MOORLACH UPDATE — OCMA — December 14, 2012

One of the anticipated milestones that I addressed in my January 24th “State of the County” address is provided below:

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I’m happy to announce that we are a third of the way there on the collaboration front and the Voice of OC provides the details below. 

The very next “anticipated milestone” slide in my “State of the County” presentation stated, “July 4th Holiday Weekend – Hope to have my first grandchild.”  Since so many have been asking, here is an election-day photo of Jordi Jane, who was born a few days before the Fourth of July:

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OC Supervisors Tackle Managers Labor Contract

The Orange County Board of Supervisors will publicly take up their first labor contract next Tuesday as they consider a three-year deal with the Orange County Managers Association.

Supervisors appear to be generally supportive of the deal, arguing that it calls for employees paying their full share of annual pension contributions and keeps overall compensation in check.

“We want to keep total compensation in place because our revenues aren’t increasing,” said Chairman John Moorlach.

Having employees pay more into their pensions has been a central theme of supervisors as they enter labor talks.

Labor leaders, in turn, have been very critical of the fact that supervisors don’t pay into their own pensions. Moorlach has defended that disparity, hinting that supervisors will only pay into their own pensions after all employees pay into their own.

The managers’ deal is the first of what observers have dubbed the Super Bowl of labor negotiations because the contracts of nearly every major labor group — the managers, the Orange County Attorneys Association, the Orange County Employees Association and the Association of Orange County Deputy Sheriffs — are up this year.

Sources close to negotiations say the attorneys contract is also close but still in the fact-finding arbitration phase with an unfair labor practice complaint filed against the county.

The managers deal — which will cost taxpayers $623,000 during the remainder of the 2012-2013 fiscal year due to performance incentives and a phasing in of payments toward retirement from managers — is set to save $883,000 annually when all the deal points take effect over the next two years of the contract, according to contract documents.

Managers have gone two years without a contract. They voted down a previous version of the contract, supervisors balked on providing bonuses and both sides have fought intensely over having managers pay more toward retirement.

Negotiations reached an impasse on Aug. 24, with the managers requesting the initiation of a fact-finding arbitration a month later. Earlier this month, managers voted to approve the subsequently negotiated offer that will come before supervisors next week.

“This has been a long road,” said Moorlach, acknowledging that the two-year delay in negotiations had ultimately lowered net savings for taxpayers.

Moorlach said he favored the deal because it kept total compensation in check and had managers paying toward their pensions.

Supervisor Shawn Nelson took aim at the managers over the delay.

“The managers don’t pay the employee full share, and to drag it on meant they didn’t pay the employee end for up to two years. That’s the best deal in the world,” Nelson said.

Nelson said the managers deal includes a message for the county’s other employee organizations: “All employees will be expected to pay the employee share of the pension,” he said. “It should have been paid a long time ago.”

That’s what the county’s general workforce has been doing since 2004.

This week, the Orange County internal auditor finished examining how employee contributions worked following the highly publicized and controversial pension enhancement of 2004.

Auditors concluded:

We found that OCEA [Orange County Employee Association] members themselves and not the County fully and accurately paid for the cost of the pension enhancements of $101.2 million (2.7% @ age 55 benefit formula) as agreed upon in their 2004 Memorandum of Understanding for Fiscal Years 2008-09, 2009-10, & 2010-11. The $101.2 million paid included additional employee contributions of $67.6 million and health insurance cost savings of $33.6 million.

OCEA General Manager Nick Berardino reacted to the news of the manager’s deal by noting, “the rank-and-file employees have been leading the way since 2004 and have proven themselves to be the true leaders. So it’s a positive step to see the managers paying for their fair share of retirement costs.”

Please contact Norberto Santana Jr. directly at nsantana@voiceofoc.org and follow him on Twitter: twitter.com/norbertosanana

FIVE-YEAR LOOK BACKS

December 13

2002

Jean O. Pasco of the LA Times provided the latest update on what was known as the “recapture case” in Court Expands Tax Suit – Litigation accusing O.C. of property-tax overcharges gets class-action status.”  There were three technical errors in the piece:  1) The case was not moving to the Court of Appeal, as the hearing only covered one of the two outstanding issues; 2) my attorney’s name is spelled Harvey Leiderman; and 3) his charges to date were actually $103,500.  The case would eventually go to the Court of Appeal, the three-judge panel would include David Sills, and it would rule in the County’s favor.  This case will be important for you if you purchased your home six or more years ago and you’ve had your assessed value reduced (either unilaterally by the Assessor or through a successful appeal process).  Using the graphic below, from the December 13, 2012, edition of the OC Register, we can explain how Prop. 13 works.  If you purchased your home at $420,000 in 2006, and had the value reduced to $400,000, and it is now worth $450,000, the assessed value can now go back up to $420,000 plus 2% per year for the six years that you were receiving a subsidy.  (You’ll also get another increase in property taxes if you reside in an area that approved a school bond measure in the November General Election.)  Therefore, the Orange County Assessor’s office will be busy returning assessed values back up to market values, where applicable, over the next few months (and will probably need additional man hours to do so).  This is not good for taxpayers, but is good news for the County.  The County of Orange is now reliant on property taxes for some 90 percent of its General Fund revenues and the County will need the future additional funding to address anticipated increasing pension plan costs (see MOORLACH UPDATE — Assumption Rate Impac;ts — December 12, 2012).

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Here is the article in full:

A judge on Thursday granted class-action status to a lawsuit accusing Orange County of overcharging on property taxes, setting the stage for a legal showdown that could cost local governments billions of dollars in tax refunds.

The decision comes a year after Judge John M. Watson ruled in favor of a Seal Beach homeowner, concluding that Orange County violated Proposition 13 in the way it calculated the man’s property tax bill.

The case now goes to the state 4th District Court of Appeal, whose decision will have far-reaching implications, because all 58 counties in California use the same method for determining property-tax assessments.

Orange County officials say that if the ruling is applied to all taxpayers, the county would have to refund up to $1 billion. Los Angeles County officials, who have been closely watching the case, said they could be liable for $4 billion if the outcome applies to them.

Proposition 13, the landmark 1978 ballot measure, limited annual property-tax assessment hikes to no more than 2%. Counties, however, frequently boost tax assessments more than 2% to "recapture" taxes they could not collect when property values dropped or stayed flat.

Seal Beach homeowner Robert Pool sued Orange County, saying his tax bill went up by 4% in one year. He bought the home for $330,000 in 1995, and for years its value stayed flat because of the cool real estate market. Then, in 1998, the county boosted the tax assessment of his home by 4%, to $343,332.

Watson sided with Pool a year ago. And on Thursday, he ruled that all Orange County property owners whose assessments rose more than 2% a year since Proposition 13’s passage were potentially harmed.

In a sign of how far-reaching the issue is, Watson also removed himself as a potential member of the class-action suit after attorneys for the county noted that he owned rental property in La Habra that might qualify for a refund.

County officials said their assessment method was agreed upon by tax officials across the state after Proposition 13 was passed. They maintain it’s legal to reclaim taxes on properties that did not receive tax increases during depressed years.

Proposition 13, they say, set a ceiling on property taxes that grew at 2% a year since 1978, regardless of how much the increases are year to year.

Fighting the suit has proven costly for Orange County. Assessor Webster J. Guillory will ask supervisors Tuesday to increase to $900,000 the amount to be paid to his attorney, Robert Luskin. Treasurer John M.W. Moorlach said his attorney, Harvey Liederman, has charged less than $100,000.

The 4th District Court of Appeal has not been shy about challenging local governments on taxation issues. In his ruling, Judge Watson quoted liberally from a 4th District appellate decision published last month that chastised Orange County for failing to follow the law in a different property tax case.

That ruling, written by Presiding Justice David Sills, reinstated a class-action lawsuit filed by a San Juan Capistrano man on behalf of about 1,500 taxpayers who were denied reductions in 1994 after challenging their tax bills.

Attending Thursday’s court hearing were a handful of taxpayers such as Alan Lavallee of Buena Park. Lavallee said the county hiked the assessed value of his home nearly 52% between 1999 and 2002.

The OC Register covered the topic in a piece by Nancy Luna, titled “O.C. tax case goes class-action – Taxpayers with property-assessment increases of more than 2 percent a year can join a lawsuit based on Prop. 13,” which provided additional details.  Everyone involved stipulated that refunds would be issued to every impacted taxpayer without their needing to file a claim for refund  if Judge John M. Watson was correct.  Regretfully, Judge Watson was recognized as the most incompetent judge on the Superior Court and he proved it by ignoring our efficiency efforts and converting the case to that of a class-action.  Here are a few selected paragraphs:

                Any county taxpayer whose property assessment has gone up more than 2 percent in any year since 1979 can now join a Seal Beach man’s quest to hold the county to the limitations of Proposition 13, a judge ruled Thursday.

                Property-tax attorney Robert Pool won class-action status for his suit against the county on Thursday.  If it is upheld on appeal, the judge’s decision could benefit hundreds of thousands of taxpayers and cost Orange County local governments $1 billion at a time when they already face drastic cuts from the state budget crisis.

                “It’s a serious dollar amount,” said Treasurer-Tax Collector John Moorlach.

                Both Pool and county officials emphasized that refunds are not guaranteed anytime soon.  An appeals court will likely weigh in first.

                “No one’s getting refunds,” said Moorlach, one of the defendants in the case.

                Moorlach called Watson’s decision a missed opportunity.  Prior to the hearing, lawyers on all sides of the case struck a deal that would have moved the case to the appeals-court level.

                Moorlach said the deal would have also allowed the county to issue refunds without having to go through the “administrative nightmare” of notifying thousands of taxpayers that they are entitled to file a claim.

                But Watson ignored the eleventh-hour agreement, saying he was concerned some taxpayers would be left out because it gave the county too much discretion.

                “We gave him a nice Christmas present with a bow, and he missed it,” Moorlach said.  “The judge failed to expedite the case and fails to understand that class certification is not the sufficient route.”

2007

Brianna Bailey and Chris Caesar, in their weekly Daily Pilot “The Political Landscape” column, titled “Selich inherits rehab issues,” also addressed the wonderful artwork The Irvine Museum loaned to my office.  Here are the two impacted sections:

WHO’S ENDORSING WHOM?

Many local officials are dragging their feet on picking a presidential candidate to pin their hopes on.

County Supervisor John Moorlach said he’s still isn’t “signing any postcards” for a presidential hopeful, but he’s “leaning toward” former Arkansas Gov. Mike Huckabee.

“Ideologically, he’s the closest candidate to me,” said Moorlach, who was seen at a Huckabee fundraiser earlier this year at the home of big Newport GOP donor Buck Johns.

Newport Beach Councilman Steve Rosansky announced his endorsement for former New York City Mayor Rudy Giuliani last month, and Councilman Keith Curry said he is lending his support to former Massachusetts Gov. Mitt Romney. Councilman Don Webb said he has made it a matter of practice not to endorse anyone or anything, except a few local issues. He also likes to keep his vote between him and the ballot box.

Newport Beach Council members Nancy Gardner, Michael Henn, Leslie Daigle and Mayor Ed Selich did not respond to the question.

As for Costa Mesa, aside from Mayor Allan Mansoor, who endorsed Ron Paul last week, and Linda Dixon, who did not return our calls for comment — all council members declined to declare their allegiance to any candidate.

“For the present, I am undecided and studying the positions of all the Republican candidates for president,” Councilwoman Wendy Leece said. “The candidates’ integrity, support of family values, [along with a] strong stand to oppose illegal immigration and any tax increases are very important in my decision.”

AN ARTISTIC EYE

Moorlach has decked out his office with about $5,000 worth of California landscape prints on loan from the Irvine Museum. The 11 plein air prints depict sun-drenched scenes ranging from Saddleback Mountain to Crystal Cove.

“It doesn’t cost the taxpayers a cent except for the people in my office to hang them and keep them off the floor,” Moorlach said.

An art admirer and who “loves anything Californian,” Moorlach made a list of his favorite paintings from the museum, expecting to get one or two on loan, but all 11 of the prints showed up at his office shortly before Thanksgiving. Moorlach’s mini-museum will be on display at his office for the next year.

The Chattanoogan, from the great state of Tennessee, provided an opinion column, titled “Public Private Benefit Gaps:  The Big Lie,” by Tim Price, a local radio talk-show host.  In making his argument, he included a recent quote of mine (see MOORLACH UPDATE — USA TODAY — February 21, 2007 or MOORLACH UPDATE — Helping Homeless — February 21, 2012).  Here are the opener, two paragraphs and the closer of the piece:

Recently, we have been inundated with studies and comments about our city and county workers and how they are being shortchanged when compared to their peers in comparable geographical and professional areas.  The problem here is that when any business evaluates whether or not to hire an employee, they don’t just look at the pay, they look at the pay plus benefits deciding whether or not to hire an employee.  Benefits cost money and someone has to pay it.  In the case of private industry, it is the company.  In the government workers case it is you, the taxpayer.  A great source of information is an article that was in the USA Today, 2/21/07, entitled, “Pension Gap Divides Public Private Workers” by Dennis Cauchon.  Don’t believe Tim Price, find it and read for yourself.

The other day on our radio show, a prominent elected official stated under cover of an assumed name “you can’t get elected in this town without the support of the public employees.”  Not only that, of the two county commissions and the main elected positions in Hamilton County and Chattanooga government, over 60% are current or former public employees.  These officials are never going to vote against themselves.  They simply can’t be objective.

The article confirms this same type of thing by quoting John Moorlach, an Orange County (California) supervisor who has tried to reduce retirement benefits.  He blames elected officials for awarding unsustainable retirement benefits to win support from employee unions.  “Elected officials love to give generous retirement benefits because they don’t cost anything today but and they’ll be out of office when the payments come due,” Moorlach says.  “And the public’s eyes droop with boredom when you bring up the topic.”  It is only the single greatest threat to our public financial health.

I would like to blame these irresponsible state and local lawmakers, but it is not their fault.  It is my fault and your fault for voting for these guys or sitting home on election day making it possible for them to mortgage our future.  Education and public employee benefits will one day bankrupt this country.

               

December 14

2007

Ronald Campbell of the OC Register starts the theme for this day in history with “Street stands pat on securities – O.C. treasurer-tax collector says he will keep controversial investments in portfolio.”  Here are two of the paragraphs, which deserve comment, as Bob Citron would use the same terminology about my campaign’s efforts back in 1994, “the criticism is all political.”  Well, not when you’re dealing with quantifiable dollar amounts and investments.  The spin, now that’s political.

                The threatened downgrade stirred more controversy for Street, who already was fighting an effort by Supervisor John Moorlach to strip Street of his control of the county pool.  The supervisors will decide that issue Tuesday.

                In an op-ed column in the Register and again at a public workshop Friday afternoon, Street said the criticism is all political.

Christian Berthelsen of the LA Times weighed in again with Orange County is again an uneasy investor – Securities whose value was written down were brokered mostly by Merrill Lynch, the firm blamed in county’s 1994 bankruptcy.”  Christian tried to sensationalize the topic by blaming the store where the product was purchased from.  It was a lame angle.  But, to show that journalism by beat reporters did not improve when it comes to financial issues, I’m providing the piece in full.

Merrill Lynch & Co., the brokerage giant blamed for triggering Orange County’s $1.6-billion bankruptcy in 1994, was the single largest dealer of complex debt securities to the county within the last two years that are now at risk of a credit rating downgrade, a Times review of county investment holdings has found.

Merrill’s role in selling the debt instruments to Orange County is emerging just one year after the Board of Supervisors voted to reestablish full business ties with the firm, over the objections of politicians who served during the bankruptcy.

 

Merrill paid $437 million to settle litigation with Orange County and other investors stemming from the bankruptcy and an additional $30 million to dispense with a criminal inquiry.

The Nov. 30 warning by Moody’s Investors Service that it might downgrade $460 million in securities held by Orange County forced the treasurer’s office to write down their value by nearly $13.8 million. The write-down led to a $12.4-million paper loss for the month of November.

The warning caused jitters among Orange County leaders, still nervous about finances more than a decade after the bankruptcy.

It is also focusing attention on the complex debt instruments tied to so-called structured investment vehicles, which have lost favor on Wall Street because of the sector’s ties to the sub-prime mortgage mess. Though the securities held by Orange County have almost no underlying sub-prime assets, they are suffering amid the broader loss of confidence in SIV securities.

Concerns over the investments have also added to Treasurer Chriss Street’s political woes.

Street faces a previously scheduled vote by the Board of Supervisors next week on whether to strip him of his authority over the county investment pool. Supervisors have cited Street’s business dealings before entering public office a year ago, a $750,000 office remodel and his handling of contracts to redesign the exterior of his building.

The notes under scrutiny constitute less than 8% of the county’s $5.9-billion portfolio, and ultimately the county may recover all of its investment with interest when they mature.

The securities had the highest possible credit rating when they were purchased and have not been downgraded, and the other ratings houses have yet to issue the same warning as Moody’s.

The treasurer’s office said Merrill remained a relatively small trading partner, handling fewer than 5% of the county’s transactions. In a prepared statement, the office defended the investments, saying: "Before making any investment decisions, the treasurer’s office conducts its own fundamental analysis and due diligence. Each investment is judged on its individual merit."

County fund managers insisted that they developed the investment strategy on their own without input from Merrill and that the brokerage acted as a passive supplier — much as a supermarket puts food on its shelves for sale. They said the county’s relationship with Merrill was drastically different from the pre-bankruptcy days.

"We know what we want to buy," said John Byerly, a financial analyst in the treasurer’s office. "They’ve just got really big shelves. If they’ve got 30% of what’s being offered that day, why shouldn’t we buy from them?"

Officials said Merrill’s role in the transactions was largely limited to facilitating contact between the county and the managers of the SIVs. They believed the SIVs were high-quality diversified securities that would give them an opportunity to move away from securities tied to the U.S. mortgage market, which have been hit hard by interest rate and repayment concerns.

Still, Merrill’s role in selling the securities to the county has old hands seeing red. "Surprise, surprise," said Assemblyman Jim Silva, a former supervisor who repeatedly objected to doing business with Merrill again. "Merrill Lynch has never really been a friend to the county, if you look at their history."

Merrill spokesman Bill Halden declined to comment, citing a company policy prohibiting discussion of client matters.

In the early 1990s, Merrill helped the county broker transactions in which the treasurer at the time, Robert L. Citron, borrowed about $13 billion and placed it in risky derivative investments tied to low interest rates. When rates rose, the county lost $1.6 billion and declared bankruptcy. The county still has nearly $450 million in bankruptcy debt to pay off.

The county refused to do business with Merrill for nearly a decade, but slowly began working with the firm again in 2003. Supervisor John Moorlach, who was one of the few to raise concerns about the county’s investments before the bankruptcy and became the county’s treasurer in its wake, led the effort to restore dealings with Merrill.

As treasurer and in his current office, Moorlach and others argued that Orange County subsequently established some of the most conservative investment rules in the country, with numerous checks and balances designed to prevent the purchase of risky investments.

Merrill’s sheer size and strength in the markets, the firm’s supporters said, made it a valuable asset to the county.

In an interview Thursday, Moorlach defended his decision to rebuild the county’s ties with Merrill. He said any fault with the current investments lies with the treasurer’s decision to approve them.

"They provide an inventory and you select what you want for your portfolio," he said of Merrill. "I would have difficulty blaming the broker-dealer. This was a credit that was approved by the treasurer’s office."

Bill Popejoy, a former county executive who helped clean up the mess after the bankruptcy, said he was reluctant to comment because he did not have firsthand knowledge of the facts. But as to Merrill’s role handling the transactions, he said: "Any broker dealing with the county treasurer’s office has a responsibility to highlight the risks involved, and not to assume the buyers are fully cognizant of the risks they may be taking. It really isn’t just ‘Buyer beware.’ "

Of the securities at risk of a possible downgrade, Merrill sold $160 million to the county, followed by $150 million sold by Credit Suisse First Boston, $100 million by Bank of America and $50 million by Lehman Bros., records show.

The amount of the write-downs was distributed along the same proportional lines, with Merrill’s representing the largest share at $4.8 million.

Roughly $115 million of the investments now on credit watch purchased from Merrill were in a vehicle named Tango Financial Corp., managed by Rabobank of the Netherlands. County investment officials refused to specify the precise nature of the vehicle’s holdings, citing a confidentiality agreement, but said they had access to detailed information on which the investment decision was based. Generally, they said, the SIVs included commercial bank debt, residential and commercial mortgages, credit cards, student loans and insurance.

Last week, Rabobank announced it would take direct control of Tango’s assets, increasing the likelihood that the county would ultimately recover its investment with interest.

The OC Register printed an editorial piece by Orange County Treasurer Chriss Street, titled The Orange Grove: County investments remain secure – A prompt disclosure of a credit-watch notice gets demagogued.”  Here are the points that I made at the time: 

·         The piece is testimony to why it is important to have certain department heads elected—they can speak their piece.  They may not always be accurate or correct, but they can swing away without fear of being fired, as an appointed department head might.

·         Accusing me of being a demagogue may be a little rash.  Chriss Street has formed a habit of jumping on the Board’s agenda without having a pre-scheduled item.  He has done this on a couple of occasions to address the homeless situation in the Civic Center.  Last week he spoke during the Public Comments portion of the agenda to notify us of the potential Moody’s credit watch announcement for his SIV holdings.  He didn’t contact me (or any other Board member, as far as I can tell) before hand.  Not a call.  Not an e-mail.  Not a note.  Nothing.  Of course, his announcement would come as a surprise.  In fact, he did not provide a memo of explanation until the following Friday, some three days later.  Obviously, communicating is not Mr. Street’s strong suit.  My attempt to encourage him to be a better communicator sure seems to have been lost on him.

·         Let me assure you that Nick Berardino and I are not in cahoots–the conspiracy theory is also off target.

·         I have not criticized Mr. Street over the issue of “credit watch negative,” just the manner in which the news was delivered, as I have very supportive positions on this topic; as he has noted.

·         If any critical noncompliance issues were not disclosed while I was the County’s Treasurer, then we should talk to the independent auditors that performed their reviews on a quarterly basis to determine how these alleged nondisclosures got past everyone (in fact, I instituted an “approved credit” listing for the monthly report that was updated every month for rating changes).

·         Being put on credit watch negative or downgraded may not be a critical concern if it happens to one issuer—it is a concern when it happens to a sector representing 14 percent of your portfolio—and even