MOORLACH UPDATE — Reminiscing — January 19, 2013

E. Scott Reckard covered my swearing-in as Orange County Treasurer-Tax Collector on March 17, 1995, (a clarification for yesterday’s OC Register, which stated I was sworn in during the month of January).  I believe this was my first encounter with Scott, but he covered the bankruptcy after it occurred and not prior.  He did his reflective piece on the subject, of which he has firsthand familiarity, in today’s LA Times.  He provides a concise history of the events that occurred in 1994 and 1995.  It is good to see some names from the past in the piece.  Former University of California Irvine Professor Mark Baldassare is quoted.  He would later write the book “When Government Fails:  The Orange County Bankruptcy,” University of California Press, 1998.  The book is one of many that recounts the story, and it is probably the most thorough and scholarly of the bunch.  I may not have agreed with every recommendation that Professor Baldassare proffered in his work, but it is an excellent resource on the subject.  Since we are reminiscing, I will provide one sample paragraph from his manuscript (page 230) that seems to expand on the conclusion of today’s piece below (because it seems to be – understandably – absent from most of the journalistic accounts during these past few days):

The Orange County news media failed to carry out their duties as the “fourth estate” in the months before the bankruptcy.  John Moorlach had made very serious allegations about the investment strategies of Bob Citron during the campaign for county treasurer in the spring of 1994.  He had claimed that the county fund was being managed in a fashion that was far too risky for government agencies.  Later he said that the county fund had a paper loss of over a billion dollars.  The county treasurer denied these charges and pointed to past performance as an indicator of his professional expertise.  The Los Angeles Times Orange County edition, the Orange County Register, and the Orange County Business Journal were all aware of these allegations.  They all prided themselves in offering comprehensive coverage of Orange County issues.  They each had reporters on staff who covered business and finance issues, such as derivatives and reverse repurchase agreements.  They each had sources in the Wall Street investment firms and county government.  Yet not one of them systematically examined Moorlach’s claims to see if they were merely election rhetoric or based on facts.  Their defense was that Moorlach’s claims were too complicated for their readers to comprehend or fell between the cracks between the business and government news desks.  Later in the year the media would have to explain the meaning of municipal bankruptcy.  If an objective local source, such as any one of these news organizations, had brought Bob Citron’s practices into daylight in early 1994, there may never have been a fiscal meltdown in December.  These local news organizations did not live up to their role as watchdog for the public.

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Robert L. Citron caused ‘great hardship’ but also some good

Aside from Orange County’s financial meltdown, his legacy includes the Legislature’s overhaul of investment rules, which were tightened to stop local governments from ever being so reckless again.

By E. Scott Reckard

Eighteen years after Orange County crashed into the largest municipal bankruptcy, with a $1.6-billion trading loss, the collapse remains the leading example of foolhardy investments, Wall Street greed and lazy government supervision.

That is an enduring legacy of Robert L. Citron, the soft-spoken but high-rolling former treasurer who died this week at age 87. His legacy, though, also includes the state Legislature’s subsequent overhaul of investment rules, which were tightened to prevent budget-strapped local governments from ever becoming so reckless again.

Indeed, it was other pressures — soaring pension obligations, diving revenues, higher unemployment and a glut of foreclosures — that sank San Bernardino, Stockton and other cities into recent bankruptcies.

Jefferson County, Ala., became the largest municipal failure two years ago, with $4.2 billion in losses. But no local government has yet overshadowed the Orange County debacle in sheer shock value.

"Everybody comes back to Orange County because it’s one of the wealthiest counties in the country, the surprising amount of debt and the types of investments that Bob Citron made," said Mark Baldassare, a former UC Irvine urban planning expert who wrote a book on the bankruptcy.

Had Citron’s speculations in complex securities not imploded, more cities, schools and local agencies would have taken similar risks to plug budget gaps that seemed only to increase over the years, Baldassare and other observers said.

"Did a great big disaster happening early help avoid an outcome of multiple bankruptcies that together would have been bigger? That’s not hard to imagine," banker Christopher Varelas, whom the county hired as a financial advisor after the bankruptcy, said Friday.

Without the example of Orange County, there probably would have been a robust market offering complex, higher-yielding securities to California cities and schools, Varelas said.

"It’s hard to believe Wall Street could have stayed away from such a large market. And it’s hard to believe municipalities could have resisted the temptation to find a quick fix for their budget problem," he said.

Citron offered just such a quick fix to Orange County during the deep recession of the early 1990s when aerospace jobs evaporated and home prices cratered.

Originally elected tax collector, Citron, who had no formal financial training, became treasurer as well when the United States’ fifth-most-populous county consolidated operations. He was elected seven times.

In the years before the collapse, he was bringing in an extra $160 million a year by what proved to be sheer wagers on low interest rates, magnified by heavy borrowing that converted $7.8 billion in local government funds into a $20-billion investment portfolio.

After huge losses were disclosed in late 1994, Orange County blamed its former financial and legal partners for the debacle. It ultimately won $900 million in settlements, about half from Merrill, Lynch & Co., which concocted many of the complicated securities that fell apart. One called an inverse Swiss floater incorporated two bets: one that the Swiss franc would decline in value, the other that interest rates would stay low.

The county had to take on $1 billion in new debt largely to repay 200 cities, school districts and public agencies that invested in Citron’s county funds.

Orange County refinanced the debt at a lower rate in 2005, keeping its annual payment at about $90 million but allowing a projected payoff in 2015 or 2016 instead of 2027, said John M.W. Moorlach, who replaced Citron as county treasurer and is on the county’s Board of Supervisors.

Repayment has forced the county to budget conservatively, ignoring or postponing projects in such areas as flood control and mental health, Moorlach said. When the debt is retired, he hopes the funds can be redirected to paying down Orange County’s unfunded pension liabilities, which top $5 billion.

Back when the money from Citron was rolling in, making belt-tightening unimportant, few had raised questions about its source.

"I don’t know how in the hell he does it, but he makes us all look good," Thomas F. Riley, a former Board of Supervisors chairman, famously said.

Citron’s bets paid off so well in the early 1990s that he and his assistant Matthew Raabe skimmed off $89 million due to cities, schools and agencies to put in the county’s coffers for discretionary use.

Both later were convicted of fraud. Citron was sentenced to a year of clerical duty in the jails during the day and spent nights at home; Raabe’s conviction was overturned on appeal.

William J. Popejoy, the financial executive brought in as county chief executive after the meltdown, says the lesson for other governments is to speak up when something looks too good to be true.

"A lot of people in the county government and at the cities and especially the special districts knew there was a huge amount of money coming in. But no one asked the question; they didn’t want to stop the golden flow of funds coming from Citron," Popejoy said. "And somebody should have."

Actually, someone had — Moorlach.

Although had lost his bid in 1994 to unseat Citron as treasurer, Moorlach had predicted a financial disaster a year earlier and tried to make it a campaign issue. Citron dismissed the talk as political posturing and was reelected.

Popejoy and other officials proposed raising taxes to help right the county’s finances, but voters refused. The county froze hiring, laid off thousands of workers and cut spending on social programs.

"It caused great hardship, and that is part of the legacy Bob Citron left as well," Popejoy said. "To my knowledge, however, he never did so for personal gain."

Citron’s defense attorney David W. Wiechert said Citron, however misguided, "was an incredibly loyal and caring individual" who believed himself to be acting in the county’s best interests.

Forgiveness is in order, Wiechert said, "especially now, when we have seen that even the brightest minds on Wall Street could bring the world’s economy to an apocalyptic precipice."

scott.reckard@latimes.com

FIVE-YEAR LOOK BACKS

January 17

2003

Peter Larsen of the OC Register provided a recapture case update in “Tax-suit’s filer is a man on a mission – O.C. homeowner’s action could mean refunds, change in how tax is collected.”  The County potentially losing property tax revenues that it is legally entitled to is occurring again with the Department of Finance suing the OC over vehicle license fees.  I believe the OC will prevail in our VLF efforts, like it did in its recapture case lawsuit.  If the OC does not, then it will be fascinating to see how it weathers this new assault, i.e. what major further cuts that will have to be made.

                “This could really be another serious dent in already a serious deficit problem,” said Orange County Treasurer-Tax Collector John Moorlach.  “We’re talking about a serious chunk of change.”

                Cities, school districts and special districts might eventually have to refund $520 million and cut annual property tax revenues by $167 million, the county said.

                The county’s potential refund is $32.8 million.  Large school districts such as Capistrano Unified face a refund of $28.5 million.  The city of Newport Beach might have to pay back $7 million.

                “It would be fascinating to see it happen, and see what municipalities could weather it,” Moorlach said.

2008

Brianna Bailey and Chris Caesar of the Daily Pilot, in their weekly “The Political Landscape” column, provided updates on two hot topics affecting the Sheriff’s Department:  Harbor Patrol and the next Sheriff, in “Safety classes approved.”

Orange County Supervisor Chris Norby nearly sunk an agreement earlier this week that would provide training to Harbor Patrol personnel on how to handle marine fires.

Norby first voted against paying for the $23,200 training sessions with county money and said the county should not pay for harbor security in cities like Newport and Huntington.

“The county should no more pay for these harbors than it should pay for Disneyland,” Norby said.

Supervisor Bill Campbell was traveling, and Supervisor Patricia Bates was involved in a car accident on her way to the board’s regular meeting Tuesday. With only three supervisors at the meeting, Norby voted down the training classes with his dissenting vote.

“This is your day, you can kill this baby,” Chairman John Moorlach said to Norby.

Norby switched his vote at the last minute to approve the training, which would have passed at the board’s next meeting in two weeks with all members present, Moorlach said. But the supervisor vowed to continue looking for ways to make the cities pay for their own harbor patrols. He said he plans to raise the issue again.

“I don’t think it’s responsible to make taxpayers pay for this,” Norby said.

MOORLACH’S NOT PICKING FAVORITES

Chairman John Moorlach says he has no comment on whether he’d like to see acting Sheriff Jack Anderson permanently replace predecessor Michael Carona, who left the office this week to prepare his defense against federal corruption charges. But Moorlach acknowledged he’d “absolutely” be open to someone else.

“I think one of the issues that we will be concerned about is the corporate culture, and when you have someone a little more independent and outspoken like [former Assistant Sheriff] Dan Martini terminated in order to make some of these moves, I think that creates a sense of serious concern by the board members,” he said. “We’ll just have to factor that in [to our decision].”

Carona’s last-minute shuffles prior to his resignation included demoting former Undersheriff Jo Ann Galisky to assistant sheriff, and endorsing Anderson as his replacement. Martini lost his position in the pecking-order shuffle.

Law dictates that, in the event of a vacancy in a county sheriff’s office, the undersheriff takes his or her place until county officials select a replacement. In the absence of an undersheriff, the assistant sheriff is next in line.

Unfortunately, large counties like Orange tend to have multiple assistant sheriffs. Thus, it was Anderson’s status as Carona’s de facto chief of staff that made him the natural choice, Moorlach said.

“I said, ‘Look, chief of staff seems like the strongest title here, let’s move on,’ ” he said. “Let’s not get into any nitpick war here over which one of the four [assistant sheriffs] should be the sheriff.”

Moorlach said he has not heard any gripes from the other assistant sheriffs about the decision.

The Letters to the Editor section of the OC Register provided the following theme:   “Beware of cronyism when replacing sheriff.”  Here’s what I wrote five years ago:  “However, he has not served on any committee or group that my office has purportedly established.”  (And you know I rarely underline.)  Presenting ideas is great, but when the law is clear, you do a recruitment, interview in public, and make a selection – something we are pursuing for three vacant elected positions as we speak.

Employees know the consequences of superiors hiring a friend or family member and placing that person in a management or supervisory position. Many of these friends or family members are not qualified and take advantage of the situation, knowing that employees believe they have no recourse and will not complain about them. The worst-case scenario is when these employees do something embarrassing or regrettable, i.e., O.C. Treasurer Chriss Street, whom Supervisor John Moorlach supported, and Sheriff Mike Carona, who hired Assistant Sheriffs Don Haidl and George Jaramillo.

Sheriff candidate Ralph Martin serves on Moorlach’s oversight group, which could pose a conflict of interest for Moorlach, and I hope the county supervisors have not already made their choice. Carona’s replacement must be chosen with professionalism.

When dealing with an open position, we should hold an emergency election, giving at least three months for candidates to convince us they are right for the position, or take the person who came in second at the original election, or continue with second in command for the remainder of the term. The supervisors could also choose their top five candidates and let voters make the final choice. This avoids any conflicts or problems, and all candidates have a fair and level playing field.

This is not about the supervisors. The candidate who fills office of sheriff is not just a puppet for supervisor positions and ideas. Fill the sheriff’s office with someone who has a different view so when sides get together they can work a compromise that benefits all sides, not just one side.

Kathy Reed of Laguna Hills

January 18

2008

The OC Register addressed the same question I would hear repeatedly about Bob Citron after the County filed for bankruptcy protection:  “Why does Mike Carona get a pension?  Answers to your questions about the recent resignation of the ex-sheriff.”

Here are the answers to some of the questions readers have had this week about the resignation of Sheriff Mike Carona:

Q: If it’s illegal for Carona to accept the pro bono services of two attorneys working on his criminal case, how could Mike Schroeder represent him for free for all those years?

A:  State law allows for free legal services to political candidates under the government’s election code, so Schroeder was free to act as Carona’s lawyer on those issues for, well, free. (Schroeder also worked pro bono on Trung Nguyen’s unsuccessful election challenge of Supervisor Janet Nguyen.)

Watchdog Shirley Grindle’s complaint to the California Attorney General, which triggered Carona’s resignation, refers to the difference. "It is my understanding that free legal services to a candidate or elected official in the state of California, for defending against charges that are not associated with the violation of state or local campaign, disclosure, or election laws, or for a recount contest, constitutes a gift."

It was the state law banning a "gift" – the pro bono services of the criminal defense attorneys – which Carona cited as his reason for stepping down. State law sets the limit on a gift as approximately $396 – which wouldn’t even pay for an hour’s pay for one of the lawyers.

Q: Which law was Supervisor John Moorlach citing when he said it was improper for Carona to appoint an assistant sheriff as the interim sheriff?

A: Moorlach (along with Mario Mainero, his chief of staff who happens to be a former law professor) was looking at this section (Government Code Section 24105) for the regular process for appointment:

"If the office of any of the county officers enumerated in Section 24000 of this code is vacant the duties of such office may be temporarily discharged by a chief deputy, assistant or deputy of such officer, as the case may be, next in authority to such county officer in office at the time the vacancy occurs, with like authority and subject to the same obligations and penalties as such county officer, until the vacancy in the office is filled in the manner provided by law; provided that if the vacancy occurs in the office of sheriff, the duties of such office shall be discharged by the undersheriff, or if that position is vacant, by the assistant sheriff, or if that position is also vacant, by the chief deputy next in line of authority."

Because Undersheriff Jo Ann Galisky turned down the interim job (she cited family reasons), Moorlach and Mainero believed the board should get to fill that position. They cite Government Code Section 25304:

"The board of supervisors shall fill by appointment all vacancies that occur in any office filled by the appointment of the board and elective county officers, except judge of the superior court and supervisors. The appointee shall hold office for the unexpired term or until the first Monday after January 1st succeeding the next general election."

The California Supreme Court and the Attorney General have interpreted this as providing that the appointee shall hold office for the entire unexpired term, Mainero said.

However, Moorlach ultimately backed away from the challenge, saying he decided to accept Assistant Sheriff Jack Anderson as the interim sheriff because he will be the chief of staff among the four assistant sheriffs. Moorlach said he wanted to offer the department some "normalcy" after Carona’s resignation.

Q: Does Carona get to keep his full pension?

A:Yes. He became eligible for his pension at age 50 (he’s 52 now), and it will be worth nearly his currently annual salary, about $200,000. However, he could take a tiny hit to it – but only if he’s convicted.

A new state law that became effective in 2006 denies a public pension to any public official convicted of wrongdoing in office. So because of that law, if Carona is convicted, he would be denied benefits accrued from January 2006 through his leaving office, which is just one year.

Carona will receive medical and dental benefits. Carona’s wife, Debbie, also receives a county pension as she worked in the probation department.

The idea of someone accused of crimes receiving a public pension didn’t go unnoticed this week. During a press conference on Monday, Moorlach was asked about it. Yes, Moorlach said, Carona will get his pension, just as former Treasurer-Tax Collector Bob Citron does. (Citron pleaded guilty to several felony counts for his role in the county’s 1994 bankruptcy.)

"I think working for the county is wonderful," Moorlach said sarcastically. "If you’re indicted, you still get your pension."

The cover story for the OC WEEKLY, written by Nick Schou, used the title of a song from “The Rocky Horror Picture Show.”   The title was “Dammit Janet!  Why Do Supervisor Janet Nguyen’s Former Supporters in Orange County’s Republican Power Structure Hate Her So Much?”  I am mentioned somewhere in this lengthy piece, but do not wish to provide anything more about it in this LOOK BACK. 

January 19

1998

Nidal M. Ibrahim of the Orange County Business Journal provided an Orange County Employees Retirement System (OCERS) investment manager update with “OC Retirement Fund Severing Heitman Ties – Loss of Confidence; Investments Total More than $100M.” Here are the opening and closing paragraphs (where I use the word “fascinating” one more time):

                The Orange County Employees Retirement System is seeking a divorce from its real estate pension fund advisor, Chicago-based Heitman Financial Services Ltd.

Quietly, the two sides are negotiating terms and possible scenarios under which the relationship could be terminated, a goal that county Treasurer John Moorlach has made clear he wants to achieve.  Moorlach said county officials have told Heitman execs:  “We’re not happy with the job you’re doing and we want you to sell our properties and we want to liquidate.”

Additionally, county officials were not happy with the property management of the portfolio as it was being handled by Heitman.

“We did not feel that there was some in-place property management that was going to squeeze or give us any premium,” [real estate committee chairman Bruce] Moore said.

“Heitman’s a big company, but boy, they’ve just been playing a fascinating game when it comes to customer service and when it comes to this customer,” Moorlach said.

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