activities of $16 billion, and the combined amount is $230 billion in the red! I told you we would be close to a quarter-trillion dollars.”

“Diving in for the basic details, we find that cash and pooled investments are up $12 billion. But, accounts payable is up $3.2 billion, for a total of $28 billion. Can you find me another municipality with a larger accounts payable balance? The big number, of course, is the addition of $45.5 billion in retiree medical liabilities to the balance sheet, bringing the balance to $73.7 billion. This is three times the amount LAUSD reported for the same fiscal year. And, although the stock market has been doing relatively well during that time period, unfunded pension liabilities rose by another $10.7 billion, to $88 billion.”

“Oh Lord, please forgive us our debts.”

The CAFR can be found at Moorlach’s analysis is here.

WalletHub’s panel of economic experts point out that not all economic growth strategies are effective. For the best ways to stimulate the economy and achieve lasting prosperity, the experts shared their thoughts on the following key questions:

  1. What are the most effective ways for state and local officials to boost their local economies?
  2. What can states do to prevent “brain drain” and develop, attract and retain highly skilled workers?
  3. States often compete for business investment by offering tax breaks and other incentives. Do such efforts more often result in a net positive or net negative impact on state economies? Do such efforts create a “race to the bottom” across states?
  4. What makes a state attractive to potential entrepreneurs?
  5. In evaluating the states with the best economies, what are the top five indicators?


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MOORLACH UPDATE — City of Inglewood — June 8, 2019

The city of Inglewood has just captured the spotlight of a diligent reporter and may become the new city of Bell. I say this as perceived public financial scandals are not pretty and abusing the public trust is disappointing to observe.

The OC Register provides an in depth look at recent financial decisions at this city in the piece below. The closing paragraphs remind everyone that our 482 city rankings for the year ended June 30, 2017 have this city at the bottom of the list (see MOORLACH UPDATE — City CAFR Rankings – Vol. 1 – February 7, 2018 and MOORLACH UPDATE — UNP Bottom Dwellers — April 7, 2018).

The similarities to the city of Bell bring back plenty of memories, so allow me to provide a sampling. On bond underwriters and gullible issuers, (see MOORLACH UPDATE — Proper Etiquette — December 4, 2012).

On above market salaries, (see MOORLACH UPDATE — OC Register — July 29, 2011 july 29, 2011 , MOORLACH UPDATE — Redistricting — June 8, 2011, MOORLACH UPDATE — MAP — September 2, 2010, and MOORLACH UPDATE — Posting/Fair/Pension Debate — August 10, 2010).

On reporters doing the heavy lifting and breaking the story, (see MOORLACH UPDATE — — August 11, 2010 ).

And, on the impacts to public employee defined benefit pension plans, (see MOORLACH UPDATE — Rollbacks — July 30, 2010).

Pension Obligation Bonds are a method of refinancing pension debt. It is a technique that I do not advise using. But, as it substitutes one debt with another, it does not require voter approval. It is proof that pension liabilities are a debt, not an estimate. Yet the ruling of the Los Angeles Appellate Court wrongly called it an estimate. It’s a shame that California’s Superior Court in Los Angeles County, the Los Angeles Appellate Court and the state’s Supreme Court Justices couldn’t make that connection a dozen years ago when I filed a lawsuit on the matter (see MOORLACH UPDATE — OIR/Retroactive Anniversary — July 20, 2012 ).

25th Anniversary Look Back

The Wednesday, June 8,1994 LA Times provided the election results from the evening before, Citron 121,484 votes (61%) and me at 76,923 votes (39%). An article was also written by Mark Platte and was titled “Citron Leads Nearly 2 to 1 Against 1st Opponent in 20 Years — Finance: Moorlach said he would consider himself victorious just for making the public aware of the way the incumbent invested public money.” Math continued to be a shortcoming for reporters. Here are two of the paragraphs:

“I win either way because [Citron’s portfolio] is so bad,” [Moorlach] said. “I feel we dealt with the issues. We ran a clean campaign. I have no regrets.”

Moorlach had gone so far as to suggest last week that Citron’s investment strategies have caused the portfolio to decline some $1.2 billion in the past five months alone.


How Inglewood sidestepped

voters when it took on millions

in debt to cover up a deficit,

then gave raises for executives

City defends the move, but experts say diverting money from pension obligation bonds is ‘wholly inappropriate,’ ‘potentially illegal’


The city of Inglewood took on $36 million in new debt in 2017 without voter approval to help plug a budget deficit, earmarked millions for future pet projects and then doled out bonuses and raises to top executives, the Southern California News Group has learned.

City officials defend their decision to dump most of the proceeds of a pension obligation bond into Inglewood’s general fund — rather than using it all to pay down pension liabilities — at a time when the city was staggering financially while awaiting a windfall from a new NFL stadium.

City Hall even boasted about Inglewood’s newfound fiscal strength in a press release and Mayor James Butts pointed to the surplus resulting from the bond money as evidence of his successful leadership during his reelection campaign in 2018.

After the cash infusion, the city’s executives received two 10 percent merit bonuses and a raise over a two-year period. Inglewood City Manager Artie Fields made an extra $51,508 in 2017, bringing his total salary and benefits to $472,680, according to payroll records provided by the city.

Police Chief Mark Fronterotta — the highest-salaried law enforcement chief in Southern California and one of the highest paid in the state — enjoyed a total compensation of $524,057.

Inglewood, which is roughly 51% Latino and 41% black, has a median household income of $44,377, according to the U.S. Census Bureau.

“The City could easily afford to give employees raises that still do not bring them to parity for comparable cities of the level of economic development as Inglewood,” Fields said in an email.

However, the reversal of fortunes in the City of Champions was actually net loss, and, as a result, property owners will foot the bill for $109 million of debt — including $54 million in interest — over the next three decades.

‘Wrong on so many levels’

“This is wrong on so many levels,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association. “To use this structure to pad the general fund strikes me as not only wholly inappropriate, but potentially illegal.”

Although the funds might help the city in the short term, taxpayers will feel the hit long after the politicians have left office, Coupal said.

Property owners in Inglewood will bear the brunt of those payments. The city charges 0.146 cents per $100 of assessed value to pay for its pension obligations, a rate that hasn’t changed since the tax was enacted in 1944.

Those taxes, meant to pay down the city’s pension costs, will pay 93 percent of the debt service on the new bond, even though nearly two-thirds of the money went into the general fund instead. Inglewood will have to pay the rest — about $17 million total — out of the general fund.

“It is basically diverting the tax revenue that would go to the pension fund to the bond,” said Jean-Pierre Aubry, associate director of state and local research at the Center for Retirement Research at Boston College. “So if the borrowed money isn’t going to the pension fund, the pension fund is getting shortchanged.”

Inglewood’s pension liability totaled $197 million in 2017, according to the city’s audited finances. City pension costs have climbed 78 percent in the past five years and are expected to grow to $36 million annually in the next five, according to its 2018-19 budget.

Sidestepping voters

In California, voters typically must approve new bonds and taxes in their communities. But that doesn’t apply to pension obligation bonds, a type of debt a city can take on to refinance its unfunded retirement liability into easier-to-manage installments.

Think of it like a consumer taking out a new credit card or a loan to pay down another one with a higher interest rate. In Inglewood’s case, the city opened a new credit card, used a small portion of the balance to refinance the old one, paid some bills and then put the rest in its savings account.

And just like that — nearly overnight — the city’s ailing financial outlook suddenly appeared rosy.

Despite the significance of what the city was doing, residents may have missed the City Council’s unanimous vote to issue the $53 million in pension obligation bonds in October 2017. The item was buried on a consent calendar — typically reserved for a group of routine, non-controversial items — and approved without discussion or a presentation.

About $16 million of the new money helped refinance an older pension obligation bond from 2005, allowing the city to cut its interest rate by about half a percent.

“The interest savings alone will cover the cost of the employee raises negotiated for FY 2018-2019,” Fields said.

The bulk of the bond proceeds — roughly $36 million — went into into Inglewood’s general fund through creative accounting that several experts on pension obligation bonds consider, at worst, illegal and, at best, a loophole that circumvented voters.

Vetted by city bond counsel

Fields, the city manager, counters that the bond is legal and was vetted by the city’s bond counsel. He expects future revenues from the new NFL stadium to cover any costs.

“This transaction was logistically and strategically wise and resulted in an interest payment savings of close to $6 million over the next two years,” Fields said in an email. “Our future cash flow projections from 2020-2021 (from the stadium project alone) forward far surpass any debt payments we have incurred.”

Indeed, Inglewood is undergoing a transformation spurred by a revitalized Forum concert venue, a new connection to the Metro rail system, the new $4.2 billion home for the Los Angeles Rams and Chargers, and potentially an arena for the Los Angeles Clippers. Property values have sharply increased, as have rents.

Inglewood projects the stadium alone could bring in more than $20 million annually once it opens in 2020, and hosts the Super Bowl in 2022.

How pension money landed in the general fund

To pull off its plan, Inglewood had to work around a law restricting the use of pension obligation bonds for anything other than pensions.

It did that by designating two-thirds of the $53 million bond proceeds a reimbursement for general fund payments it had already made to the California Public Employee Retirement System in 2016 and 2017.

TDB-L-BROKEINGLEWOOD-0601.jpg?fit=620%2C9999px&ssl=1Source: Inglewood’s Official Statement for the 2017 Pension Obligation Bonds

“The monies to the general fund were a reimbursement for legal pension expense,” Fields said in an email.

None of the experts consulted for this story had heard of a city reimbursing its general fund through a pension obligation bond. Some cities, they say, have used pension obligation bonds to fund future payments to CalPERS.

Fields said it was “irrelevant” whether anyone else was familiar with bonds being spent in such a way.

The bond’s insurance company, Assured Guaranty, referred questions to the city’s bond counsel, Brian Quint. He did not return a call for comment.

Inglewood, which has experienced budget deficits in three of the past six years, has been accused in the past of shifting funds from other accounts to prop up its struggling general fund.

In 2016, a former accountant sued Inglewood, claiming she was fired from City Hall for blowing the whistle on a series of accounting irregularities while the city was pursuing the NFL.

Barbara Ohno alleged the city “regularly and knowingly fostered, ordered and engaged in faulty financial and accounting practices, fraudulent regulatory reporting, and reclassification of costs to depict a favorable, but false, financial picture of the city’s general fund and overall fiscal responsibility,” the lawsuit said.

The city denied the claim and the lawsuit was settled in 2017.

Pension bonds are risky

Pension obligation bonds can be risky even when used properly, according to Jeffrey Michael, an economist and director of the center for business and policy research at University of the Pacific. Michael studied the city of Stockton’s failures when it went bankrupt in 2013. At the time, the city owed more than $100 million toward such bonds.

The central California city issued its bonds in 2007 at the top of the market, Michael said. When the recession hit, the bonds lost half their value overnight.

Inglewood’s decision to issue pension obligation bonds is concerning because cities across the state are struggling to deal with skyrocketing annual payments to CalPERS, Michael said.

“It raises a question of what they’re going to do in the next year and the year after that,” he said.

Inglewood’s plan for the bond money

Inglewood spent part of the bond money paying down a projected $11 million deficit in fiscal year 2017-18, then moved the rest of the bond money — about $25 million — into its reserves after calling it a surplus. City officials say they now expect to end the current fiscal year with a $56,000 surplus, in part due to the savings from refinancing earlier pension obligation bonds from 2005.

Oddly, Inglewood had about $19 million in reserves that could have covered the deficit without taking on new debt. Fields said the city didn’t need the money, but instead it made a cash-flow decision that will allow the city to put $2 million toward a first-time home-buyer program, replace its aged police fleet, repair the roofs on city facilities, renovate the main library, put money aside for affordable housing subsidies, and improve the city’s “cash reserve position.”

Fields insists the money is not new debt, though the city’s own budget lists it as “debt issued.” The city now has $60 million in unobligated reserve funds, he said.

“The city will easily be able to retire the bond issue and pay down its pension unfunded liability going forward,” he said.

An accountant, a pension researcher, an economist and the president of a taxpayers association all separately agreed that the bond money should not be considered reserves because it is a debt that will need to be paid off.

Voters should have a say

Inglewood should have asked voters to approve a general obligation bond if the purpose was to infuse the general fund, said Marcia Fritz, a retired certified public accountant and president of the California Foundation for Fiscal Responsibility.

“Calling it a pension obligation bond is how they’re getting out of having a vote (of the people), because pension obligation bonds, by law, are for refinancing an existing debt, and an existing debt is not the money sitting in your bank account,” Fritz said. “It is one thing to try to get a vote and it’s another thing to hide it on a consent calendar.”

Fritz reviewed the city’s official statement for the bond and a draft of Inglewood’s Comprehensive Annual Financial Report for fiscal year 2017-18 for this story. The budget documents show Inglewood is living beyond its means and the bond money allows the city to conceal it, she said.

“I don’t think it’s a valid debt,” she said. “I think someone broke the law here. It should be challenged.”

The city’s total unrestricted net position — the value between its assets and liabilities — was negative $388.7 million in 2017.

Last year, California Sen. John Moorlach created a per-capita ranking of the financial soundness of 482 cities by dividing their unrestricted net position by the number of residents. Moorlach created the list because many cities are facing insolvency “mainly due to unfunded pension liabilities,” he said.

Inglewood ranked near the bottom at No. 471 out 482.


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MOORLACH UPDATE — Recognizing Movement — June 7, 2019

The Indy of Laguna Beach has a Letter to the Editor that provides a great description of SB 584 (see MOORLACH UPDATE — Undergrounding In Paradise — May 28, 2019). It’s the first piece below.

There is only one small problem — SB 584 is in a legislatively induced coma in Senate Appropriations Committee. That decision is usually made by the chair of the committee and is often arbitrary, no matter how reasonable a possible legislative alternative may be.

While I’m disappointed that SB 584 has stalled for now in its current form, there is always a chance that some aspect of the bill, as it pertains to Rule 20A, may show up in another legislative proposal. Last year, portions of my SB 1463 ended up SB 901, providing more resources to wildfire resiliency using current funds without raising taxes (see MOORLACH UPDATE — Big Gas and Electric Costs — May 21, 2019).

I now serve on the Select Committee on Wildfires, which will be meeting on Monday to review the Commission on Catastrophic Wildfire Cost and Recovery’s report (it is also known as the SB 901 Commission). Perhaps funds from the Rule 20A credits can be considered in the set of broader recommendations? As Yogi Berra said, “it ain’t over till it’s over.”

I also have the opportunity to recognize a nonprofit every year and this year’s is Mind OC (Be Well). The Aliso Laguna News provides our press release in the second piece below. Last year’s recipient was Mercy House (see MOORLACH UPDATE — Gov. Brown’s Final Budget — June 15, 2018). In 2017, it was HomeAid (see MOORLACH UPDATE — First SB 2-Zone Victory in the OC — August 6, 2017). And in the first year of this new annual initiative, 2016, it was the Orange County Rescue Mission, where I was sworn in as Senator in March of 2015.

California Community College Annual CAFR Analysis

It has taken a long time, but the tardy Comprehensive Annual Financial Reports (CAFRs) are finally coming in. We just received the final Community College District CAFR this week. Consequently, we can do some analysis.

Last year I provided you with the districts’ unrestricted net positions and populations, which provided the per capita amounts for ranking purposes (see MOORLACH UPDATE — UC, CCC and CSU — May 11, 2018). If I provided this data, comparing 2018 to 2017, we would find that the total combined unrestricted net deficit of the 72 districts has grown by nearly $2.6 billion!

This year, I’m providing the per capita amounts for the fiscal years ended June 30, 2018 and June 30, 2017. The districts are ranked according to the 2018 per capita amounts.

For perspective, in the fifth column — I’ve provided the 2017 ranking and the sixth column provides the amount of movement, up or down. Customarily, changes in rankings should only be one to three positions. However, with the entire retiree medical liabilities now being required to be added to the audited financial statements for the first time, many districts have moved up or down in dramatic fashion.

There may be additional stories for the movement of each District, but the Other Post Employment Benefits (OPEBs) having to be reported on the financial statements by the Government Accounting Standards Board (GASB) this year has had a massive impact on transparency.

Each community college district board of trustees negotiates OPEBs with its bargaining units. Granting lifetime medical benefits must have seemed like an easy vote, as it does not cost much of anything in the first decade or two. But, with the passage of time there come more retired instructors and more actuarial liabilities. And, when the price tag morphs into significant debts, those who voted for the collective bargaining agreements are probably long gone and have left the fiscal vice grip to their successors.

Here are the 15 most improved districts:

Feather River (up 29 positions)

Solano (up 24)

Mendocino-Lake (up 16)

Barstow (up 16)

State Center (up 16)

Copper Mountain (up 15)

Long Beach (up 15)

Compton (up 13)

Palo Verde (up 12)

Sierra (up 12)

Antelope Valley (up 11)

Ohlone (up 11)

Southwestern (up 11)

Contra Costa (up 10)

MiraCosta (up 10)

Here are the 15 districts that dropped the furthest:

Ventura County (dropped 34)
West Kern (dropped 30)
Shasta-Tehama-Trinity (dropped 28)Yuba (dropped 25)
Merced (dropped 23)

Citrus (dropped 17)

Yosemite (dropped 17)

Cabrillo (dropped 16)

Los Angeles (dropped 15)

Palomar (dropped 12)

Butte-Glenn (dropped 11)

Coast (dropped 10)

Kern (dropped 9)

Peralta (dropped 9)

Rancho Santiago (dropped 8)

It’s interesting to note that even with all this movement, numbers 1 and 72 retained their positions.

Rank Name 6/30/2018 6/30/2017 Rank Chg
1 South Orange County $ 200 $ 141 1 0
2 San Bernardino $ 52 $ (73) 26 5
3 Los Rios $ (58) $ (72) 44 3
4 Mt. San Jacinto $ (74) $ (48) 21 -1
5 Desert $ (75) $ (72) 12 0
6 Chaffey $ (101) $ (92) 38 5
7 Sequoias $ (114) $ (56) 11 -3
8 Palo Verde $ (155) $ (163) 2 12
9 Barstow $ (155) $ (178) 6 16
10 Victor Valley $ (160) $ (109) 24 3
11 Kern $ (164) $ (41) 17 -9
12 Rio Hondo $ (172) $ (137) 32 4
13 West Valley-Mission $ (190) $ (88) 23 -3
14 Solano $ (191) $ (233) 41 24
15 Compton $ (191) $ (196) 31 13
16 Antelope Valley $ (203) $ (183) 37 11
17 Cerritos $ (204) $ (106) 27 -5
18 North Orange County $ (210) $ (166) 55 4
19 State Center $ (217) $ (220) 62 16
20 Ohlone $ (227) $ (201) 20 11
21 Gavilan $ (228) $ (199) 22 9
22 San Jose-Evergreen $ (228) $ (166) 51 1
23 Redwoods $ (235) $ (162) 14 -4
24 Riverside $ (241) $ (182) 58 2
25 Allan Hancock $ (249) $ (199) 29 4
26 Butte-Glenn $ (252) $ (120) 13 -11
27 MiraCosta $ (258) $ (227) 39 10
28 San Luis Obispo $ (262) $ (221) 33 8
29 Long Beach $ (272) $ (288) 50 15
30 Cabrillo $ (284) $ (119) 16 -16
31 Southwestern $ (284) $ (272) 49 11
32 Los Angeles $ (293) $ (137) 72 -15
33 Hartnell $ (297) $ (244) 35 6
34 Feather River $ (303) $ (471) 5 29
35 Citrus $ (321) $ (156) 18 -17
36 San Joaquin Delta $ (321) $ (208) 54 -3
37 Shasta-Tehama-Trinity $ (335) $ (86) 10 -28
38 Sierra $ (342) $ (331) 56 12
39 El Camino $ (343) $ (275) 53 4
40 Mendocino-Lake $ (347) $ (372) 15 16
41 Yosemite $ (361) $ (177) 43 -17
42 Ventura County $ (373) $ (80) 36 -34
43 Contra Costa $ (375) $ (354) 69 10
44 Palomar $ (392) $ (203) 57 -12
45 Copper Mountain $ (399) $ (407) 9 15
46 Yuba $ (405) $ (165) 28 -25
47 San Diego $ (408) $ (307) 68 0
48 Pasadena Area $ (408) $ (250) 42 -8
49 Monterey Peninsula $ (419) $ (332) 19 2
50 Mt. San Antonio $ (434) $ (357) 66 4
51 Lassen $ (435) $ (289) 4 -6
52 Grossmon-Cuyamaca $ (450) $ (305) 48 -6
53 Sonoma County $ (467) $ (322) 52 -5
54 West Hills $ (489) $ (383) 25 3
55 Santa Clarita $ (498) $ (418) 46 6
56 San Francisco $ (508) $ (420) 70 6
57 Merced $ (525) $ (215) 30 -23
58 Lake Tahoe $ (530) $ (502) 7 6
59 Coast $ (540) $ (330) 60 -10
60 Rancho Santiago $ (547) $ (337) 61 -8
61 Chabot-Las Positas $ (610) $ (368) 64 -6
62 Santa Barbara $ (639) $ (589) 40 6
63 Siskiyou $ (646) $ (397) 8 -4
64 Marin $ (669) $ (798) 59 7
65 Glendale $ (698) $ (582) 47 2
66 San Mateo $ (721) $ (755) 71 4
67 Peralta $ (764) $ (394) 65 -9
68 Napa Valley $ (897) $ (533) 34 -3
69 Foothill-DeAnza $ (980) $ (554) 63 -3
70 Imperial $ (1,076) $ (670) 45 -1
71 West Kern $ (1,194) $ (268) 3 -30
72 Santa Monica $ (4,185) $ (2,391) 67 0

Letter: A Win-Win

Last Wednesday, Pacific Gas & Electric Co. (PG&E) announced it would underground electric lines in areas damaged by the Paradise Camp Fire, at its own expense. This is great news, and praise should be given to PG&E for their leadership. Let’s hope its example and continued political pressure will encourage So Cal Edison and SDG&E to follow suit in Southern California high fire threat areas.

Praise also goes to Republican State Senator John Moorlach (R-Costa Mesa) who is working on Senate Bill 584 to promote undergrounding of utilities by expediting unused Rule 20A credits to assist in undergrounding in high fire threat areas, including Laguna Canyon Road. Rule 20A credits are a form of financial assistance in the form of credits to local governments to facilitate undergrounding projects.

Currently Laguna is allocated only limited Rule 20A credits and has to purchase additional credits from other cities who don’t need or use them. SB 584 would direct electrical corporations to reallocate Rule 20A credits to cities like Laguna and would require SDG&E and SCE to develop and administer programs to provide matching funds to local jurisdictions for undergrounding projects. This would give Laguna new tools to use more Rule 20A credits and get some matching funds for undergrounding.

Other tools in our toolbox include that our city should be actively encouraging local neighborhoods to form an assessment district to underground their own neighborhoods, like Bluebird Canyon, for both safety and their own aesthetics/view improvement, seeking matching funds from Cal-Trans and the County, federal and state grants, and setting aside funds from our $100 Million budget, to get the undergrounding job done, paying as we go.

Collectively, a great common-sense solution without raising taxing on residents. Let’s hope more common sense and fiscally responsible solutions like this are thoroughly explored before raising the fear flag and hitting the “must raise taxes” button. If passed, SB 584 would go into effect immediately. Let’s hope the powers that be in Sacramento get this bill passed ASAP. It’s a win-win and should be a no brainer.

Jennifer Zeiter, Laguna Beach

Moorlach Names Mind OC Nonprofit of the Year

State Senator John MW Moorlach presenting a  SenateResolution to Bill
Taoramina and Dr. Clayton Chau from Mind OC.

Senator John M. W. Moorlach (R-Costa Mesa) recognized Mind OC as the Nonprofit of the Year for the 37th Senate District with the California Association of Nonprofits. Moorlach was pleased to present Mind OC a Resolution on the Senate Floor for their outstanding record of community support.

“Mind OC is leading the effort to solve Orange County’s mental illness and homeless crisis,” Moorlach expressed. “Even before I began public service 25 years ago, I engaged in helping the mentally ill in our county and state, so Mind OC’s efforts are close to my heart. I am honored to recognize this incredible organization with this well-deserved award.”

Mind OC was created to support the advancement of Be Well Orange County, a partnership among public, private, academic, business, medical, and faith-based organizations. The Be Well charter created a community-wide, coordinated ecosystem to support mental health.

Mind OC’s coalition includes doctors, hospitals, service providers, advocacy groups, faith leaders, businesses, and local government. It works among the coalition to treat the whole person and reduce the stigma of mental illness.


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MOORLACH UPDATE — Results Released — June 6, 2019

Wednesday provided an opportunity to look at a few critical occurrences.

The first is the election result for the parcel tax for Los Angeles Unified School District (LAUSD), which failed miserably (see MOORLACH UPDATE — LAUSD and Future Concerns — January 24, 2019, MOORLACH UPDATE — LAUSD Comes Calling — January 19, 2019, MOORLACH UPDATE — LAUSD vs. OC School Districts — September 18, 2018, and MOORLACH UPDATE — $15 Billion Obligation — December 27, 2018).

It’s a shame when public employee unions negotiate lucrative contracts that break the bank and then, instead of modifying the collective bargaining agreements, the union-controlled governing board’s answer is to stick it to the taxpayers with yet another tax increase. When Orange County filed for Chapter 9 bankruptcy, the voters rejected a proposed sales tax increase to bail out, and thus enable, the county’s failed fiscal management. The residents of LAUSD reacted to the parcel tax proposal in the same manner. The California Globe provides the details in the first piece below.

The second is the 33rd Senate District Special General Election, where the Republican candidate regretfully did not win. Cudahy City Councilman Jack Guerrero was an excellent candidate and would have been a wonderful addition to the State Senate. Now that the race is over, I’m providing the recent coverage by the Long Beach Post from last month in the second piece below.

The third is the release of California’s CAFR for June 30, 2018 by the State Controller (see MOORLACH UPDATE — California’s Tardy CAFR — June 3, 2019 june 3, 2019 john moorlach). It actually happened before the State’s Budget Bill was concluded, which is a pleasant surprise. I’m currently at the call of the Chair of the Budget Conference Committee and anticipate working through the weekend to meet the June 15 constitutional deadline.

What does the Comprehensive Annual Financial Statement tell us?

The latest CAFR can be found at I focus on the Governmental Activities of a municipality, so let me start there. First, the Unrestricted Net Deficit has grown by nearly $44 billion! That’s about $1,100 per resident. California’s Unrestricted Net Deficit for Governmental Activities is now $213.3 billion, up from last year’s $169.5 billion. Add in the Unrestricted Net Deficit for Business-type Activities of $16 billion, and the combined amount is $230 billion in the red! I told you we would be close to a quarter-trillion dollars.

Diving in for the basic details, we find that cash and pooled investments are up $12 billion. But, accounts payable is up $3.2 billion, for a total of $28 billion. Can you find me another municipality with a larger accounts payable balance? The big number, of course, is the addition of $45.5 billion in retiree medical liabilities to the balance sheet, bringing the balance to $73.7 billion. This is three times the amount LAUSD reported for the same fiscal year. And, although the stock market has been doing relatively well during that time period, unfunded pension liabilities rose by another $10.7 billion, to $88 billion.

Oh Lord, please forgive us our debts.

Here are the highlights, in millions, with net deferred resources rounded slightly to make the math work:

Current Liabilities up . . . . . . . . $7,025
Retiree Medical up . . . . . . . . .$45,536
Pension Liabilities up . . . . . . .$10.749

Subtotal . . . . . . . . . . . . . . . . . $63,310

Cash up . . . . . . . . . . . . . . . . .$12,284
Accounts Receivable up , , , . . $1,825
Net Deferred Resources up ~. .$5,385

Subtotal . . . . . . . . . . . . . . . . . $19,494

Unrestricted Net Deficit up . . .$43,816

25th Anniversary Look Back

It was the last few days of the campaign. In the June 5, 1994 Sunday edition of the LA Times, Thomas A. Fuentes of Lake Forest and the chairman of the Republican Party of Orange County, had his Letter to the Editor printed. It was titled "Backing Challenger in Treasurer Race." He finally had a chance to respond to the critics that had pulled him into the fray. Here are the concluding paragraphs:

[Citron] gambles with taxpayers’ money in his Las Vegas-like high-risk investment strategy. Safety and liquidity be damned is Citron’s attitude.

In contrast to Citron, who has been on the public payroll for over 33 years, Orange Countians have the opportunity to elect talented and able certified public accountant and certified financial planner John Moorlach from the private sector.

I know John Moorlach as he has served with ability and distinction as assistant treasurer of the Republican Party of Orange County and likewise as the chairman of our precinct committee. He is an accomplished business professional and a dedicated family man. He is a keen conservative thinker.

John Moorlach is just the kind of anti-tax, pro-term limits leader we need in Orange County government.

For the last Look Back, see MOORLACH UPDATE — Budget Conference Season — May 30, 2019.

Big Blow to Mayor Garcetti in the defeat of Measure EE in Los Angeles

Second time in 10 years LA voters defeat parcel tax increase

By Katy Grimes

Following the contentious Los Angeles Unified School District strike in January, the controversial property tax hike proposed by the school district went down in a resounding defeat Tuesday. Measure EE garnered only about 45 percent of voter approval when it needed a two-thirds majority vote to pass.

“Measure EE has been voted down, a rare win for common sense in a region that could use it,” the Los Angeles Daily News reported. “The measure was nothing more than a bailout for Los Angeles Unified’s irresponsibility. Its defeat should discourage the recent wave of tax hikes pitched as the solution for poorly run school systems.”

A yes vote would have authorized the LAUSD to levy an annual parcel tax for 12 years at the rate of $0.16 per square foot of building improvements to fund educational improvements, instruction, and programs.

Democratic Los Angeles Mayor Eric Garcetti and school district officials campaigned vigorously for Measure EE, and were counting on its passage largely for the cash infusion into the nearly insolvent mega-district.

What’s Going on at LAUSD?

California State Sen. John Moorlach (R-Costa Mesa) has issued many warnings about the Los Angeles Unified School District budget crisis, saying it is so big it could wipe out the California budget surplus… and perhaps the state budget.

Moorlach says the LAUSD has the largest unrestricted net deficit of any California school district, at $10.9 billion, and now that the district has to report the retiree medical unfunded liability on the balance sheet means it will increase LAUSD’s deficit by another $15 billion.

“The unrestricted net deficits for 2016 and 2017 were $10.5 billion and $10.9 billion, respectively,” Sen. John Moorlach (R-Costa Mesa) wrote in 2018. “For 2018 it is $19.6 billion, or 80 percent higher!” Moorlach said this is largely the result of net “other postemployment benefit (OPEB) liability and net pension liability for various retirement plans.”

Moorlach’s 2018 report, “Financial Soundness Rankings for California’s Public School Districts, Colleges & Universities,” found two-thirds of the 944 state school districts “bleed red ink.”

“LAUSD ranked 922nd, at a negative $2,315 per capita, based on its 2017 CAFR. Using the LAUSD’s new 2018 CAFR, that number now jumps to a negative $4,180 per capita. This is what every man, woman and child would have to pay to get LAUSD out of its negative condition,” Moorlach found.

This is why Mayor Garcetti and LAUSD officials were counting on passage of Measure EE and the anticipated cash infusion.

Ten years ago, Los Angeles voters were faced with a $100 per year parcel tax to raise about $100 million per year for LAUSD. “Measure E not only failed to reach the required two-thirds majority needed to pass the measure, but it was actually voted down 53 percent to 47 percent,” LADN reported.

“Nine years later, LAUSD is still a fiscal train wreck, and is led by a school board and superintendent who thought the best way to get out of the district’s financial hole was to dig a deeper hole and then ask for a $500 million per year tax increase through Measure EE.”

Notably, Garcetti’s Los Angeles spends one out of every five general fund dollars on retirement benefits for city employees, according to the city’s proposed annual budget.


‘I’ve been battle tested’: Jack Guerrero says he’s ready to fight corruption in Sacramento

by Stephanie Rivera in Politics

Jack Guerrero had no intention of going back to his hometown city of Cudahy—or even becoming a politician—when he left as a teen after receiving an acceptance letter to study at Stanford University in Palo Alto.

Growing up in a tough neighborhood in southeast Los Angeles County in the 1980s and early ’90s, he said he faced taunting from local gang members on his way to school, witnessed drug deals and domestic violence incidents and experienced the constant presence of police helicopters above his neighborhood.

“It was tough to be a kid at that time,” Guerrero said.

Today he is a two-term councilman of Cudahy, a position he’s held since 2013, and the Republican candidate in the 33rd state Senate District race that will be decided on June 4.

He’s up against Long Beach Councilwoman Lena Gonzalez, the heavily favored Democratic front-runner, to represent a district that includes southeast cities along the 710 Freeway, including Huntington Park to the north and the majority of Long Beach to the south. The position was left vacant by Ricardo Lara, who was elected state insurance commissioner in November.

Guerrero faces an uphill battle to win the seat; the district is over 55% registered Democrats, and roughly 11% Republican.

The son of working-class Mexican immigrants, Guerrero said his journey to political office happened almost providentially. Months into moving in with his father in Cudahy while he found a place to live in a beach city, a bribery scandal involving local elected officials broke out.

It was “made for television” stuff, Guerrero recalled. One Cudahy city official even barricaded himself in his business for hours as authorities attempted to take him into custody.

“I remember feeling just awful for my city,” Guerrero said, “thinking, this poor city where I was born and raised and leadership can’t get it together to serve constituents honestly.”

It motivated Guerrero to find a candidate who was both honest and competent to support. When he couldn’t find one, though, he decided to run.

The private sector life

Before the 45-year-old unmarried economist grew homesick and decided to live closer to relatives, he wore many hats in the finance industry and traveled the world.

He’s a certified public accountant and vice president of corporate treasury at Union Bank with experience in investment banking, auditing government agencies and advising Fortune 500 companies. His jobs have taken him to New York, San Francisco, London and Zurich.

Before that, he earned a bachelor’s degree in quantitative economics from Stanford University (one of his professors was former U.S. Secretary of State Condoleeza Rice) and a master’s in business administration focusing on corporate financial management from Harvard University.

As a result, he considers himself a classical economist and free marketeer—a believer that the competitive market is the solution to many of today’s issues.

State Sen. John Moorlach, who represents the 37th District in Orange County and whom Guerrero closely aligns with politically, said having someone with Guerrero’s background could bring “real positives to Sacramento.”

Right now, Moorlach is the only certified public accountant on the state Legislature. “I could use some company,” he quipped.

More importantly, Moorlach said, having Guerrero on the Legislature would mean having a financial- and detail-oriented mind for one bill in particular: the budget.

“We need some people in Sacramento that have some real world business experience, that accounting acumen,” Moorlach said.

Red in a sea of blue

Guerrero may understand balance sheets, but is he able to muster enough support in a heavily Democratic district that hasn’t been represented by a Republican in recent years?

As a fluent Spanish-speaking child of blue collar Mexican Catholic immigrants, Guerrero believes he understands the 33rd Senate District, which is about 70 percent Latino.

“I think a lot of Democratic politicians are a little bit disconnected from the working poor,” Guerrero said.

He described some Democrats in elected positions as middle class who can bear the brunt of taxes as opposed to the working poor trying to make ends meet.

“It’s unfair to tax them in ways that make life difficult for them when the government then uses the money and gives fat salaries to executive management, money for consultants, pensions that are out of control and mismanages the cities’ finances,” he said.

David Hernandez, chairman of the Los Angeles Hispanic Republican Club, which has endorsed Guerrero, believes his willingness to call out politicians who offer sweetheart deals to businesses has resonated with his constituents in Cudahy—a city just over 1.2 square miles and a population at about 23,000.

“That type of pay-to-play favoritism—single bid contracts—that’s going on in every city of the district,” Hernandez said. “So often than not politicians are unwilling to point that out because there are so many people benefiting financially from that and who in turn contribute to the campaign.”

Guerrero’s colleague, Cudahy Councilwoman Elizabeth Alcantar, doesn’t doubt he cares about the community. But she differs in opinion on a lot of political issues that “have a lot of implications for our community,” she said.

Take, for example, immigration.

The councilwoman—whose day job is advocacy work for a nonprofit—estimates that nearly half of the mostly Latinos living in Cudahy are immigrants and half of those immigrants are undocumented.

“I don’t doubt he cares, but it’s tough,” Alcantar said.

What is seen as a nationally divisive issue had local effects when, in 2014, a resolution declaring Cudahy a Sanctuary City came before the council and passed. Guerrero abstained from that vote, which Alcantar interpreted as him not finding the issue important enough.

“We should be standing up and being vocal about our support for our immigrant community, our undocumented folks,” Alcantar said.

The council decision led to high tensions in future council meetings when outside conservative groups opposing illegal immigration continuously attended them in the following years.

Guerrero said he isn’t against immigration—pointing to his parents who worked as farm workers before turning to factory work—but does believe the U.S.-Mexico border needs to be made secure.

He believes legal immigration needs to be fixed so that it is more efficient and more closely aligned with the needs of the country’s economy.

His conservative views on LGBTQ issues and women’s reproductive rights are also troubling for Alcantar—and has been a point of criticism by his opponent, who supports both issues.

Guerrero abstained from a Pride month resolution put forth by another Cudahy colleague last June and has criticized Planned Parenthood.

“His staunch opposition to Planned Parenthood, to continue to paint it as simply an abortion clinic when it provides so many more services […] it does hurt our communities,” Alcantar said.

Alcantar believes such mischaracterizations of a health care center that provides flu shots, mammograms and other screenings may deter community members who could feel ashamed of being associated with it.

Similarly, she worries about their disagreement over what benefits city employees should have.

“One of the bigger issues we disagree on is the terms of what benefits our employees should have—whether they should have a pension in order to support themselves past working for the city,” Alcantar said.

The environment seems to be the one issue both Alcantar and Guerrero can agree on.

They both agree that plans to expand the 710 Freeway will hurt communities alongside it—including Cudahy and Long Beach. Gonzalez on the other hand, has expressed support for it.

However, Alcantar would like to see Guerrero speak about not just the negative health impacts but the environmental injustices that disproportionately affect low-income, communities of color.

Key issues for Guerrero

Business-friendly climate: Guerrero would like to lower taxes and cut the red tape that many businesses face when opening up in cities. He saw the issues in Cudahy where it took some businesses a year and a half to set up shop.

Guerrero believes these efforts would level the playing field for companies who don’t have lobbyists or have money to buy off politicians who then in turn provide special treatment, known as “carve-outs.”

“By doing policies that lower the tax burden for businesses across the board we then have the additional benefit of averting corruption,” Guerrero said.

Education reform: This is perhaps the most personal issue for Guerrero, who has called the state’s public education system “decrepit” and criticized funding priorities.

“Education should be about the children and most of the funding should go to the classroom,” said Guerrero, who noted the astonishing payments to consultants, administrators, lawyers and others that funding goes to.

A complete overhaul of the education system under Guerrero’s plan would include a focus on school choice—whether it’s public, parochial or charter—reform of teacher tenure rules and a “focus on core academic disciplines, not indoctrination of ideology or over-sexualization of elementary schools,” he said.

Guerrero said his charter school growing up was Cal State Los Angeles with which he supplemented his education at Bell High School. The school, at the time, was one of the lowest performing schools in the state and did not offer Advanced Placement courses that he sought.

“I really felt a bit short-changed by the quality of my education,” Guerrero said.

Without any help from his family or school, he was also able to attend Stanford and Georgetown University for summer classes between his sophomore and junior years. He paid for those courses by fundraising, reaching out to the local Elks Lodge and Kiwanis Club organizations.

He now sits on the advisory board for the Hispanic Scholarship Fund and donates to local schools and other charities the equivalent of his city council stipends.

Pension reform: Multiple times, Guerrero has been told to “dumb down” discussions or avoid talking altogether about what he believes to be the biggest threat to the state’s long-term sustainability: unfunded pension liability.

It’s estimated at one trillion dollars, according to a Stanford study, and Guerrero says it should be thought of as debt—something public agencies have not been honest with their constituents about.

Everyone in state government could be fired, Sacramento could be shut down and all of California’s tax revenue could be hoarded for six years “and we still would not recover,” Guerrero said.

At least one of the ways to address the issue is by taking a cue from the private sector by migrating away from a deferred pension plan and toward contributions like a 401K plan.

“If you are an employee in the public sector and you have earned your deferred compensation, that should be honored to the extent economically feasible,” Guerrero said. “Anything above that—that you have not yet earned—should be the subject of renegotiation.”

An ‘unusual’ senator

If elected, Guerrero says he is ready to expose corruption in Sacramento—from Democrats or Republicans.

“I will be an unusual senator because I’m not afraid to challenge the status quo and to call attention to corruption when I see it,” he said.

He hopes to bring to light what he believes are pernicious consequences of excessive taxation on working families.

“I’ve been battle tested,” he said, “and I will bring the same discipline to Sacramento.”


This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District. If you no longer wish to subscribe, just let me know by responding with a request to do so.

MOORLACH UPDATE — California’s Tardy CAFR — June 3, 2019

Although serving on the Budget Conference Committee is a massive time commitment, I do get to speak to numerous direct and indirect components of California’s proposed spending plan for next year. More importantly, many are watching, as it is streamed live and repeated on the California Channel.

Thursday’s opening meeting was being monitored by The Bond Buyer. But, something was lost in the translation.

Although not super critical, I was not quoted correctly on the state’s unrestricted net deficit of $168.5 billion

(see MOORLACH UPDATE — Budget and Legacy Priorities — January 11, 2018) and the $91 billion retiree medical unfunded liability (see MOORLACH UPDATE — Happy Independence Day Week — July 1, 2018) . Unfortunately, confirming with my office did not help the reporter in clarifying the numbers. I did submit the following correction, but it was too late.

Here is how the piece reads:

“It’s May 30 and we haven’t received the CAFR for California,” said Sen. John Moorlach, R-Costa Mesa, Thursday during the state’s joint Senate and Assembly budget conference committee hearing. “Will we receive it before we approve the budget?”

Moorlach pointed out that the state’s Department of Finance has reported a $21.5 billion surplus, but the most recent CAFR for year-end June 30, 2017 showed $91 billion in unfunded liability on retiree medical benefits and $165.5 billion for state employee, teachers and judges pensions.

“I don’t want it growing to $1 trillion,” said Moorlach.

Here’s how it should read:

“It’s May 30 and we haven’t received the CAFR for California,” said Sen. John Moorlach, R-Costa Mesa, Thursday during the state’s joint Senate and Assembly budget conference committee hearing. “Will we receive it before we approve the budget?”

Moorlach pointed out that the state’s Department of Finance has reported a $21.5 billion surplus, but the most recent CAFR for year-end June 30, 2017 showed an unrestricted net deficit of $168.5 billion and up a $91 billion in unfunded retiree medical liability benefits for state employee, teachers and judges.

“That’s a quarter-trillion dollars,” said Moorlach.

As for the long delay in the publication of the state’s Comprehensive Annual Financial Statement (CAFR), I wanted to know if the Department of Finance and the Legislative Analyst were aware of the delay, if they were going to address the accounting software called Fi$Cal, and would we find any surprises if it was released after the budget was approved (see MOORLACH UPDATE — Fi$Cal Frustrations — March 28, 2019).

The Government Accounting Standards Board’s (GASB) Statement 75 has been the untold story of the June 30, 2018 CAFRs. We are accumulating the CAFRs from the 50 states, 58 counties, 482 cities, 944 school districts, and 72 community college districts. The increase in Other Post Employment Benefits (OPEBs) has been staggering and mind blowing. I hope to release the results soon.

25th Anniversary Look Back

On June 1, 1994, the OC Register had a Letter to the Editor which impacted me, as I immediately required checks from taxpayers to be made out to the Orange County Treasurer-Tax Collector after my appointment in 1995. I remember one individual informing me during the campaign that she could not vote for me because she worked for a property management company and had a “Robert L. Citron” rubber stamp for manual check writing purposes. The letter came from Steve Brow of Anaheim. Here are the last two paragraphs:

What would we think if an employee of a business asked us to make a check payable directly to him instead of his employer? Yet we are instructed to make our checks payable not to the Orange County Tax Collector but directly to Bob Citron.

I have made these concerns known to the tax collector’s office in the past. Shortly, I’ll take them directly to Bob Citron at the ballot box.

Also on June 1, 1994, Kevin Johnson of the LA Times reacted to my letter to Supervisor Riley in “Treasurer Candidate Says County Portfolio Value Down — Politics: Moorlach blames Citron strategy for $1.2-billion decline. Official says figures wrong.” So, what are the correct figures? Why don’t reporters ever ask this question. Since you saw my letter and its eerie precision, I’ll only provide the paragraphs with reactions:

Riley, who has endorsed Citron’s reelection bid, said he had reviewed Moorlach’s analysis but retained his confidence in the incumbent.

Assistant Treasurer Matthew R. Raabe said Moorlach’s figures are in error. He described the challenger’s study as a “last-minute chance to get publicity for his campaign.”

On June 2nd, The Tustin News endorsed “Democrat Bob Citron.”

The recent flurry caused by our Tustin councilman, who supports [Citron’s] opponent, did not convince us to change our opinion.

On June 3rd, Chris Knap of the OC Register weighed in with “Moorlach fires another salvo at Citron — Politics: The incumbent county treasurer calls the attack the ‘dying gasps’ of his challenger’s campaign.” Since Chris Knap would come under intense criticism after the investment pool imploded, I’m providing the complete piece below. The major theme would continue to be the partisan angle — oops. The incumbent just told you he was earning 300 basis points more than the market — danger!! Why no one put a business reporter on the case is the journalism tragedy of this sad chapter. Twenty-five years later, and still very few business reporters digging into the financial affairs of government.

Costa Mesa accountant John Moorlach has renewed his attack on incumbent county Treasurer Robert L. Citron, comparing Citron’s investment of public funds to the “savings-and-loan fiasco” that cost taxpayers billions.

Moorlach, who wants to knock the 23-year Orange County treasurer out of his seat during Tuesday’s election, said an eight-page investment critique he sent to county supervisors Monday was meant as a wake-up call.

“Regardless of who is elected on June 7, Orange County has a bleak future for its fiscal assets,” Moorlach said. “The supervisors need to know that their goose is no longer laying golden eggs.”

But Citron dismissed the attack as “the dying gasps of a candidate who started out on this track and has been greatly derailed.”

Citron said the county’s $8 billion investment pool “is in no way in the same position as the (failed) savings-and-loan institutions. The pool is still making tremendous returns. In March we earned 7.61 percent, and in April it was 7.59. In the same period, the state’s investment pool returned 4.33 percent.”

Moorlach’s campaign, the first challenge that Citron has faced in more than 20 years, was fueled by partisan rancor over Citron’s support of a fellow Democrat four years ago, and local Republicans have not tried to hide it.

Moorlach’s recent campaign statements show contributions from GOP Assemblymen Mickey Conroy of Orange and Gil Ferguson of Newport Beach and county GOP chief Thomas Fuentes, among other prominent Republicans.

But the most acrimonious debate has been generated over an intensely complicated and highly speculative subject: the complex investment strategies that have allowed Citron to bring in double the earnings of other, more conservative public finance pools.

After initially coming on strong, including pointed attacks on Citron’s investment strategies printed in national financial publications, Moorlach fell silent last month.

He acknowledged Tuesday that his campaign was hurt when state Sen. Marian Bergeson, R-Newport Beach, pulled back her endorsement in late April, saying she was worried that his attacks had threatened the financial stability of county investments.

But Moorlach said he remains convinced, after more than a month of analyzing public documents, that Citron has gambled dangerously on the belief that interest rates will stay low.

By investing in short-term “reverse repurchase” arrangements, and using the money to buy long-term bonds, Citron has earned an arbitrage, or differential profit, that even Moorlach says gave the county “incredible performance numbers.”

But if interest rates continue to rise, as they have in the past six months, Citron will be stuck with billions of dollars worth of bonds returning less-than-market rates, Moorlach said. If he’s forced to sell the bonds in a down market, the losses could cut into principal.

“I’m not trying to cry wolf or scream fire in a theater,” Moorlach said. “All I’m saying is, `Board of Supervisors, look, this is risky.’ If interest rates rise, based on how he’s grown his garden, the harvest isn’t going to be very attractive. Win, lose or draw, the problem’s still there.”

Citron said Moorlach’s dire scenarios are based on speculation. “We don’t believe that situation will crop up,” Citron said. “If interest rates do go up, not all of the securities we have will (lose value) in that way.

“We may not be earning the very high interest rates, but we are still predicting that we will earn no less than 6.5 percent in the fiscal year that begins July 1.”

For my letter that generated the pieces above, see MOORLACH UPDATE — Budgeting Millions of Dollars — May 31, 2019. For the Look Back that provides my first engagement with The Bond Buyer, see MOORLACH UPDATE — The Week That Was — April 26, 2019.

California lawmaker raises questions about tardy CAFR

Keeley Webster

California lawmakers are weighing decisions on the $214 billion budget this year without the benefit of the state’s audited financial documents.

California Controller Betty Yee said the state’s comprehensive annual financial report for the fiscal year ended June 30, 2018 won’t be released until Wednesday. It was due out April 1.

“When I was a county supervisor for Orange County, we used to get our CAFR in December — and here we are in June,” said state Sen. John Moorlach, R-Costa Mesa.

Yee attributed the delay in an emailed response to “interface delays” with FI$CAL, the state’s new digital accounting system, and implementation of GASB 75, a change to the accounting rules that requires that the full liability of other post-employment benefits, such as retiree medical, be included on government balance sheets.

The FI$CAL system was designed to create a comprehensive budget program to replace a patchwork of outdated accounting programs. The project was supposed to be completed by July, but has experienced delays.

The delay means lawmakers will only have the audited financial report available for the final ten days of the budget process.

“It’s May 30 and we haven’t received the CAFR for California,” said Sen. John Moorlach, R-Costa Mesa, Thursday during the state’s joint Senate and Assembly budget conference committee hearing. “Will we receive it before we approve the budget?”

Moorlach pointed out that the state’s Department of Finance has reported a $21.5 billion surplus, but the most recent CAFR for year-end June 30, 2017 showed $91 billion in unfunded liability on retiree medical benefits and $165.5 billion for state employee, teachers and judges pensions.

“I don’t want it growing to $1 trillion,” said Moorlach.

Part of budget discussions have been over how much money to dedicate to paying down pensions and other long-term debt as opposed to placing more money in the state reserves.

Moorlach asked the state’s legislative analyst, Gabriel Petek, if he was planning on doing further analysis of problems related to implementation of FI$CAL.

“I want to make sure, we don’t get surprised by the numbers,” Moorlach said. “If you can help with that, I would appreciate it. When I was a county supervisor for Orange County, we used to get our CAFR in December — and here we are in June.”

The state has unaudited financial documents for year-end fiscal 2018 posted on the Municipal Securities Rulemaking Board’s EMMA site under disclosures for the state’s bonds.

“The unaudited financial figures are complete and submitted to the state treasurer,” Yee said. “I have no concern that a later fiscal year 2017-18 CAFR will harm the state’s financial position.”

That response is much different from what Yee wrote in a March 22 letter to lawmakers where she said that if departments were forced to submit estimates to the controller’s office, it “increases the risk that the CAFR could receive a modified opinion from auditors.”

The controller also noted that California does not have a statutory deadline for completing the CAFR.

California regularly releases its CAFR roughly two months later than the average for U.S. states even when it hits its April 1 deadline, according to data from Truth in Accounting, a Chicago-based think tank.

“It’s significant that California is slower than other states, if you think all governments are slow in releasing them, which we do,” said Bill Bergman, director of research for Truth in Accounting. “It is not that significant if you consider how much larger and more complex California is than other states.”

While financial statements are a valuable check on the accountability of governments, the value of that check diminishes the longer it takes to get the information, Bergman said.

Much of the financial information states put out regularly is cash-based and doesn’t take into account the accrual of long-term liabilities like pensions, OPEB or bond debt, Bergman said.

“I think for most people’s purposes the unaudited financial documents are inadequate,” said Marc Joffe, a senior policy analyst with the Reason Foundation. “I think it reflects poorly on the state’s credit when they can’t get a CAFR out on time.”

Two Fitch Ratings senior directors, Karen Ribble and Karen Krop, who co-rate the state, didn’t see the late CAFR as an issue, primarily because the state puts out so much “robust” financial information throughout the year.

“CAFRs are important, but in the best case, the fiscal year ends in June and they are released in November, so that information is six months old,” Ribble said.

For California, in particular, the interim data is sufficiently robust for Fitch to do a rating, Krop said.

California received the Government Finance Officer Association’s certificate of achievement for excellence in financial reporting for its 2017 CAFR.

In order to win the award, governments have to release their CAFR’s within six months of the end of the fiscal year. California asked for a six-month extension from GFOA for this year and was granted one, said Michele Mark Levine, director of GFOA’s Technical Services Center.

State and local governments across the United States facing pension solvency challenges are at the early stages of exploring various means of leveraging assets—primarily through transfer, lease or sale—for the purpose of shoring up underfunded retiree benefit systems.

Though timeliness is a criteria for the award, Levine said GFOA has a “tightrope to walk, because we understand information needs to be as timely as possible, but we are aware of the challenges governments face in getting out the information on time.”

“Sometimes there are a shortage, or backlog of firms, who are interested in doing government audits, and the actuarial information needs to be prepared. There are a great variety of reasons governments might be late, but we do think timeliness is important,” Levine said.

The new accounting regulations around reporting on OPEB has been a challenge for other states, she said.


This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District. If you no longer wish to subscribe, just let me know by responding with a request to do so.

MOORLACH UPDATE — Budgeting Millions of Dollars — May 31, 2019

We started the Budget Conference Committee in earnest yesterday and today. My four overriding concerns are:

1. The Governor recommended an additional contribution into CalPERS of $3 billion, but the Senate and Assembly recommendations were much lower. The Legislature should be encouraging an amount higher than $3 billion, not lower.

2. The Governor’s wanting to contribute $2.3 billion into CalSTRS on behalf of the school districts is the right thing to do with a budget surplus. This is even more critical when two-thirds of the state’s 944 school districts are fiscally hemorrhaging.

3. It is not only school districts that are fiscally stressed. Sacramento has a budget surplus of $21.5 billion and our cities and counties are struggling. A big percentage of this largess should go to these subsidiary governments.

4. We have enjoyed a robust economy since the election of President Trump, but the bond market is warning us a recession is on the horizon. An economic downturn hurts defined benefit pension plans, which increases employer contributions just when they are making massive budget cuts. We should be preparing now for those who will follow and pick up the pieces.

The number of bills the majority party approved the last two weeks that had massive price tags was astounding. What will be cut to pay $500 million annually towards new bond payments? How do you add $300 million annually for health care for undocumented individuals? That was the question I, as an immigrant, asked on the Senate Floor on Wednesday. Fox News 40 provides an account in the piece below.

25th Anniversary Look Back

I had several bond brokers who had reviewed the Orange County Investment Pool in great detail. I wanted their respective analyses to be as independent as they could be, so I did not let them know they were one of a group offering me feedback. They all came to the same conclusions. I aggregated their research, along with my own, and prepared a detailed account.

I addressed it to Tom Riley, dated May 31, 1994, 25 years ago today, the then-Chair of the Orange County Board of Supervisors. This letter would later be the platform for California State Senate hearings and hearings by the U.S. House of Representatives.

I found a copy, which has a few typos, that you can link to at

Since I do not have the full copy up on my blog, I am also providing it in full below.

Mr. Thomas F. Riley, Chairman
Orange County Board of Supervisors
10 Civic Center Plaza
Santa Ana, CA 92701

Dear Mr. Riley:

The race for Orange County Treasurer-Tax Collector has garnered significant media attention. The media has offered many insights; some most enlightening, some very disturbing. Most disturbing was your quote concerning Mr. Robert L. “Bob” Citron in the April 2nd issue of the Los Angeles Times:

“This is a person who has gotten us millions of dollars. I don’t know how in the hell he does it, but he makes us all look good.”

I have high regard for you and for your personal contributions to our great county. However, your quote displays an ignorance that prompts me to write so that you may, in fact, understand what your current Treasurer is doing. Especially since he is doing it with your tacit approval. So your “if it ain’t broke, don’t fix it” attitude is a serious leadership mistake. It’s synonymous to sticking your head in the sand.

My major concern has been “interest rate risk.” I have been consistent with this concern throughout my campaign. During this campaign the Federal Reserve Board has raised interest rates four times. Should interest rates continue to rise, then our County will not “look good.” And it will be your successor Supervisors and the citizens of this County who will have to deal with the ramifications of the activities which occurred during your watch. The victims will be our school children from even less funding; residents waiting longer for infrastructure improvements; road users tolerating poor driving conditions due to further delayed deferred maintenance.

After personally reviewing the Orange County Investment Pool (Pool) and also having numerous bond brokers analyze its various components, I would like to provide the following observations:

1. Overall, the portfolio is a major bull market bet in the middle of a bear market. The incumbent has structured the portfolio only on the premise that interest rates would continue to decline for the next four years. This is a major gamble with public funds that he is losing as of late.

Mr. Citron said as much as recently in a letter to the Board of Supervisors, dated September 10, 1993 (one month before the top of the bond market):

“This strategy has been predicated on interest earning rates to continue to remain low for a minimum of the next three years. If rates were to rise materially, it is reasonable to expect that the overall performance of the portfolio would decline. Although we strongly believe that future interest rates will remain low.”

In managing a portfolio, certain assumptions must be made. But who can accurately predict interest rates for the next six months? Let alone, the next three to four years?

2. Citron, labeled “a Democratic leverage artist” (Grant’s Interest Rate Observer, May 6, 1994), has borrowed an additional $8 billion dollars in the twelve months ended March 31, 1994, bringing the total funds under management to $22 billion. The top of the bond market was October 15, 1993. Accordingly, $8 billion of investments were purchased at the highest ask prices (over 36 percent of the portfolio).

3. The refinancing of this debt comes due every 90 or 180 days. Accordingly, the cost of borrowing increases as interest rates increase, similar to an adjustable rate mortgage.

4. Twenty-five percent of the portfolio, $5.5 billion, was invested in derivatives, the most controversial product in the investment community. Unfortunately, seventy-five percent of the derivatives are “inverse floaters.” Inverse floaters have a lower yield when interest rates rise.

5. Over ninety percent of the derivatives and the $7 billion in FNMA investments in the Pool mature in 1998. Over half of the portfolio has to be held for four years until maturity. As interest rates rise the value of these assets will decrease and cannot be repositioned for four years without a substantial loss. Also, the yield will be lower than market rates, presenting an opportunity cost, the less of the time value of money, to the participants. The Pool has borrowed short-term and loaned long-term, analogous to the Savings and Loan fiasco.

6. If interest rates continue to increase, investment opportunities offered by Citron’s competitors in the open market will out perform the County’s Pool. And the better performance will be provided with low or no risk investments.

7. The borrowing costs at March 31, 1994, averaged 3.7 percent. Recently, they have been as high as 4.7 percent. According to our model of the Pool as of March 31, 1994, if the borrowing costs go up to 7.7 percent the Pool will have a break even cash flow. That is, the investment income will equal the interest costs and result in net zero income to the Pool’s participants. Should rates exceed 7.7 percent the Pool would have a negative cash flow and implode. A recent example that you should research and become familiar with is the University of Houston and their reverse repurchase agreement experience.

8. Due to recent interest rate increases the Pool has incurred over $300 million in collateral calls. Because the derivatives have no secondary market, their value may be down as much as twenty percent. It is safe to say that the value of the Pool is down as much as $1.2 billion. This is equal to a loss in value of $1,000 per registered voter in the County of Orange. It’s enough to build a nice airport, let alone a terminal.

Quiet frankly, if interest rates do not drop, Mr. Citron will have lost as much in principal value as he has earned in income during the last three years. Such is the cost of taking risks.

Mr. Citron is relying on his past record which has provided great returns because his bull market bet was actually in a bull market. Unfortunately, when it was time to disengage this approach he, in fact, doubled down. This is extremely risky for any investor to do with his or her own money. But with public tax dollars it is dangerous.

A public official in a fiduciary role should not have made such risky investments. However, the conclusion of Mr. Citron’s letter of September 10, 1993 provides a clue as to why he did:

“We also look forward to continue to manage these funds in the professional manner that constantly out-performs the market as a whole.”

Mr. Citron believes he can accurately anticipate the market all of the time and also out-perform everyone. That’s impossible. Ask David Askin and George Sorros, two individuals who built aggressive, highly leveraged portfolios on the same assumptions Citron is using, resulting in large losses of investor dollars.

Local political writers have supported Citron’s strategies. Unfortunately, they have not researched the Pool. They were provided a copy, but failed to do the necessary analysis. I can understand the old adage of “don’t confuse me with the facts,” but it is intellectual bankruptcy for them to comment on a business/investment issue without having the proper background. They certainly qualify for the “I don’t get it” award.

The utilization of Standard & Poor’s to defend Citron has also been dubious at best. This organization has to monitor over 37,000 municipalities. They have also commented on the oneyear “tax and revenue anticipation notes (TRANs)” which the Treasurer is guaranteeing. Diane P. Brosen, whom the local papers have quoted, is S & P’s director of short-term debt ratings, and is happy to have any $22 billion portfolio guaranteeing the bonds of local municipalities: she is not rating the Pool, only the bonds that look to the largesse of the Pool as a buyer of last resort.

The irony is that the TRANs are being issued only to invest in Citron’s Pool. This is immoral I can assure you that if interest rates continue to rise, these bond issues will be a bust. And the Finance Directors and elected officials approving these transactions will have serious explaining to do to their constituents.

The problem you face is that Mr. Citron is using the County of Orange to guarantee these TRANs. Who will bear the loss, should one occur? The County? The participants in the Pool? Have the over 180 participants agreed to share losses?

One only needs to look at the bond issue that the Newport-Mesa Unified School District is participating in. They have borrowed some $47 million, which Mr. Citron invested in Federal National Mortgage Association (FNMA) government bonds. These bonds collateralized another roughly $46 million in funds, through the use of a reverse repurchase agreement, allowing the purchase of additional FNMAs.

The TRANs are due mid-June, but the approximately $93 million in FNMA investments are down some five percent in value. According to Mr. Citron, the County will take the nearly $5 million loss: He states that he will hold the FNMAs, which are intermediate bonds with a life of five years, until maturity.

However, for every one percent more in yield that the participants of the Pool could have received elsewhere, they lose nearly $1 million in annual income. Put simply, the Pool could even lose more by holding to maturity if rates increase by more than 125 basis points (1.25 percent). Obviously, this strategy of Mr. Citron’s is somewhat shallow, if not disingenuous.

Mr. Citron goes on to state in his letter of September 10, 1993:

“It is the threat of inflation returning because of perceived economic circumstances that would cause interest rates to rise. The long term prospects are that we are going to have very slow growth; and, therefore, forestall inflation growth from happening that would have a material effect on interest rates rising. Interest rates could rise 100 basis points (1.00%) tomorrow, because of some temporary phenomena happening in the world. But higher interest rates are not at all sustainable.”

I hope, for the sake of Orange County, that Citron’s prognosis is correct. Unfortunately, most economists and others familiar with the Federal Reserve Board do see inflation on the horizon. Even the commodities markets are portending of things to come.

Most interest rate experts do not expect a decline in interest rates soon or at all. This will negatively impact the Pool. Our research indicates that for every point increase in interest rates, the Pool’s yield decreases two points. This is due to the extensive use of leverage. Therefore, if interest rates continue to rise we may incur major financial losses in Orange County.

It is interesting to point out that Mr. Citron has predicated the majority of his basis for a longterm interest rate decline on the theories proposed by Mr. Charles Clough, Chief Investment Strategist for Merrill Lynch. It so happens that Merrill Lynch is the major broker for the Orange County Pool and the major underwriter of the Pool’s derivative investments!

It is of great concern to me as a citizen of Orange County to see our Treasurer wager away our tax dollars on long-term bets. And he’s doing it under the noses of elected officials at the Board of Supervisors and at almost every small District level.

Citron has structured an open ended, highly leveraged mutual fund about which he confidently proclaimed “we believe that our comparative higher interest earning rate yields over the next three fiscal years is insured.” They say that pride comes before the fall. It is tragic that Citron did not factor in a major problem: President Clinton’s new fiscal program.

If I am elected I will pursue a major revision in the Pool’s reporting of its investments with the participants. The Pool must be marked to market and treated like the mutual fund that it is. Money market funds trade at a $1 net asset value, but the Pool does not even resemble a money market fund. In fact, money market mutual funds are specifically prohibited by the Securities and Exchange Commission from investing in inverse floaters. Mr. Citron has over $3.5 billion of inverse floaters in the Pool. Ironically, his office stated recently that inverse floaters are “one of those securities you say, ‘I wish I hadn’t bought that’” (Orange County Register, May 8, 1994). The participants have to face the music, have their investments reported at their net asset value, and not anticipate a dollar back for every dollar invested. This must be done for the financial integrity of Orange County.

This task will require a tremendous amount of cooperation with the Treasurer’s office, the Board of Supervisors, and the Finance Directors of the municipalities in the Pool. This is the only realistic approach to take. If interest rates continue to rise, not doing so will only postpone the inevitable.

Furthermore, if elected, I will request that you and the rest of the Board of Supervisors provide me with independent forensic accountants, legal counsel, and investment counsel. We must determine the extent of Mr. Citron’s side deals, such as the one with the Newport-Mesa Unified School District, his derivative investments, etc.

It is time to recognize that the County has been in a high risk situation and the participants have to bear the costs of those risks. Actions have consequences.

I provide no miracle cure. I provide no secret “exit plan.” Mr. Citron’s Pool has minimal defensive positions. His approach has been to purchase “fixed interest rate coupon instruments,” hardly a dramatic hedging maneuver.

The Pool is focused on decreasing interest rates, even after those rates have been at all time lows as far as recent history is concerned. The only quasi-legitimate “exit plans” Citron has are increased leveraging or increased contributions to the plan.

It was Citron’s use of leveraging that prompted the City of Tustin’s withdrawal from the Pool. Let me quote from that City’s “Statement of Investment Policy:”

“Cash Purchase Only. Securities shall not be purchased on margin, credit or for other than full cash payment and shall not be pledged as collateral.

“Repurchase agreements. Funds shall not be invested in repurchase or reverse repurchase agreements of any kind.”

Their policies are no different than that of any other prudently run institution. Accordingly, they had to pull out. And Mr. Jeff Thomas’ involvement as a City Councilmember was appropriate in his fiduciary role in that position.

It would be interesting to see how many other municipalities who are participants in the Pool who are in violation of their own investment policies. Why has Mr. Citron enticed them to circumvent their own investment policies?

For some reason Mr. Citron and his cronies, like Assemblymember Tom Umberg, just don’t get it. Instead, they prefer intimidation and belligerence. They send a strange message. Instead of wishing the City of Tustin well and encouraging them to consider modifying their investment policies and then returning to the fold, they try to make a “political” issue out of it. How narrow minded. Mr. Thomas did his job and he did it properly, I can not say the same for Mr. Citron or Mr. Umberg.

If elected I will take a conservative approach with the Pool. It will take a considerable length of time to do so, thanks to Mr. Citron’s long-term bets. It would be fair to inform you where my forecasts of the near-term market will be. My forecast for the future parallels that described in the May 6, 1994, issue of Grant’s Interest Rate Observer, page 1 and forward. The 1994 bear market can be compared to the 1958 market which saw a significant amount of margin calls:

“In the spring of 1958, a recession was ending, and the Federal Reserve was preparing to change course. The bulls, rich and thinking well of themselves for owning bonds that had risen by more than 10 points since the autumn of 1957, were bearish on business activity and skeptical about inflation. Such was the shape of the yield curve that they could borrow at 1 1/2% or so– Garvin, Bantel & Co. was a leader in the repo business–and invest at 3% or so. [George K. Garvin, senior partner of Garvin, Bantel & Co., was suspended from the New York Stock Exchange for overlending to bond speculators and the leveraged purchase of Treasurys was condemned on moral grounds by a writer at The New York Times]. ‘The equity margins put up in this period by credit speculators were, in too many instances, either nonexistent or too thin,’ the Fed and Treasury concluded in a 1959 postmortem of the bear market. That sentence may be recycled for the inevitable official postmortem of the 1994 bear market.”

Another article in the same issue of Grant’s Interest Rate Observer, on page 10, it was observed about this Treasurer’s race in Orange County:

“It isn’t every year that the suitability of leveraged derivative securities comes up for the vote on a local ballot; watch this space.”

A copy of the articles are attached and are reprinted with permission from The Interest Rate Publishing Corp., copyright 1994.

I believe a conservative approach to investing is needed for our County. Every prudent investor chooses safety of principal as the top priority. Next comes the need for liquidity. The last priority is achieving yields. It’s time to get back to basics. Mr. Citron has these priorities inversed. He has focused primarily on yields. He has poor liquidity. And he has put our principal at risk. He is willing to make highly leveraged, highly speculative and highly aggressive investments. I am very uncomfortable with that, and you should be, too.

I would strongly recommend that you prepare for a worst case scenario. As for myself, I will pray that interest rates go down. If they do, you had better inform your Treasurer that although he survived that scare he must modify his investment approach immediately.

Should you have any questions regarding the above or the attachments, please do not hesitate to contact me.

Very truly yours,

John M. W. Moorlach


Copies of referenced documents attached:
1. Letter regarding the Annual 1992-1993 Financial Statement, dated September 10, 1993, from Robert L. “Bob” Citron to the Board of Supervisors.
2. Grant’s Interest Rate Observer, May 6, 1994, applicable pages (copied with permission).

cc: Supervisor Roger R. Stanton
Supervisor Gaddi X. Vasquez
Supervisor William G. Steiner
Supervisor Harriet M. Wieder
Interested members of the media

For the last Look Back, go to MOORLACH UPDATE — Budget Conference Season — May 30, 2019 may 30, 2019 john moorlach.

Senate Approves Bill that Would Provide Medi-Cal Coverage Regardless of Immigration Status


The California Senate has approved a controversial bill that provides health care for immigrants, regardless of their immigration status.

If signed by the governor into law, Senate Bill 29 will allow immigrants who are ages 19 to 25 and 65 and over and living in the state without legal permission to receive Medi-Cal benefits.

"They are contributing through hard work and they are contributing through $3 billion worth of taxes every year that we know of," said Sen. Maria Elena Durazo D-Los Angeles, the bill’s author.

Durazo said the move will actually save taxpayers money in the long run, since she claims state money has already been paying for immigrants’ health care for years.

"We as taxpayers are paying for their care. The problem is we’re paying for their care when they go to the emergency room, which is just to treat the symptoms," she said. "Emergency room care costs us far more than preventative care."

But before the bill was voted on, some lawmakers questioned if it’s money well spent.

"From a budget perspective, that cumulatively this could be very difficult," said Sen. John Moorlach, R-Costa Mesa.

"Show favoritism to people that are not here legally at the expense of people that are here legally," said Sen. Jeff Stone, R-Temecula.

Stone made the argument that the money should instead go to another group in need.

"In California, we have 10,000 homeless veterans and instead of spending a billion dollars on people that are not here legally to give them health care, we should take that billion dollars and, as a first priority, take care of those 10,000 veterans," he said.

Following the 24-11 vote, the bill will go to the Assembly. From there, if passed, lawmakers will conform with the budget to determine how much funding there will be available. If it gets that far, then it will go to the governor’s desk to be signed into law.


This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District. If you no longer wish to subscribe, just let me know by responding with a request to do so.