MOORLACH UPDATE — School District Debt — August 22, 2013

In January, the Westminster School District came to the Board of Supervisors to request that the Board issue its general obligation bonds because it “may not meet its financial obligations for the current fiscal year or two subsequent fiscal years.” Surprisingly, this was not the topic of discussion for Westminster’s item. My main concern was the District’s use of Capital Appreciation Bonds (CABs). The next month, the OC Register provided a scathing article on CABs (see http://www.ocregister.com/articles/bonds-496091-school-bank.html). What the article did not mention is my prior efforts as a County Treasurer to address a number of financing abuses that were being perpetrated on or for school districts in California. Consequently, former Orange County Supervisor and California Assemblyman Chris Norby wrote about it in a Letter to the Editor (see MOORLACH UPDATE — CABs — February 19, 2013). Here is something that I wrote in that UPDATE: “As a post script, at the January 15th Board meeting, the Westminster School District requested approval of their general obligation bonds (agenda item #21). Since it included CABs, I voted in opposition. After a lengthy discussion, I was joined by Supervisor Spitzer. Now that the OC Register has made such an eloquent argument against CABs, it would be wise for school districts within the County to reconsider their use. I would think that obtaining ministerial approval from the Board of Supervisors will not occur in the future, or at least one could hope.”

This week the Garden Grove Unified School District came to the Board with a similar request, but they followed my admonition and did not include CABs in their proposal. However, this time the fiscal status of the District became the prominent concern and the motion to approve the District’s request was not seconded. The Voice of OC provides their perspective below.

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Supervisors Reject School Bonds Due to District’s Financial Woes

By NICK GERDA

As Garden Grove school officials stare down a major structural budget deficit, the Orange County Board of Supervisors Tuesday rejected their request to issue $120 million in bonds for infrastructure repairs.

The district is “not in a good financial position, so how do we feel comfortable with this deal?” asked Supervisor John Moorlach.

“Right now you don’t have a comfortable Board of Supervisors,” said Supervisor Janet Nguyen, whose district includes Garden Grove.

The reason why Garden Grove needs approval from the supervisors before issuing the bonds is it is facing a significant budget deficit and is at risk of not meeting "its financial obligations for current fiscal year or two subsequent fiscal years."

The district’s most recent budget had a massive $76-million deficit with $430 million in total expenses.

The proposed budget for this fiscal year again shows a deficit, this time $60 million.

To pay its bills this year, the district has been planning to drain its fund balance from $87 million to $27 million, according to the budget.

It was for these reasons that no supervisor would agree even to vote on a motion.

Lynn Paquin of bond underwriter George K. Baum & Co. sought to reassure supervisors that the district was in good enough financial shape.

“In my experience, I do not think that this is a district that is in financial trouble or will have trouble paying back this bond debt service,” said Paquin.

A district representative agreed.

“When we take our budget to the [school] board in a week, we’re going to be positively certified,” said Nancy Medford, the district’s executive director for business services.

If that’s the case, supervisors might not be needed to issue the bonds after all, since they participation would come from the district’s precarious financial situation.

The bonds stem from Measure A, known as the Garden Grove USD [Unified School District] Safety and Repair Measure, which was approved by 64 percent of voters in June 2010.

The measure allowed up to $250 million in bonds for “infrastructure modernization projects for aging schools in the Garden Grove Unified School District,” district spokesman Alan Trudell

. The first $130 million of those bonds were issued in 2010.

At the time, the district had told residents it would cost them between $35 and $100 per year for about 30 years.

The current round of bonds for $120 million comes with hefty interest payments. To pay off the bonds, taxpayers will ultimately pay $244 million, more than twice the bond amount. It’s set to be paid through property taxes.

Garden Grove Unified serves around 50,000 kindergarten through 12th-grade students and 16,000 adult education students in Garden Grove and parts of Santa Ana, Westminster, Fountain Valley, Cypress, Stanton and Anaheim. It has more than 5,000 employees.

You can reach Nick Gerda at ngerda, and follow him on Twitter: @nicholasgerda.

FIVE-YEAR LOOK BACKS

August 22

1998

Jean O. Pasco of the LA Times provided a review of the Irvine Ranch Water District in “Amid Inquiry, District’s Affluence Under Fire.” It was an accompanying piece to “Controlling the Floodgates – Inquiry: Amid $2.2-million misappropriation case, experts say simple financial checks could have halted alleged loss at Irvine water conservation program.” Bob Citron did not mark his portfolio to market like mutual funds do. If you let someone come in at $1 per share and go out at $1 per share, everything is fine until the actual underlying value of the investments is less than $1 per share. When you realize that you can withdraw at $1 per share, when the value is probably $0.95 per share, then you take your money out, and you do it quickly. This is also known as starting a run on the bank. Back in 1998, I was still smarting from the Irvine Ranch Water District having started the proverbial run on the bank with the Orange County Investment Pool back in the fall of 1994. This action was a portion of the County’s bankruptcy story for which I was still smarting,as someone who came from the private sector and stood in awe of the peculiarities of what was occurring in the public sector. This piece will give you a quick tutorial on what I had the privilege of learning back in the day.

The Irvine Ranch Water District has never been an ordinary source for water.

While most other Orange County special districts operate amid whispers of public recognition, Irvine Ranch screams its prosperity and influence from a $12.9-million copper-clad complex that rises Oz-like from acres of furrowed farmland off the San Diego Freeway.

It’s the only water district in the state allowed by the Legislature to invest in residential real estate. It spent $43 million for luxury apartment complexes in Anaheim Hills and Aliso Viejo.

It put $300 million in the county investment pools, making it one of the largest investors before the pools collapsed in December 1994. But despite its $70-million loss, the district was still so flush with cash that it could float loans to three school districts that also had lost money.

In the last decade, Irvine Ranch has become a recognized statewide leader in water conservation. Its reserve fund has hovered near $100 million. Its water rates remain the lowest in the county.

Throughout it all, the district appeared to have mastered the ability to operate on the cutting edge without getting sliced.

So observers were stunned this week when police arrested a former Irvine Ranch employee and three others and accused them of embezzling $2.2 million from a water conservation program. Irvine police said the losses occurred over 2 1/2 years from 1994 to 1997.

The arrests gave critics of the district an invitation to point out the dangers of complacency.

"When you’re fat, you become dumb and happy," said county Treasurer John M.W. Moorlach. "Even when you have what we call discretionary income, you should have a budget, you should have oversight and you should have proper auditing procedures in place. If those weren’t in place, then shame on you."

UCI professor Mark Petracca was on the board of a Turtle Rock homeowner association when it took advantage of the conservation program from which the money disappeared. He said the board appreciated the program but was irked that it was funded by surcharges tacked on for what the district arbitrarily decided was excessive water use.

"All of this gets nicely summed up by the observation that this is an agency that somehow managed to forget what it’s supposed to do," Petracca said. "It’s an agency that’s supposed to deliver clean water for people at an affordable price."

Irvine attorney Susan Trager, who specializes in water issues, said the district is known for capable management, innovative use of reclaimed water and a loss of water from leaks that is one-tenth what other districts experience. The district attributed its low leakage rate to its aggressive maintenance program.

Trager, who is working on a project for Irvine Ranch, said consultants want to be hired by the district because it has "the resources to do it right." It can try new things because its core operations are so solid, she said.

"They may appear to be arrogant to the outside world," but executives are spending more time working with other agencies and cities, she said.

The district first was thrust into countywide notoriety during the fallout from the county bankruptcy. Then, focus turned to the district’s high reserves and the behind-the-scenes actions of the president of its governing board, Peer Swan.

A former Republican congressional candidate, Swan was a savvy investor for the district and had defended then-Treasurer-Tax Collector Robert L. Citron to the Lincoln Club, a prestigious group of GOP donors, during the June 1994 election.

Several months later, Swan became the first person to demand money from the county’s then-teetering investment fund. He got $100 million before Citron halted further withdrawals. Swan served out his term as president and remains on the board.

In 1995, Assemblyman Curt Pringle named Irvine Ranch a prime example of bloated, obscure government bureaucracies that hoard millions of dollars in unneeded reserves. He criticized the district for having too much unused cash, despite arguments that the money was needed to fund future water system construction.

The Legislature ultimately scuttled Pringle’s attempt to consolidate the county’s special districts and reduce their powers.

Pringle said this week that it was only a matter of time for someone to take advantage of the extraordinary amounts of money raised and spent by the water district.

"These districts are off the radar screens of most voters, and they can get away with a lot," Pringle said. "The bottom line is that this money comes from ratepayers. The district wasn’t the victim–their [customers] were."

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