Look Backs on Transparency

The news articles just kept pouring in.  In fact, today may be the “Mother Lode” for all three of the five-year look backs.  Today’s theme is “transparency.” 

Peter Pan shows up a couple of times.  So does Chairman Riley’s famous quote.  But the closer will give you chills.

December 5


On this day in history I FAXed the County Administrative Officer offering to make myself available to assist, but I do not recall receiving a response. 

Chris Knap’s submission was titled “Investors got no warning about potential losses—For nine months, participants were in the dark.”  Excuse me?  Don’t they read the newspapers?  Oh, well.  It was tragic that none of them received detailed financial reports like I had, which took a California Public Records Act request to obtain.  But, they didn’t ask.  This article is a tough read, with quotes from city managers, councilmembers, and others feigning ignorance (so I’m not including them).  Here are selected quotes, which brings closure from the most famous one uttered during the campaign.

How many local officials actually understood these complex transactions is an open question.

“If everyone was dealing at the same level of sophistication, that would be one thing, but I’m not sure that was the case,” said Irvine Ranch Water District’s [Peer] Swan.  “They had been lulled to sleep by some pretty spectacular returns.”

Indeed, when Costa Mesa accountant John Moorlach challenged Citron’s strategies during the spring primary, county administrators and the entire Board of Supervisors sprang to Citron’s defense.

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

Since Thursday, the sheen on those fancy transactions has faded for many investors.

“I wish I had known about this earlier so I could stop it,” said Riley, Citron’s former defender.

Scott Peotter had an excoriating editorial submission in the OC Register’s “The Orange Grove” section titled “Officials ignored signs of risky investments.”  This provided a counter-balance to Knap’s piece.

Now it has finally hit the fan!

The sky is falling over the Orange County Board of Supervisors in a multi-billion dollar fiasco.  We have now discovered that the concerns John Moorlach had regarding the safety of the Orange County Investment Pool (OCIP), in his race for county treasurer against Robert L. Citron, were true.  Higher returns do mean higher risks.

What do we as taxpayers do?  Demand Citron’s resignation effective immediately and have the board appoint John Moorlach (if he is willing to serve) since he was one of the first to identify the problem and call for correction.

The headline for the OC Register’s Letters to the Editor section (Talk Show) became the material for a very popular bumper sticker:  “Don’t blame me, I voted for Moorlach.”  These two letters (the first is abbreviated) provide a sense of what readers were thinking.  (Thank you, Eric Christensen!)In all honesty by election day in June, it was too late, but instead of punishing the guilty, the voters killed the messenger.  Where can I get my “Don’t Blame Me, I Voted For Moorlach!” bumper sticker?

Eric Christensen


Wouldn’t it have been helpful to the voters of Orange County if the Register had spent a portion of its time and effort explaining derivatives before the June election?

John Moorlach tried to explain – he was genuinely concerned about the investment policies of Robert Citron.  A full-color front-page expose is easy after the fact – but not too helpful.

In a democracy, an informed electorate is essential, and the role of the media in assuming responsibility for making information available is crucial.  Your coverage is excellent, but several months late.

Elizabeth W. Richards

Corona del Mar

The impending doom raised its head with the LA Times front-page, top-of-the-fold, headline “Supervisors Call Emergency Session on Fund for Tomorrow—O.C. officials spend Sunday in series of briefing meetings.  Dismay builds over selective no-loss guarantee” by campaign reporters Jodi Wilgoren and Gebe Martinez.  The continuation title read “Republicans Ponder Citron Recall,” which followed the theme in the December 3rd Daily Pilot.  The no-loss guarantee is addressed in the Daily Pilot’s article, provided next.

The Daily Pilot’s Carolyn Miller had a front-page article on a possible solution in “Cap may ease loss for risky investment—Newport-Mesa officials hope insurance coverage and county’s special guarantee will minimize losses in controversial investment pool.”  It has similarities to Bernie Madoff investors believing they’ll get their entire investments back.  Let’s just say I was not amused.

Newport-Mesa Unified School borrowed $47 million to participate in the county’s controversial investment pool that has suffered a $1.5 billion loss.

It’s a strategy that school board President Ed Decker calls “too risky” and one critic says is “a joke.”

But school district officials are banking on an insurance cap and a special guarantee from Orange County Treasurer-Tax Collector Robert Citron to protect their investment made with two other districts – Irvine Unified and North Orange County Community College District – and the Orange County Department of Education.  The four agencies borrowed a total of $200 million to invest in the fund.

However, Costa Mesa CPA John Moorlach, a harsh critic of Citron’s investment strategy, blasted the district’s move to borrow $47 million to invest.

“It’s a joke,” said Moorlach.  “I’m mad.  You don’t borrow to invest.  It’s a technique that’s too big a risk to take.  You’ve got guys on Wall Street losing money all the time – what makes a school board and financial director think they can predict, with accuracy, interest rates a year from now?  It’s faith at best and gambling at worst.”

Moorlach also questions whether Citron had the power to extend a guarantee to safeguard the four agency’s principal on their investments.

“Citron made it on his own which is an abuse of power,” he said.  “He wanted to be a hero.  He gave them something creative – that’s crazy.”

Moorlach said Citron wrote a letter of guarantee for the ’93-94 year, but said during the election when he asked the county for proof of one to cover ’94-95, none could be found.

“If this deal does fail, it would be a sad legacy to leave by board members going off . . . what a tragedy that one vote caused,” Moorlach said.  “They could leave the district so damaged it would take years to recuperate.”

Another reporter who was early to call was Andrew Bary of Barron’s.  “I’m 3,000 miles away and we’re hearing that your county’s local government investment pool is about to implode!”  He was early, but, his article didn’t print until Monday the 5th of December.  The title was a classic:  “Peter Pan Portfolio:  Orange County bet that interest rates would stay low forever.”  The punch line?  “You’ve just got to believe.”  Here are the three opening paragraphs and a few other selected ones:

Perhaps the biggest mistake being made in assessing the $1.5 billion or more in financial losses announced last week in Orange County, Calif., is to lump them with the derivatives losses suffered earlier this year by the likes of Procter & Gamble and Gibson Greetings.  It’s true that Orange County Treasurer Robert Citron did have a heavy dose of derivatives in his $20 billion portfolio, Barron’s reports.  But his problem was more fundamental and old-fashioned:  He ran a highly leveraged bond operation, yet he chose to ignore the fact that his strategy’s success depended on interest rates staying low.  Obviously, it didn’t work out that way.

When rates shot up this year, the 69-year-old Citron did what many bond managers around the country consider inexcusable:  He put his head in the sand and pretended that nothing significant was wrong.

A critical flaw in Citron’s approach was that he never  believed in adjusting the value of his securities based on changes in rates.  Some West Coast wags have taken to calling it the Peter Pan Portfolio, noting that its reporting technique is based on the idea that “ya gotta believe” things will work out.

“The county leadership should never have allowed this to happen,” says John Moorlach, a Costa Mesa accountant who made Citron’s handling of the investment the centerpiece of an unsuccessful bid to win Citron’s job this spring.  Adds Moorlach:  “If you want to make a killing, that’s fine, but do it with your own money.  Don’t play with the taxpayers’ money.”

Before this week, Citron remained popular, the only Democrat elected to a major post in overwhelmingly Republican Orange County.  When Moorlach ran against Citron earlier this year, it was the first time Citron had been challenged in 28 years.  “People tried to paint me as a mean young kid challenging a nice old man,” Moorlach said, noting that the Orange county establishment treated him as an alarmist when he talked about the risk in the fund.  When the Los Angeles Times endorsed Citron, the newspaper praised his “successful stewardship of the county’s money,” and said the “cloud over Citron increasingly looks like a bum rap.”

Moorlach felt a measure of vindication Thursday – the L.A. Times ran an article saying he had been right all along – but was sad because of the impact on the county.  “We’re going to have a lot of victims.”

Michael Utley of The Bond Buyer weighed in with “Largest Depositors Pledge to Stay in Orange County, Calif., Pool.”  Brad Altman, who covered the race back in April, also contributed to the article.  Although Brad is no longer a journalist, we have also continued to maintain contact over the years.

 “I feel vindicated,” Moorlach said Friday, “but I’m not going to gloat.  I live here and this is a real crisis for the residents of Orange County.”

Moorlach said he would not join others in calling for Citron’s resignation.  Nor would he speculate on the future of the fund because, he said, its complexity makes the future difficult to predict.

“That’s the problem with this kind of portfolio,” Moorlach said.  “When it’s going right, you’re a king, but when it’s going wrong, you’re a goat.  And if you’re doing that with your own money, hey, fine.  But with public dollars, it’s a tragedy.”


The OC Register’s Jenifer McKim kept the pressure on in Saturday piece titled “Toll road tussle – Backers of a plan to sell the 91 Express Lanes say the public will gain.  But skeptics abound.”

Supporters of a controversial deal to sell the 91 Express Lanes say commuters will benefit because the new owners will funnel as much as $500 million in profits into local roads over the next 30 years.

“What profits?  There won’t be any profits,” County Treasurer John Moorlach said Friday.  “Haven’t we had enough of overly optimistic toll road use projections?”

Moorlach said he’s concerned that projections leave little room for error.  He also called for more public scrutiny of the project and a release of details into the sale.

“It doesn’t make financial sense,” Moorlach said.  “Here we have a process that has been in the dark.”

On Sunday, the 5th, the lead editorial in the Commentary section of the OC Register was the only editorial.  “Detour on the road to privatization” took up the entire length of the page.  This was an instance where, instead of just responding to reporter inquiries, I jumped in and actively attempted to oppose this deal.

Explaining that the plan has a “peculiar odor,” county Treasurer John Moorlach told us that it reminds him in a way of the 1994 county bankruptcy.  “Everyone is being compensated,” he said, but it looks like the bond holders might get shortchanged.  He also worries that the project doesn’t appear to be an “arm’s-length deal.”  That’s because the sellers lent the buyers seed money, and this multimillion-dollar arrangement was pushed forward without an outside appraisal.


The 10th anniversary of the county’s filing for bankruptcy protection spawned a few fun articles on this Sunday.  It was probably ten years prior when so many articles would hit in one day.

The LA Times had a profile by Stuart Pfeiffer, titled “Treasurer’s Credo:  Safety Above Profits – Moorlach’s conservative investing, openness are in stark contrast with his predecessor Citron.”

“What we do now is run a money-market fund, completely on the opposite side of the bell curve from my predecessor, who ran a highly leveraged hedge fund,” Moorlach said.  “We’re on one side, super-conservative.  Citron was on the other, highly speculative.”

In addition to safety, there is another major difference in the fund today:  Every investment and the balance of every account is disclosed in a monthly report to county officials and on the treasurer’s website.

Two investment ratings agencies that review the treasurer’s investment pool give it high marks for creditworthiness.  Citron did not have the pool rated and did not issue monthly reports about his trades.

“Offering a monthly report and every piece of information you’d want to know is pretty impressive.  That is very transparent” and unusual, said Douglas Rivkin, a Moody’s vice president and lead analyst for the rating of the Orange County investment and educational pools.

The lead editorial in the OC Register’s Commentary section was also the only editorial.  “Lessons of the bankruptcy – What we know now that the county refused to see 10 years ago” also took up the entire length of the page.  The writer used my May 31, 1994, letter to the Board Chair.  This letter would be waved at every hearing subsequent to the bankruptcy filing, whether in Sacramento or in Washington, D.C.

*It can happen in front of everyone’s eyes.

In a May 31, 1994, letter to the Board of Supervisors Chairman Tom Riley outlining the problems with Mr. Citron’s investment strategy, then-treasurer-candidate (and now treasurer) John Moorlach pointed to a remark Mr. Riley had previously made to a newspaper:  “[Citron] 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.”  That attitude show how an absurd investment scheme could move forward in broad daylight, without anyone in power speaking out against it.  The attitude is common:  As long as things are good at the moment, don’t bother us with the facts.

*Don’t dismiss Casssandra just because she might have political motives.

A key reason Mr. Moorlach didn’t get heard was because he was running for Mr. Citron’s office in spring of 1994 for the June 8 election.  The claims of political candidates must be closely scrutinized.  But Mr. Moorlach’s letter provided plenty of nuts-and-bolts information about the Citron investment strategy that could have been verified by independent sources, if officials were inclined to look beyond motives and examine closely the merits of the case he was making.

*Question the status quo.

With the investment fund returns coming in and bureaucratic tendencies taking over, virtually everyone went along with Mr. Citron.  In a Register article from the time, Chairman Riley dismissed the Moorlach letter, arguing that he didn’t read past the first page because Mr. Moorlach accused the supervisor of displaying ignorance.  Mr. Moorlach could have chosen a less-offensive word, perhaps, but that’s no reason for top officials to ignore an informed challenge to the status quo.

*Just because an official has an impressive past doesn’t mean he or she shouldn’t be examined anew in present circumstances.

*Pay attention to the dead canary in the coal mine.

As the Register reported, “Citron’s financial plan appears to have involved little more than staying the course.”  He did nothing, even as interest rates went up, up and up again through February and March 1994.  He should have realized the problem and changed course when it became obvious.  Said Mr. Moorlach:  “He said he had an exit strategy during the campaign, but we thought it meant a trip to Brazil.”

*Whatever the question, a tax hike isn’t the answer.

*Apply yesterday’s lessons today.

Steven Greenhut made the topic the grist for his weekly column, titled “Ten years after:  Have we learned anything?”  The “box quote” (the quote highlighted boldly as a break in the column) was prescient.  It read “Just as it did a decade ago, the county is betting on financial returns that seem unsustainable – this time to fund employee pensions.  And once again, John Moorlach is sounding the warning.”  Greenhut was in his usual, grumpy form.  But very, very prescient.

A decade ago John Moorlach, our current treasurer, warned, loudly and clearly, about the looming financial disaster.

The instinct throughout county government wasn’t to conduct audits and blow the whistle on the scam, but to circle the wagons, protect themselves and their treasurer and treat the bad news bearer as an opportunist who was simply after Citron’s seat.  The paradigm . . . said:  “Look, the status quo is good, it’s providing good earnings.  Citron has been doing this a long time.  Who is this guy Moorlach?”

[Former county administrator Ernie] Schneider accused Moorlach of trying to hurt the county’s credit rating after Moorlach questioned Citron’s investment strategy in a Wall Street Journal article.  Some instinct.

The county paid a consulting firm $250,000 to get the advice they got for free from Moorlach.  By then it was too late.

New systems have been put in place to promote disclosure, internal controls and better auditing of county governments.

But that doesn’t mean that similar financial malfeasance isn’t taking place.  The same forces are at work to ignore a financial scandal that threatens to burden Orange County and trigger a statewide, indeed national, crisis that will make the O.C. bankruptcy seem like a minor bump.  One of the few politicians who is now yelling about it is Moorlach.  But status-quo-minded elected officials and bureaucratic staff are still ignoring him.

Orange County, the city of San Diego, other California cities and counties, and municipalities across the country have been agreeing to outlandish pension benefits for public employees – first for police and firefighters, and now for everybody.

What explains the groupthink that allows bad investments to go forward even though they are so obviously troublesome?

“It all gets back to people,” Moorlach said.  “There always will be creative people trying to accomplish selfish, greedy goals.”

Ten years from now, after the tax hikes and service cuts and moaning and whining about the ramifications of the unsustainable pension spikes for bureaucrats, county officials will be saying the same thing Schneider told the columnist.  They should have followed their instincts.

An old and dear friend had his Letter to the Editor printed in the OC Register.  It created the headline:  “Ultimately, voters will determine if another bankruptcy will occur.”

I served on the treasurer’s oversight committee after the bankruptcy.  We re-wrote the investment policy for Orange County, a policy that will protect the invested funds of the county, unless and until the need for money and the political will to change that policy intersect.

We learned that a good person, like John Moorlach, who makes the hard, correct decisions rather than the easy wrong ones, is important to the safety of the invested funds.  Someone has to have the visibility and the will to speak out against the establishment and use the press to expose danger when those in higher political positions ignore the danger and take the wrong path.

I think the funds will be safe for many years.  So long as the bankruptcy looms in a past recent enough to cast its shadow we will be safe.  What will happen 15 years from now is up to the voters.  If the voters determine to hold elected officials accountable for their misdeeds, then we will continue to be safe.

Bruce Hughes

Coto de Caza

The OC Register also did a sidebar on “Where they are now.”  It included updates on Robert Citron, Matthew Raabe, Mike Capizzi, Gaddi Vasquez, William Steiner, Roger Stanton, Ernie Schneider and myself.

Moorlach was hailed and appointed treasurer-tax collector in 1995.  He set up oversight committees and adopted policies to ensure mistakes would not be repeated.  He has clashed with supervisors when he feels they’re making financial mistakes.  He plans to run for supervisor in 2006.

The OC Register also did a “Bankruptcy timeline” sidebar.  But, the front-page story by Norberto Santana, Jr. and Teri Sforza, “O.C. Bankruptcy 10 Years Later – Financial fallout still haunts O.C. – Services that no longer exist affect life in subtle ways.  Moorlach sees another threat,”  was the cornerstone to the entire day’s edition.  This article is also prescient.  Spooky prescient!  Remember folks, these are predictions I made five years ago!

Portions of this article were also used by the Associated Press for their “Bankruptcy cloud hangs over the O.C. a decade later” nationally syndicated piece.

“Did the average guy on the street notice there was a bankruptcy?  At the end of the day, I don’t think he did,” said county Treasurer-Tax Collector John Moorlach.  “But how do you notice what is missing?

“If we didn’t have the bankruptcy, we might have a courthouse in south county.  If we didn’t have the bankruptcy, we might have better health care and emergency-room programs for the people who need them.  If we didn’t have a bankruptcy, we might not be dealing with so much bacteria at our beaches because we could have spent more on infrastructure.  We could have been a lot better county in a lot of areas.”

Moorlach has begun to ring the alarm bells again.  This time, he’s worried about the steep rise in pension costs and the expanded benefits granted by county supervisors to law enforcement and other county workers in recent years.

Within a few years, those increases have added more than $1 billion in debt to the pension system.  Over time, it could mean that county officials have to step up how much they put into the fund, which would further drain resources from other public services.

Moorlach says such increases mirror the pattern of events preceding the bankruptcy.

Instead of granting salary increases, officials are balancing budgets by tacking on liability to the pension system and hoping that their investments keep generating healthy returns.  The danger, he says, is that you can always take back a salary increase, but pension benefits are a “lobster trap” in Moorlach’s words – once you’re in, there’s no way out.

Board of Supervisor Chairman Tom Wilson says Moorlach just doesn’t get the push and pull of balancing budgets.

“We couldn’t afford to give (employees) a raise,” he said.  “But you can’t just keep people working without recognizing their efforts in a real way.”

“I don’t see us under any kind of financial penalty over the long term,” he said.

County auditor David Sundstrom estimates that the pension increase pays for itself over four years because of the corresponding freeze in wages and the high medical insurance premiums accepted by workers in the contracts.

But Moorlach again warns that many of the financial estimates about the stock market underpinning the strategy are based on what he calls the “Peter Pan” model.

“You just gotta hope,” he said.  “You’re relying on experts and the investment community to make it work.  For Citron, interest rates went the wrong way.  And for the county, if we are in an extended bear market, the ultimate costs to the taxpayer could be very high.”

Before the bankruptcy, numerous county officials labeled Moorlach a “Chicken Little.”

Today, similar critiques are voiced about his pension concerns.

But remember, this is the guy whose license plate reads, “SKY FELL.”