I want to wish you a safe and happy President’s weekend and hope you have a wonderful Valentine’s Day.
FIVE-YEAR LOOK BACKS
My sister lives in the Denver area. So, it was fun to be mentioned in The Denver Post. Alex Berenson did a two part series, titled “Privatizing Orange County,” for their Business section. The article starts off with Robert Poole of the Reason Foundation, who would show up again in the 91 Express Lane Look Backs, saw Orange County as a privatization opportunity. Here are a few selected paragraphs to give the flavor of the article.
[Poole’s] newest laboratory is bankrupt Orange County, Calif., which must figure out how to balance its budget in the wake of a $1.69 billion loss from risky investments. And he has a ready audience at the county’s sprawling headquarters complex in Santa Ana. With the county’s conservative residents apparently unwilling to accept any tax hikes, frazzled politicians are working 16-hour days and looking at any alternative in taxes in the hopes of saving their jobs.
Orange County’s financial problems are twofold. First, it faces losses of at least $600 million on its $2.7 billion share of the $7 billion investment pool. The county’s total losses could be much higher, since some of the pool’s other investors have sued the county, arguing it should be responsible for their losses, which top another $1 billion.
Although serious, the asset loss is a one-time problem. But the county faces an ongoing crisis because it depended so heavily on interest from the pool. Interest revenues were the county’s largest source of discretionary income last year, totaling $162 million out of the $462 million in spending the county controls.
Now that income has disappeared, leaving the county with a huge hole in its budget.
Some outside financial experts blame California’s Proposition 13, which limited the rate of increase in state property taxes, for the county’s heavy reliance on interest income. They say the crisis is proof that the county must raise taxes.
But county politicians disagree. They say former Treasurer Robert Citron caused the crisis by investing inappropriately.
“I don’t believe (Citron) felt pressure to do this. I believe he felt arrogant—he wanted to be the hero. (Blaming Proposition 13) is a red herring,” John Moorlach said. Moorlach ran for treasurer against Citron last year. He was soundly trounced but has since been hailed as a hero for his predictions of financial disaster.
The lead article of this week’s Orange County Business Journal was by Howard Fine and it was titled “Tort reform: Cox takes on Clinton, lawyers, Boxer etc.” Chris Cox’s legislation to address tort reform was passed by Congress but vetoed by President Clinton. If my memory is correct, Congress then overturned the President’s veto. This was, I believe, the first (and maybe the only) veto that Clinton had overturned.
As for me, my letter to Congress generated a most interesting response from one Bill Lerach, a partner with the former Milberg Weiss Bershad Hynes & Lerach law firm, who was probably the “poster child” for lawsuit abuse. It was Mr. Lerach that I was referring to in my correspondence. Mr. Lerach devoted four pages to go after my letter. What an honor. I would find him in our Orange County Employees Retirement System closed session board room many years later, requesting us to be his client in going after another publicly traded firm whose share price had declined in value. No thank you! Mr. Lerach is now in prison for having obstructed justice and making false declarations under oath.
Here is one early paragraph to set up the article and the concluding six paragraphs.
Cox has been in the forefront of efforts at tort reform. He co-authored the plank in the Contract With America promising limits on lawsuits, and he has introduced legislation to limit abusive securities fraud lawsuits, known as strike suits.
Another critic has been . . . Sen. Barbara Boxer, who launched an attack on Cox’s Contract With America plank. She said the Cox reforms would make it harder for OC bondholders to sue the county to recoup fund losses because it would require investors to prove that the county had actual knowledge of a fraudulent statement or omissions in statements to investors.
“Millions of dollars of Californians’ and other citizens’ hard-earned money will be forever lost because they were defrauded by defendants whom they can no longer sue,” she charged.
Cox shot back, tell Boxer “you have chosen to exploit the tragic situation in my home county to stop the Contract With America.”
Cox also enlisted in his defense the “hero” in the OC bond debacle, Costa Mesa accountant John Moorlach, whose unsuccessful campaign last year against then-county treasurer Robert Citron was chaired by Cox.
In a letter to House Finance subcommittee ranking minority member Edward Markey, D-Mass., an ally of trial lawyers, Moorlach declared, “A handful of unscrupulous lawyers . . . bring cases for their extortion value and settle them without trial on the merits. We are a ‘conservative’ county. Please do not insult us by somehow allowing us to be the undeserving ‘poster boy’ of the ‘liberal’ opposition to this long overdue legislation. I resent the inference. And the mockery to innocent business owners, like myself, is not lost on me.”
Cox said he shared one patch of ground with Boxer, however, “I do agree with her that there is a need for better disclosure of municipal securities transactions,” he said.
The cover of the OC METRO was a photo of Congressman Chris Cox with the headline “White House Bound? It’s early, but don’t bet against GOP star Chris Cox.” The story was by Gail Hulbert and it was titled “Onward and Upaward – As a key player in the GOP’s Contract With America, Rep. Christopher Cox is on the fast track to larger things in politics, and a final White House destination may not be out of the question.” The article provides a glimpse of what Cox went through by supporting my campaign. Starting under the heading “The contract and the bankruptcy,” the article provides the following:
This piece of legislation is a particularly important part of the Contract With America for Cox. It deals not only with his area of expertise, but the lives of his constituents of miles away.
Cox insists that while such a bill would eliminate frivolous suits, it would also protect the ability of constituents to file lawsuits in connection with the collapse last December of Orange County’s investment pool, which suffered a $1.69 billion loss.
For Cox, there is a direct correlation between what his party hopes to do for the country and what must be done for his local government.
“For a reason that all of us wish didn’t exist, government will have to be reinvented in Orange County,” Cox says. “The balance of the ‘90s will bring government much closer to individual Californians and individual Americans than people have experienced for many decades.”
Cox blames the Orange County bankruptcy on the fact that “no one knew precisely what then-county Treasurer Bob Citron was doing with their money.” Citron resigned under pressure when the county declared bankruptcy last Dec. 6.
Although Costa Mesa accountant John Moorlach ran an aggressive campaign for Citron’s seat last year, the law prevented him from getting a complete listing of a portfolio of investments, Cox says.
“If that information had been made available to investors,” he says, “they would have headed for the hills.” Cox endorsed Moorlach and chaired his short-lived campaign.
“People called me at the time and said you cannot chair [Moorlach’s] campaign because he’s saying all these things about the Orange County investment fund,” Cox recalls. “I talked to him and he explained . . . what he had discovered about how Bob Citron was taking unnecessary risks with taxpayers’ money. And I backed him up.”
Cox says better rules for municipal disclosure are needed to avoid future disasters. He held a hearing in Congress on the subject several weeks ago and says he will propose legislation “to deal with the problem” this spring.
I was a speaker at the MMX 2000 Conference for Money Market and Local Government Investment Pool managers and Michael McDonald of The Bond Buyer attended one of my two sessions. It generated his article “New Fund Proposal Latest Bandage for Orange County.” The County did open its Extended Fund (X-Fund) and it is now yielding about 1.55 percent, compared to 0.24 percent for our two main Money Market funds. The timing of our initiation of the X-Fund was also propitious, as rates declined dramatically shortly afterward, but the new extended fund had locked in longer-term paper at the prior higher yields. This good timing would receive some accolades in a national publication a few months later. Here are a few selected paragraphs from the article.
John Moorlach, [the treasurer of Orange County, Calif.], who was appointed treasurer in 1995 in the wake of the county’s financial crisis and has since been elected to the post, said that a proposal is being considered to break out a large portion of the county’s money into what is being called an extended fund, which would essentially operate like a short-term bond fund.
The question that has driven the debate, Moorlach added, has been: What can the county do to extend out along the yield curve in order to reap greater returns from its portfolio? Moorlach used the occasion of a money market fund conference here, sponsored by IBC USA Conferences, to tout the success of the county’s management but also to point out that a large chunk of money is not being invested effectively because of the current limits on the pool.
The success of the management has come in the form of improving returns, which Moorlach said are outpacing money market averages, and the addition of new participants in the investment pool. Last year, a water district and a sewer district that were among the nearly 200 other participants who dropped out of the Orange County pool in the wake of the bankruptcy, rejoined.
“We have to educate our customers that we are going into a longer-term environment,” Moorlach said. “We’re trying to find a comfort zone.”
“It’s running shoes for Moorlach ally” was the title for Martin Wisckol’s “The Buzz” column in the OC Register. With my announcement to run for OC Supervisor, potential and viable candidates for the Treasurer-Tax Collector position were becoming visible. Wisckol had some fun forecasting one-year in advance.
First into the ring is Corona del Mar investment banker Chriss Street, who worked with Moorlach in prognosticating the county’s 1994 bankruptcy – the prediction that catapulted Moorlach to fame and into his current job.
Also considering bids are Shari Freidenrich, the elected treasurer of Huntington Beach, and Pall Gudgeirsson, the elected treasurer of San Clemente.
"They’re all great candidates," said Moorlach, who’ll be running against Assemblyman Tom Harman, R-Huntington Beach, and possibly former GOP Assemblywoman Marilyn Brewer. "They’d all bring a lot to the job."