MOORLACH UPDATE — Quasquicentennial — December 24, 2013

The County of Orange split off from Los Angeles County after a successful vote in 1889. During the year of 1989, the County of Orange commemorated its centennial. For 2014, the County will celebrate its 125th anniversary, also known as the quasquicentennial. I had the privilege of serving as the Vice President of the California Sesquicentennial Foundation during the years of 1994 up to the Sesquicentennial of the State’s admission into the United States on September 9, 2000. Needless to say, I believe in observing significant milestones. Appreciating the current and constant fiscal constraints, I requested that a very low-budget effort be pursued at last Tuesday’s Board meeting. It generated push back, and the OC Register covers it in the first piece below.

Last Thursday the Voice of OC Editorial Board invited Paul Leon, Rusty Kennedy, Karen Roper and myself to discuss efforts to address homelessness here in Orange County. One guest to last Tuesday’s Open House was not amused with what he saw here in the Civic Center and spared no vitriol in letting me know his disappointment. It made me want to weep and say, “if you only knew how difficult it has been to push this heavy rock up a very steep hill.” This morning another kind donor distributed some $5,000 of clothing to the homeless here at the Civic Center. I say another, as groups provide such items nearly every Saturday in our parking lot. I even had the opportunity to participate. Now, if the homeless only had a place to store their meager supplies. What a joy it would be to provide them lockers at the vacant bus station directly across the street. It’s Christmas and one can only hope . . . The Voice of OC’s item is best seen online, and links are provided in the second piece below.

BONUS: One of my readers discovered a typo on our electronic Christmas card. He will be coming on staff next year as our new Chief Proofer. The updated card is provided as the third item below. Merry Christmas!

Who should pay for county’s birthday party?

Supervisors debate whether public funds or private donations should support 125th anniversary.


County officials selected this logo for the 2014 celebration of the county’s 125th anniversary. On Aug. 1, 1889, Orange County officially seceded from Los Angeles County.

They can agree to celebrate the county’s 125th anniversary next year, but as politicians typically do, they disagree on how to pay for it.

Supervisor John Moorlach, who is championing the quasquicentennial celebration, wanted $10,000 of county funds for books, birthday cake, banners, videos and other commemorative materials.

But Supervisor Todd Spitzer says the party should be funded by private donations.

Moorlach compared the proposed expenditures to those made by tourism groups and chambers of commerce.

In an interview, he predicted the anniversary events would draw people to Orange County and boost the economy.

“The amount of money we’re allocating is de minimis,” he said at last week’s board meeting. “This is a celebration on the cheap.”

“It’s not a huge dollar amount,” Spitzer agreed at the meeting, “but it’s just the principle. … Given the situation we’re in financially … this sends the wrong message.”

Moorlach agreed to explore other funding options, although the supervisors may be restricted from soliciting private donations. County Counsel Nick Chrisos said he would research whether staff members could request contributions.

“I’m even more than happy to buy the cake,” Moorlach said.

To save money, organizers are trying to piggyback on existing events, such as the OC Fair.

They are planning an Aug. 1 party at the fair to celebrate the official formation of the county, and an Aug. 5 party at the Board of Supervisors meeting to celebrate the first board meeting.

In the summer of 1889, voters chose to secede from Los Angeles County.

Contact the writer: mreicher

OC Leaders Discuss Present and Future of Efforts for Homeless


Guest speakers at the recent Community Editorial Board meeting on homelessness. (Photos by: Nick Gerda/Voice of OC)

It is difficult to find a place where the effort to fight homelessness has more hurdles than Orange County.

It is among the few large counties in the state lacking both a year-round emergency shelter and a county hospital. Nonetheless, like others Southern California, the county’s warm climate makes it a magnet for homeless people.

Despite these challenges, a dedicated group of government officials and nonprofit leaders continue to work on behalf of the homeless with the goal of someday finding a roof to put over everyone’s head in Orange County.

Last week, some of those folks visited the Voice of OC Community Editorial Board to talk about their efforts and have a frank discussion about what works and what doesn’t.

The group included: Orange County Supervisor John Moorlach, Orange County Human Relations Executive Director Rusty Kennedy, Illumination Foundation CEO Paul Leon and OC Commission to End Homelessness Executive Director Karen Roper.

The two nonprofit advocates, Kennedy and Leon, clashed over whether to focus on countywide or city-centric approaches:

Roper, meanwhile, compared the efforts of the homeless commission to a small rudder on the Titanic:

When it comes to a key law for mental health treatment, Moorlach said his efforts to get funding included an unexpected reaction from state officials:

As for the taxpayer angle, Leon pointed to a Los Angeles program as showing that actually dealing with homelessness would save millions of public dollars:

Moorlach, meanwhile, talked about his struggles with Santa Ana officials, citing his failed effort to convert the city’s shuttered bus depot into a homeless shelter as an example:



December 21

The OC Register’s Sunday Commentary section contained the following editorial, “We get to cover CalPERS risky bets – Giant state worker pension fund, knowing taxpayers had its back, lost its shirt in real estate,” which was prescient. It highlights what a rough year 2008 was, but also precisely warned of the future ramifications. Here it is in full:

Look out – another massive taxpayer-funded bailout is coming down the pike.

The front page of Wednesday’s Wall Street Journal featured a shocking news story about severe financial problems in the public employees union-dominated California Public Employees’ Retirement System, which has lost a quarter of its assets since July after investing heavily in real estate schemes – including high-risk speculative ventures on vacant land. According to the Journal, CalPERS has experienced its worst decline since 1932 and has lost 103 percent on its housing investments in the latest fiscal year. Here’s the kicker: "CalPERS invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails." And this means that "[u]nless CalPERS’ returns bounce back by June, the fund expects that the rates it charges government to participate in the pension could rise starting in 2010."

The simple translation is that taxpayers are going to have to pay far more to prop union pensions because of CalPERS’ imprudent investments.

All told, CalPERS provides retirement and health benefits to more than 1.6 million state and local public employees and their families. It has $182 billion in assets, the most of any U.S. public pension fund, but in the past 14 months has lost nearly $80 billion, reports the Sacramento Bee.

"The use of debt is unconscionable," said Supervisor John Moorlach, the former county Treasurer who predicted the county’s bankruptcy in 1994 caused by the leverage-based investments made by former Treasurer Bob Citron. Mr. Moorlach, as well as the Register Editorial Board, have warned of an emerging pension debacle. "This is the O.C. investment pool story all over again. Leverage kills if you’re trying to make a killing. … The goal should be a reasonable rate of return on annual net rental income – not on appreciation from flipping."

CalPERS plays games with amortization, Mr. Moorlach explains. Instead of amortizing its losses over five years, it amortizes them over 30 years, which pushes eventual costs into the future. And CalPERS takes an extremely aggressive investment strategy.

Why not? If the investments work, then union members get even more financial benefits, but if they don’t then they are still guaranteed their generous pensions, and taxpayers bail them out. The leveraging is not illegal.

Reed Royalty, president of the Orange County Taxpayers Association and Orange County retirement board member, told us, "Public employees are guaranteed their pensions no matter what. The tendency is to want to take higher risk because the more they earn the easier it is to talk to supervisors, legislators and city council members about granting them higher benefits. … It galls me. … Public employees have no risk. It’s wrong for employees of anything to have zero risk and nothing but gravy."

Craven politicians have used these high returns to justify a constant ratcheting up of pension plans, with a significant number of public employees retiring as early as age 50 with 90 percent or more of their final year’s pay guaranteed. The only way to sustain this is to keep the investments performing at unrealistically high rates. "It’s like putting your foot on the pedal and making the machine run at 7,000 rpm even though it’s not designed to run at this pace," Mr. Moorlach said. In 2004, when he predicted problems after the board approved a big retroactive pension spike for county employees, he compared the decision to banking that the Angels would make the playoffs every year for 30 years.

What happens when companies, unions, governments and others understand that taxpayers will bail out their worst financial decisions? The answer is "moral hazard." Those who are protected from the consequences of their decisions will continue to make unnecessarily risky decisions. Expect more bad decisions and an endless number of taxpayer-funded bailouts.

December 22

As a result of The Wall Street Journal article, referred to in the prior day’s OC Register editorial above, along with an editorial that had appeared earlier in the month in the Sacramento Bee, I submitted a rebuttal which the OC Register published. It was titled “Investment losses at CalPERS – Boosting benefits in good economic times was shortsighted,” and it addressed the statements made by public employee union representative Rob Feckner that I found extremely disingenuous. His abbreviated remarks were provided alongside my submittal and is included below.

Our governor has signed budgets with annual expenditure increases greater than those of his predecessor. So it is disingenuous for him to be critical of the Legislature now. For more than four years he has been guilty of pushing problems out into the future. Gov. Schwarzenegger, please do not lecture us now about requiring a balanced budget, requesting spending caps or being horrified at the lack of a "rainy day" fund. You’re a classic finger-pointer, with most fingers pointing back in your direction.

The same is true of Rob Feckner, president of the California Public Employees’ Retirement System. This schoolteacher lectured that "every time the stock market suffers a major setback, those who don’t fully understand how government pensions work begin sounding alarm bells that it will absolutely drive up the cost of government pensions."

Mr. Feckner also suffers from a severe credibility gap. CalPERS has done quite well over the past 20 years, averaging annual investment returns of nearly 10 percent.

What Mr. Feckner failed to mention is that nearly a decade ago CalPERS was fully funded. Consequently, with the great yields that he touts, CalPERS should be more than fully funded. The reason it is not is the second small concern that he failed to mention: Ten years ago he supported formula enhancements that increased benefits by some 50 percent.

Changing retirement formulas in the middle of the game is a recipe for disaster. It shows a severe case of not fully understanding how government pensions work. They are not there to be plundered and pillaged.

When Mr. Feckner states that "market downturns are followed by recoveries," he is correct. The opposite also is true: Market upturns are followed by corrections. Instead of using the overfunding from banner years and protecting the taxpayers during the next down cycle, he increased benefits to the tax-eaters, of which he is one. I guess blatant conflicts of interest make it difficult to tell the entire story.

Here was Rob Feckner’s piece, titled “CalPERS’ long-term investment strategy helps weather the market,” which the OC Register provided with my submission.

It seems that every time the stock market suffers a major setback, those who don’t fully understand how government pensions work begin sounding alarm bells that it will absolutely drive up the cost of government pensions. A close examination of history and the facts suggests it’s way too early to make such assumptions.

First, the California Public Employees’ Retirement System employs a long-term investment strategy designed to weather periodic financial storms. This strategy, along with professional investment management, has produced an average annual investment return of nearly 10 percent over the past 20 years – which included two market downturns – well above our target of a 7.75 percent average annual return to fund benefits.

We amortize investment gains and losses over 15 years, greatly reducing cost volatility for state and local governments. One year of poor investment performance will not cause a sharp increase in employer costs because we can use investment gains from previous years. We cannot predict the future, but we do know that come July 2009, employers will not have to pay more due to investment performance.

Historically, market downturns are followed by recoveries. CalPERS began in the Depression of the 1930s. We survived the 1987 stock market crash and the recession of 1990. During the 2000-02 recession, our pension fund lost $50 billion on paper, but we rebounded with a gain of $120 billion over the next four years.

It may take time for markets to recover, but CalPERS has more than enough cash to pay benefits without selling a single asset.

A longer version of this appeared Nov. 9 in the Sacramento Bee.

December 23

One trait I have is to predict things, but to do so a little early. By the end of 2008, with the massive impacts of the harshest months of the Great Recession, I anticipated repercussions around the nation for cities and counties. World-renowned municipal columnist Joe Mysak of Bloomberg News, see MOORLACH UPDATE — Encyclopedia of Municipal Bonds, caught my concern in “Moorlach Sees Up to 10 Municipal Bankruptcies in Coming Year.” Fortunately, I did not get the same kind of push back as Meredith Whitney has received in recent years (she predicted hundreds on an episode of “Sixty Minutes”). However, with Mammoth, Stockton, and San Bernardino, we did get close to reaching four California cities. Maybe Desert Hot Springs will complete the set. I am surprised that Rio Vista and Isleton have managed to avoid Chapter 9. But, it may take the city of Detroit to answer the prediction that I had for Vallejo in the conclusion. Here is Joe Mysak’s column in full:

The accountant who predicted the nation’s largest municipal bankruptcy says as many as 10 insolvencies will roil the $2.7 trillion U.S. market for state, county and city debt next year as public finances worsen amid calls for federal aid to state and local governments.

John Moorlach said in 1994 that Orange County, California’s leveraged investing strategy could wreck its finances. The county went bankrupt about six months later after losing $1.6 billion.

As many as four cities in the Golden State and six others nationwide may seek court protection from creditors next year under Chapter 9 of the bankruptcy code, the section devoted to municipal governments, Moorlach said in an interview.

“The total could be higher,” said Moorlach, 53, now chairman of the Orange County Board of Supervisors. He didn’t name any cities outside California, which has seen the cost of insuring state debt against default more than quadruple since September. He said his estimate was based on general economic conditions.

States project a $97 billion shortfall over the next two years, according to the National Conference of State Legislatures. This mounting pressure on public finances gives President-elect Barack Obama’s administration “strong incentives” to provide federal aid, wrote George Friedlander, a municipal strategist at Citigroup Inc., the largest U.S. underwriter for tax-exempt bonds, in the firm’s Dec. 12 Municipal Market Comment.

Three Considering

“In an environment where the federal government needs to stimulate the economy, keeping states from being forced to take steps that are rapidly and severely restraining will become absolutely essential,” Friedlander wrote. He could not be reached for comment yesterday.

Two California cities, Rio Vista, with a population of 8,000, and Isleton, a 10th as large, have said budget gaps and debt loads may force them into insolvency. Likewise, Jefferson County, Alabama, which is trying to restructure $3.2 billion in sewer debt, has considered what would be the largest U.S. municipal bankruptcy.

The most such filings in a year is 104 in 1940 at the end of the Great Depression, according to a 1964 study, “The Postwar Quality of Municipal Bonds.” Since 1980, the record is 18 in 1987, the year of the Oct. 19 stock-market crash.

There may be 36 bankruptcies over the next two years, said Richard Ciccarone, chief research officer of McDonnell Investment Management LLC of Oak Brook, Illinois.

Borrowing Cost

Ciccarone predicts a dozen defaults in 2009 “and at least double that number in 2010.” He didn’t identify cities or counties and said his forecast is based on studying how municipalities respond to economic crises.

If well-known localities turn up among the insolvent, he said, borrowers’ costs will increase at least 50 basis points. A basis point is 0.01 percentage point. If the interest rate on 10-year bonds worth $1 million increases to 5.5 percent from 5 percent, borrowers pay an additional $50,000 over the bonds’ life. Tax-exempt yields on the Bond Buyer 20-bond index were at 5.46 percent on Dec. 19.

Orange County sought court protection on Dec. 6, 1994, about six months after Moorlach, a Republican, predicted the bankruptcy while running for the treasurer’s office. Incumbent Robert Citron, a Democrat whose investment strategy required heavy borrowing to increase bets, resigned. Moorlach, a Republican, replaced him and held the office through 2006.

California Insolvencies

Now, he says, three or four of next year’s insolvencies will be in California, the biggest borrower in the municipal bond market. State lawmakers are grappling with a $14 billion shortfall in the fiscal year that ends June 30. A $42 billion hole is projected for the year that begins July 1. The state this year has sold $21.6 billion in tax-exempt bonds while localities have sold $31.1 billion, according to data from Thomson Reuters.

Standard & Poor’s downgraded California’s short-term note rating to SP-2 from SP-1 on Dec. 10. The state has “some vulnerability to adverse financial and economic changes over the term of the notes,” the New York-based company said. Notes rated SP-3 are deemed to be speculative.

Spreads on credit-default swaps against 10-year California debt rose to 507 basis points on Dec. 12, more than double their value of 213 on Dec. 2, according to data compiled by Bloomberg. They declined to 400 yesterday, meaning investors would pay $400,000 annually to protect $10 million of California debt. California swaps are the most expensive of any state, followed by Michigan, at 365 basis points.

‘Gone Haywire’

The swap contracts, conceived to protect bondholders, pay a buyer face value in exchange for the underlying securities or the cash equivalent should an issuer fail to adhere to debt agreements. They increase in value as perceptions of credit quality deteriorate.

The market for municipal credit protection has “quite literally, gone haywire,” Citigroup’s Friedlander wrote Dec. 12, noting that the cost for California debt was higher than for Turkey’s. “These prices bear no relationship to real risks whatsoever,” he said in the report.

More Chapter 9 filings are not inevitable, said Bruce Bennett, a partner at Hennigan, Bennett & Dorman law firm in Los Angeles who designed Orange County’s 1994 bankruptcy strategy.

“Municipalities are unbelievably artistic at deferring liquidity problems,” by tapping reserves and cutting expenses, he said.

Vallejo Impact

Moorlach said many California cities are watching Vallejo, a city of 117,000 on San Francisco Bay that filed under Chapter 9 in May. The city hopes to rewrite its labor contracts with police and firefighters.

“If Vallejo is successful in unwinding pension agreements, you could see Chapter 9 become a whole new industry,” Moorlach said.

Orange County needs to close a projected $84 million gap in next year’s $700 million general fund. On Dec. 11, after the state cut funding for social services, county leaders said they would lay off 210 workers. Nick Berardino, general manager of the Orange County Employees Association, the county’s largest union, said politicians have been slow to respond to suggestions on how to prevent layoffs.

Berardino said he thought most municipalities would avoid bankruptcy and mass job cuts by slashing services this fiscal year.

“After July of 2009, though, it’s a whole new ballgame,” he said.


December 25

Jean O. Pasco of the LA Times gave a Christmas shout out to the Noble Vikings of Orange County in “Giving Viking Lore a Generous Twist – O.C. group named for Scandinavian pirates boxes holiday meals for 8,000 needy people.” With thanks to the Noble Vikings for their annual Christmas charity. And, with thanks to The Ritz for its many, many years of service to the community. As The Ritz prepares to close its doors on February 15th, due to the nonrenewal of its lease, may a new and appropriate setting be located soon.

On most days, the Ritz in Newport Beach is a fine-dining establishment adorned with mahogany booths, antlered chandeliers, oak wainscoting and dinner-jacketed gentlemen.

For one Sunday in December, the restaurant becomes an impromptu packinghouse where about 60 volunteers with the Noble Vikings of Orange County prepare more than 8,000 meals.

During several frenzied hours, the meals are assembled into dinners for six, boxed and distributed to 15 charities and organizations — from the Santa Ana Police Department to the Boys & Girls Club of San Juan Capistrano — for consumption Christmas Day.

This year’s meals feature a Danish ham, a five-pound bag of russet potatoes, sweet potatoes, instant potato flakes, canned and fresh fruits and vegetables, 20 corn tortillas, assorted cakes and pies, holiday-themed plastic place settings and bags of candy.

The cost of the meals, about $40,000, is defrayed by donations from Sysco Corp.

The dinners have come in handy for the Boys & Girls Club of Santa Ana, which signed up for 35 boxes five years ago. This year, the club took 150 dinner boxes and handed them out to needy families in central Santa Ana.

"Folks are very appreciative," said John Brewster, the club’s president and chief executive. "It gives them a holiday meal they wouldn’t otherwise have."

For the Vikings, the Sunday meal-packing party is the highlight of their year.

Not bad for a group of guys, who aren’t even necessarily Scandinavian and who organized 50 years ago in Los Angeles as an excuse to toss back a few glasses of aquavit, a Danish liqueur, at lunch.

"I’m one of the few [group leaders] who really is Danish," said VerLyn "Sonny" Jensen, an Irvine attorney and longtime lobbyist who helped form the Orange County chapter in 1984.

The group’s lore traces back to the late 1950s, when a cadre of Los Angeles’ business and community leaders, including Los Angeles County Sheriff Peter Pitchess, began a tradition of social lunches at Ken Hansen’s Scandia restaurant on Sunset Boulevard. Determined to do more than socialize, the group decided to raise funds for disabled children and others in need.

Members were honored by having their names engraved in glasses that lined the back wall of Scandia’s bar, where the group would gather for meetings on the last Monday of each month.

The glasses caught the eye of actress Elizabeth Taylor, according to the group’s official history. While dining one afternoon at Scandia, she asked Hansen about the group having so much fun in the back. The story goes that he made her an honorary member on the spot and placed a glass, etched with her name in violet to match her eyes, with the rest of the group’s.

Other famous members included Gen. Jimmy Doolittle, comedian Nipsy Russell, actor Broderick Crawford and then-Sen. Barry Goldwater.

The Orange County group formed after enough members retired in Orange County, many in Newport Beach, who didn’t want to face the drive north.

Famed chef Hans Prager had apprenticed at Scandia and offered the Ritz, his restaurant in Fashion Island that opened in 1977, as a home base.

The local group has grown to 120 members and, like its Los Angeles counterpart, includes businessmen and local leaders, including Orange County’s previous and current sheriffs, Brad Gates and Michael S. Carona. Former Gov. George Deukmejian is scheduled to be January’s guest speaker.

Several years ago, the Orange County group made Orange County Treasurer-Tax Collector John M.W. Moorlach, who is of Dutch descent, an honorary member. Like other Viking newbies, he drank aquavit from a horn and engaged in "all sorts of cornball stuff," he recalled.

"They’re a great group of friends who are very charitably inclined," Moorlach said. "It’s the way it ought to be: A bunch of friends come together and then do things for the community."

In 1995 the members began assembling a few hundred holiday gift baskets featuring frozen turkeys. But not only did the meat require refrigeration, it was difficult for motel-bound families to prepare.

"We decided the [pre-cooked] hams were the way to go, but they cost us $9 a pop," Jensen said. "I could have gotten turkeys for half that."

There are now three branches of the organization, with the third in Solvang. Other annual activities include a fishing trip for disabled children and a "day at the races" at Del Mar, when the eighth race is named for the group.

"It’s a nice service they provide," Brewster said. "They’re colorful guys."

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