MOORLACH UPDATE — OC Register — November 21, 2011

Thomas E. Margro, CEO for the Transportation Corridor Agencies (TCA), responded to my Sunday editorial submission in yesterday’s OC Register’s Commentary section, provided below.

Perhaps the best way to approach the TCA subject is to refer you to the MOORLACH UPDATE — Daily Pilot — May 17, 2009 LOOK BACKS.  For fun, I’ve reprinted the 2004 portion below.  Why this bears repeating is that, unlike Jefferson County, the TCA did not have to file for Chapter 9 bankruptcy protection, simply because the two agencies did not merge, thus avoiding a billion dollars in interest rate SWAPs in the potential refinancing.  It’s too bad that the vote of the elected body for Jefferson County a few years ago did not have the same outcome, as it was their very high use of interest rate SWAPs that crippled the County’s finances.

May 16

The Transportation Corridor Agencies came to the moment of truth and voted down the merger.  History will find that this decision would save the TCA a billion dollars.  It shows that some of the best deals are the ones you say “no” to.

The OC Register’s Sunday lead editorial said it all, “Toll-road deal dies a deserved death.”  I’m providing the opening paragraphs, which in hindsight are extremely profound.  In fact, this editorial deserves an award for its prescience.

Two factors would be manifested years later.  The first is that it would be revealed that MBIA was cooking their books and badly needed a cash infusion of more than $100 million at the time this deal was being negotiated.  The editorial’s reference to “insurers would reap a windfall” is prophetic.  More prophetic is the observation that “some of the early assumptions perhaps change.”  With the liquidity crisis we just went through, last year’s interest costs for the “interest rate SWAPs” would have cost the TCA an additional $100 million in interest costs.  That would have put it in Chapter 9 bankruptcy.  Sometimes it is good to be skeptical and to say “no.”

County Supervisors Bill Campbell and Chris Norby and Treasurer John Moorlach did yeoman’s work in turning the tide against an ill-advised and costly merger and refinancing deal for the toll roads, one of which is facing tough financial times.  The Transportation Corridor Agencies board rejected the plan at Thursday’s board meeting.

“What Campbell did is he worked on the spreadsheets and double-checked the numbers,” said Mr. Moorlach.  “These consultants made arithmetic mistakes.  I heard he worked until 2 in the morning, figured out how [the consultant] made the mistakes, and then dressed the guy down in the meeting . . . It was incredible drama.”

Something never smelled quite right about the $4 billion bond deal, which would have been one of the largest bond deals in history.

The Foothill/Eastern road is in good financial shape.  By contrast, the San Joaquin Hills Toll Road, which runs from Newport Beach to San Juan Capistrano, is facing a potential technical default on its bonds in several years.

The TCA staff proposed a refinancing plan that merged the two tollways into one.  Given the size of the deal, consultants and insurers would reap a windfall of more than $160 million in fees.  Treasurer Moorlach, like some other officials, wasn’t against a merging of the two toll roads, but eventually came to think it wasn’t worth doing, given the enormous transaction costs.

Here’s where one of the realities sets in, whether the discussion is about refinancing toll roads, redevelopment projects or the county’s proposed light-rail system:  The consultants, financiers and insurers stand to reap very large profits from such deals.  That’s their business, and that’s great.  But the pressure becomes so intense to make the deals happen, and the momentum so strong, that it is hard for anyone to stand back and consider whether the project or deal really is in the public’s interest, especially as time moves along, and some of the early assumptions perhaps change.  Too often, the projections made by those who want the deal to happen don’t pan out years down the line.

May 17

The Bond Buyer covered the story with Rich Saskal’s “Orange County, Calif., Officials Spike Toll Road Merger.”  I got the box quote (the one that is highlighted somewhere on the page), which is the first sentence below.

                “Wall Street lost this time.  They didn’t bully a bunch of people into rushing into a deal that didn’t need to be done right away,” says Orange County Treasurer John Moorlach.

                Opponents of the deal cited the risks inherent in the $1 billion of interest-rate swaps proposed in one of the bond alternatives as well as the sheer size of the deal, with about $160 million in issuance costs.

The TCA dodged a significant bullet.  But, it still needs developer fees as a component of its overall revenues.  The TCA cannot collect the fees from a governmental agency, so it is going after the tenants of JWA.  This was done the last time JWA was remodeled.  That does not make it right.  This matter will be debated at the TCA’s December 8th Board meeting.  Stay tuned.  I still contend that the shock of the large amount required by the TCA for the developer fees has had an impact on the construction timeline of the food concessioners.  Is it the only reason?  Probably not.

Reader Rebuttal: Toll-road fees at JWA Reader Rebuttal: Toll-road fees at JWA

I read an op-ed authored by Supervisor John Moorlach [“A new era at JWA,” Commentary, Nov. 13], which was not reflective of a conversation Supervisor Moorlach and I had in June about the Transportation Corridor Agencies’ development impact fees and the Terminal C expansion at John Wayne Airport. I found his op-ed, along with some other recent media coverage, to be filled with errors and misrepresentation of facts that need to be corrected.

Yes, TCA charges development impact fees; we have since our formation by the Legislature 25 years ago. In accordance with Government Code Sections 50029 and 66484.3, TCA’s member agencies must impose fees on new development in areas of benefit along its roads. Fees and tolls go toward retiring debt to bondholders, who financed the roads.

The county of Orange is a member of TCA’s Joint Powers Authority, which means the county is responsible for collecting development impact fees. TCA’s fee program is very clear that governmental facilities, such as the airport, that generate revenue are subject to fees.

County supervisors decided in 1990 that fees for airport development would be passed on to tenants, and an agreement was reached among the county, the airport and TCA for the application of development fees. The same methodology and application of development fees, agreed upon 20 years ago was used for this expansion.

Our fee program should not have been a surprise to the prospective tenants. TCA contacted the airport in 2009 about these fees in relation to the expansion and repeatedly asked that the tenants be notified so that there were no surprises when they pulled their permits. The airport chose not to notify the tenants or allow TCA to notify them as requested in an email dated Feb. 17, 2011, and sent to the airport’s legal counsel. Again, the fees are the same as those paid by tenants when the first terminal was built in 1990; at least one tenant in the new terminal paid the same fees in the 1990 terminal.

As for common space in the new Terminal C, it was the airport – not TCA – who designated the baggage-claim area as common space, rather than space leased by the airlines. This is the business model the airport negotiated with the airlines, with TCA having no say in the matter.

If the tenants were to pay for only their leased space, then either the airport or the county would need to pay fees for the common area, which neither the airport or the county has offered to do. The Board of Supervisors just approved a reduction in rent for airlines as an incentive for the airlines to add flights to Mexico. Could a reduction in rent be approved for the concessionaires to offset the fees paid on common space? Absolutely.

I agree with Supervisor Moorlach, Orange County is fortunate to have John Wayne Airport. TCA is obviously a supporter of ways to keep people moving. However, Terminal C’s failure to be fully complete upon opening should not, and cannot, be blamed on TCA.


November 21


The SEC’s actions against CS First Boston was front-page news for the LA Times in a piece by James S. Granelli, titled “SEC Sues First Boston Over Sale of O.C. Bonds – Bankruptcy:  Agency says advisers’ actions hastened the county’s collapse.  Company denies fraud allegation.”  For a little history, and for a taste of what Jefferson County will experience over the next few years, here is an edited version:

The federal regulator charged that First Boston and two of its investment bankers misrepresented or omitted crucial information about the county’s shaky financial condition in documents offering to sell $110 million in county bonds. The company and the bankers denied any wrongdoing.

The bonds were sold only months before the county collapsed into the nation’s worst municipal bankruptcy.

The agency’s action, filed in federal court in Santa Ana, raises the specter of other lawsuits, including one against the nation’s largest investment banker, Merrill Lynch & Co., the county’s main investment advisor.

The agency’s investigation is "wide-ranging" and "continuing," said Elaine Cacheris, the SEC regional director in Los Angeles, but she wouldn’t elaborate.

Earlier this year, the SEC filed enforcement actions against former County Treasurer-Tax Collector Robert L. Citron and his former assistant, Matthew Raabe. Separately, the agency ordered Orange County and its Board of Supervisors to halt future fraudulent conduct in the offer and sale of securities.

The lawsuit against First Boston and its two former brokers–Douglas S. Montague, 39, of La Canada and Jerry L. Nowlin, 53, of Park City, Utah–seeks an unspecified amount in penalties. The firm is liable for $500,000 per violation and each individual faces a penalty of $100,000 per violation, but the SEC would not detail how many violations occurred.

The agency alleges that while preparing documents for the bond sale, the defendants "knew, or were reckless in not knowing, significant negative information" about the county’s beleaguered investment pools. They either misrepresented the information or omitted it from the official offering statement, the suit alleges.

It accused the firm and the former employees of fraud and "deceptive, dishonest and unfair practices."

First Boston asserted that "there is no basis for a fraud charge" and that it will defend its position "vigorously."

"The county provided CS First Boston with misleading information," said Andrew MacMillan, a spokesman for the brokerage. First Boston, he said, was "clearly victimized" by Citron, who was sentenced Tuesday to a year in jail for his role in the collapse.

The individual defendants also blamed Citron and the county.

"Mr. Nowlin denies the charges and expects to be cleared at trial," said his lawyer, Jan Lawrence Handzlik. "He played by the rules and did his job properly at all times. Even the SEC was hoodwinked by certain officials in Orange County."

The bonds were issued in September 1994 to help fund the county’s obligation to the Orange County Employees Retirement System.

But the sale came as the county-run investment pool was teetering under the weight of repeated hikes in the interest rate, which was gutting the value of some highly risky securities it held. The $20.6-billion investment pool crashed, losing $1.64 billion, and the county went into bankruptcy in December 1994.

The SEC charges that First Boston and its brokers couldn’t help but know that increases in the interest rate through 1994 had been destroying about a third of the county’s portfolio.

"From a variety of sources, they knew of the risks in the Orange County investment pools," Cacheris said. "They knew from the transactions they engaged in, from news reports and from other sources that there was substantial risk. None of this was disclosed.

"The disclosure that investors got cast the pools in a false light," she said. "It gave a false sense of safety and security."

What made the offering particularly worrisome to county officials was that it offered short-term notes that investors could cash in with only seven days’ notice.

The seven-day feature hastened the county’s collapse, officials have said. Already losing $1.5 billion, the pools couldn’t withstand a call by bondholders for refunds. But news leaked out, and they demanded their money. The county responded by filing for bankruptcy, making the $110-million bond issue the only one to default and adding to the county’s problems.

In selling county pension bonds to the public, however, First Boston had a duty to examine the county’s financial condition, including the investment pools, and disclose any risks to potential investors. That, the SEC charges, is what the brokerage failed to do.

"I’m glad to see the SEC stepping up to the plate," said John M.W. Moorlach, who first warned about the county’s risky holdings and eventually took over as county treasurer.

Moorlach said the debt offering didn’t even make economic sense because the interest rate benefit the county was supposed to get by selling debt to the public vanished by the time the offering was ready.

"The county should have backed out of the deal in September [1994]," he said. "There was no gain in going forward, except for CS First Boston making a profit on the deal. Greed has a funny way of biting back."

COAST, a twice-monthly magazine, did a five-year review on what Orange County had weathered in “The Agony and the Ecstasy.”  For their February 4, 1995 there is the following:

                Times Orange County, The Register and other O.C. media were accused of missing the county bankruptcy story despite warnings from Costa Mesa accountant John Moorlach.

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