MOORLACH UPDATE — Twentieth Anniversary — December 5, 2014

The OC Register provides its perspective on the twentieth anniversary of the County’s filing of Chapter 9 Bankruptcy on December 6, 1994, below.  It’s a thorough piece and I only have one clarification.


In 2004, the OC Register contacted an independent actuary, not an auditor, to opine on the efficacy of “2.7% @ 55.”  During the years 1999-2013, I provided Five-Year Look Backs on articles that I was mentioned in.  It was a way to catch up my three adult children on articles that occurred while they were busy focusing on school work and the other fun things involved with keeping young people occupied.  Here is the LOOK BACK related to the actuary, from MOORLACH UPDATE — OC Register — August 25, 2009:


The OC Register’s Tony Saavedra and Norberto Santana, Jr. did an amazing thing for their story.  They hired an actuary.  They did some heavy lifting!  Oh, if only one decent expert would have been hired by one of the dailies when I was running against Bob Citron!  Their story, “Actuary questions O.C. pension plan—Independent analysis of proposed county contract says cost assumptions may be wrong,” was an award winner!  With the benefit of hindsight, the actuary was spot on.


The review by actuary Pamela Morris for The Orange County Register concluded that the county’s cost analysis is based on a potentially wrong assumption that the retirement rates will stay the same.  The new plan gives huge incentives to retire early.


The pension fund already is underfunded by $1 billion, and county Treasurer John Moorlach has said the new contract could sink it further.


The warnings that I conveyed in August 2004 are provided below.  I was arguing against an agenda item where the Current and Annual Cost summary boxes were filled in with the term “N/A.”  Once again, I was telling the truth, and regretfully, my concerns have been borne out.  A $1 billion unfunded actuarial accrued liability has jumped more than five-fold in the last ten years, thus eclipsing the $1.7 billion net losses incurred when the County’s Investment Pool was liquidated in 1994.  It was this 2004 Board of Supervisors vote that motivated me to run for County Supervisor in 2006.  It’s been an amazing “financial” adventure for this Certified Public Accountant and Certified Financial Planner, as you can see from the current LOOK BACKS series segment directly below.



LOOK BACKS (see MOORLACH UPDATE — Supervisor Bartlett — December 3, 2014 for the last segment)


  • 2012 – Working with the Los Angeles County Board of Supervisors and both county’s LAFCOs, we were able to clean up selected parcels on our common border along Coyote Creek
  • 2012 – Kermore Island was annexed into the city of Stanton
  • 2012 – GASB 67 and 68 were issued, which require the reporting of municipal pension liabilities on the annual audited balance sheets; this is something I’ve advocated for many years and will become effective next year
  • 2012 – Gov. Brown signs the Public Employee Pension Reform Act (PEPRA) into law – It contains a provision that Gov. Brown and I discussed:  No granting of retroactive benefits
  • 2012 – Removed 19th Street Bridge from the Master Plan of Arterial Highways
  • 2013 – Annexed Emerson Island into the city of Newport Beach








Watchdog: 20 years after O.C. went bankrupt, changes prevent a repeat

County’s investments are in the top tier, but problems persist.




Robert Citron, self-proclaimed “master of the ship at the helm” and former Orange County treasurer, consulted psychics and a $4.50 star chart as he managed the county’s highly leveraged, multibillion-dollar investment pool.

Citron vowed to furnish a stunning chunk of Orange County’s budget – some 11 percent of its general fund – from interest earnings, taking greater and greater risks with public dollars in his attempt to make good.

But it all came to a screeching halt on Dec. 6, 1994, when Citron’s wrong-way bets on interest rates imploded. The County of Orange fled into federal bankruptcy court, the largest municipality ever to seek such protection at the time. The investment pool lost $1.64 billion.

Twenty years later, Orange County has forked over nearly $1.6 billion to repay its bankruptcy debts and added a host of safeguards to prevent a repeat performance.

But the financial illiteracy that led local officials down the garden path persists, as evidenced by municipal bankruptcies in Detroit, Stockton and San Bernardino.

Take heart, though. In stark contrast to the 11 percent promised in 1994, Orange County now gets an anemic pittance of its budget from investment earnings: Just 0.9 percent in 2014, according to figures from the state controller’s office.

Still, that gives Orange County the third-best ranking among California’s 58 counties.

“When I look at the percentage of the budget that interest was providing in 1994 versus today, it’s just amazing,” said Supervisor John Moorlach, who foretold the coming crisis when he ran against Citron for the treasurer’s job in 1994. Moorlach wasn’t just ignored back then; he was vilified.

In the years before Orange County went bankrupt, Citron’s aggressive investing earned two and three times more than other public money managers. That was extremely attractive to local schools, cities and special districts, which had been squeezed by the tax-limiting fallout of Proposition 13.

Attempting to boost their coffers, they flocked to Citron’s pool by the dozens. Warnings that it was all a sham were branded as traitorous, and Moorlach was dubbed “Chicken Little” for crying that the sky was falling.


How did Citron do it? By taking billions of public dollars, persuading elected officials to borrow against it, and then essentially persuading Wall Street to lend O.C. money on the loaned money. All of it went into the investment pool, dramatically increasing earnings.

That’s called “leverage.” Shortly before implosion, Citron had managed to leverage $7.6 billion in public funds into a $20.6 billion investment pool. Earnings had grown so astronomically high that the treasurer’s office was skimming money off the top and reporting lower-than-actual returns to cities, schools and special districts so as not to alarm them and trigger a run on the bank.

The skimmed money – $89 million, to be exact – did not go into any person’s pockets. It went, instead, into an account just for the county’s use.

This false accounting was the source of the criminal charges to which Citron ultimately pleaded guilty.

There was no shortage of blame to go around: the rogue treasurer making risky investments; the auditor who noted problems but didn’t ensure they were taken seriously; managers who delighted that more than one-third of their discretionary spending was pouring in from interest income, even though that should have raised eyebrows; elected supervisors who unquestioningly borrowed hundreds of millions of dollars for the sole purpose of boosting those interest earnings; and citizens who ignored warnings that the whole scheme was going south, voting the rogue treasurer back into office anyway.

In the end, Orange County vowed to repay agencies most of what they lost in Citron’s pool, issuing debt of $1 billion to do so.

We have been paying off that debt ever since, averaging $69 million a year over the 23 years of repayment – money that could have funded better roads, libraries, health care and myriad other services for Joe Citizen.

But soon, that will all be over. The first batch of refinanced “Bankruptcy Recovery Bonds” is slated to be paid off in June, freeing up millions for the county’s general fund. The second batch will be retired in 2017.

Total principal and interest costs of repaying O.C.’s bankruptcy debt: $1.6 billion, according to Frank Kim, chief operating officer. That includes about $544 million in interest and related costs.

Much has changed for the better. Back then, simply getting a copy of Citron’s portfolio was an act of sheer will, involving Public Records Act requests, paper copies and attendant charges. Now, it’s posted online, for free, available to anyone who cares to look.

Now, public treasurers and auditor-controllers must possess some basic qualifications before they can get those jobs. An oversight committee with citizen-experts peers over the treasurer’s shoulder (and has been beefed up by current Treasurer-Tax Collector Shari L. Freidenrich). There’s monthly reporting on the portfolio’s health and an annual audit of the treasury’s assets.

“These are important checks and balances to ensure the protection of public funds,” Freidenrich said.

Public agencies can’t borrow just to invest the proceeds and reap the rewards anymore; many exotic investments are verboten, and treasurers must “mark to market,” a gift Orange County has given public treasuries everywhere.

Rather than tallying what a portfolio was worth when investments were purchased or mature, public treasurers must disclose precisely what those investments are worth now, in today’s dollars.

That lays bare paper gains – and losses. If mark-to-market had been in place during Citron’s reign, Orange County’s story may well have turned out quite differently.


Other changes: A beefed up in-house watchdog (the internal auditor, whose occasionally scathing reports have caused some friction over the years); term limits for county supervisors (most on the board during Citron’s reign had been there for decades); and, locally, “more of a watchdog mentality around public spending,” said Mark Baldassare, president and CEO of the Public Policy Institute of California.

“We’ve seen some other very spectacular municipal bankruptcies, and what they have in common is a certain short-sightedness,” Baldassare said. “Not all public officials have a deep knowledge about budgeting issues, and they’re not always looking at the big picture, the long-term consequences of the financial decisions being made.”

Moorlach – the “Chicken Little” whose license plate now reads “SKY FELL” – will argue that’s precisely what led Detroit, Stockton, San Bernardino and others into municipal bankruptcy. During flush times, officials granted big pay and pension boosts to workers, without really understanding what they would cost down the line, when times weren’t so flush.

“That will always be going on,” Moorlach said. “In August 2004, the Board of Supervisors approved pension enhancements on a 3-2 vote, even though an independent auditor consulted by your paper called it crazy. One of those yes votes was from a graduate of the Harvard Business School.”

Still, the county is in solid financial shape. It has negotiated changes to retiree medical plans with its unions that will save more than $1 billion, is pre-paying to get the pension situation under better control, and has seen its credit ratings go from the toilet in 1994 to double-A today.

But while its financial woes have been greatly eclipsed by the woes of others, Orange County remains wedged in the public consciousness as a most spectacular example of financial failure.

“That’s because it was so surprising,” Baldassare said, “that this wealthy, fiscal conservative place could go bankrupt was so unexpected. If it could happen in Orange County, maybe it could happen anywhere.”

Contact the writer: tsforza@ocregister.comTwitter: @ocwatchdog




  1. Detroit, 2013: $18.5 billion
  2. Jefferson County (Alabama), 2011: $4 billion
  3. Orange County, 1994: $1.64 billion
  4. Stockton, 2012: $1 billion
  5. San Bernardino, 2012: $500 million

Sources: Cities and counties, bankruptcy filings, Forbes


Investment pool losses: $1.64 billion

Fees to the county’s bankruptcy law firm, Hennigan, Mercer & Bennett: $29 million

Cost of repaying $1 billion borrowed to repay pool investors: $1.585 billion

Recovered through litigation against investment banks, auditors, et al.: $847.1 million







August 4




The OC Register’s Norberto Santana, Jr. addressed the proposed pension plan negotiations in “County workers voting on contract—Union plan calls for employees to accept wage freeze, pay part of health insurance in exchange for more access to pension.”  In retrospect, it is safe to say that we have experienced a “market dip” and it will have a dramatic impact on employer and employee contributions in the future.  As Supervisor Norby alludes, it will not have a financial impact on those who retired in the last five years, as they are no longer required to make contributions.


As to the multi-year requirement for employees to fund the retirement system’s unfunded liability created by this contract, I have tasked our Internal Auditor to verify that this commitment has been satisfactorily addressed on an annual basis.  The last thing our work force needs is to find out that they are behind on their commitment and will be subject to even higher payroll deductions in order to honor this major financial commitment.


Orange County Treasurer John Moorlach has expressed concerns about adding further strain to the pension fund.


County officials are basing their calculations of the financial impact of the added pension benefits on a 7.5 percent rate of return on the investments made by pension-fund managers.  Moorlach said he’s concerned about how a market dip might impact those calculations.


He also expressed concern that supervisors are making what could be a 30-year commitment on pension payouts in a contract that stretches for only three years.  The question,Moorlach said, is what happens to the pension deal after the three years are up?


At this point, few have concrete answers.


Supervisor Bill Campbell said he hopes to see final language locking in the self-financing pension commitment from employees, describing that as “critical” to any deal.


There are also generational impacts to such a deal, Moorlach said.  Younger workers are being asked to take on a larger portion of funding their own pensions and health insurance without pay increases.


“I hope they have an open and frank discussion among their members because the issue of higher wages versus richer retirements affects workers differently depending on their age,” Supervisor Chris Norby said.


August 8


The lead editorial in the Sunday Commentary Section of the OC Register had the headline of “Union label’s on new pension horror.”  It addressed the proposed pension deal that was being negotiated between the Board of Supervisors and the unions.


It is amazing that we were raising these concerns five years ago.  Now, it seems that we cannot go a week or two without an article in our local papers addressing the pension liabilities that local governments have to pay.


Here are selected paragraphs from the editorial.


Anyone who has paid attention to the political and fiscal situation in California in the past year should be aware of a cascading financial crisis that threatens to push one city after another to the brink of financial ruin.  We’ve previously called it the “pension tsunami”—a tidal wave of taxpayer-backed promises to public employee unions that cannot be afforded by the government bodies that had made the promises.


Orange County Treasurer John Moorlach, who has good credentials for predicting fiscal meltdown after predicting the 1994 county bankruptcy, argues that the pension tsunami could eventually rival the bankruptcy.


August 10


Stuart Pfeifer of the LA Times covered “the” topic of the month in “O.C. Workers Union OKs Pension-Boosting Pact:  Government employees to skip raises, pay more into retirement.  Deal now goes to supervisors.”  The prophetic observations continued.


County Treasurer-Tax Collector John M. W. Moorlach also questioned the wisdom of the contract, noting that it puts the county retirement system, already underfunded by $1 billion, another $300 million in debt.


The Board of Supervisors is scheduled to vote on the pact at its Aug. 24 meeting.


Moorlach said he was not surprised that workers approved the pact, noting that the median age of county workers is 43 and within sight of the new retirement benefits.


“All the employees are going to be so excited to get this gift.  You increase your benefits and you didn’t pay for it.  Well, someone is going to,” he said.  “If you’re close to retirement age, you’re elated.  If you’re new and you’re young, you’re going to be burdened.”


August 15


The OC Register’s Steven Greenhut made me the subject of his Sunday column, “Bankruptcy, Part II?  John Moorlach, the prophet of Orange County’s fiscal meltdown 10 years ago, has some really bad news about the cost of public-employee pensions.”


Here are a few segments to make one ponder five years later with the help of hindsight:


For the plan to work, the stock market must perform at levels Moorlach describes as “irrational exuberance.”  Remember when Gov. Gray Davis went on a spending spree, promising that the new programs wouldn’t harm taxpayers – provided the economy kept providing record levels of revenue, year after year?  We know how that panned out.  Would you incur debt based on the prediction that your house will continue to appreciate for the next 30 years at the same rate it has appreciated over the past five years?


I didn’t think so.


“It’s always an up escalator, there is no down escalator,” said Moorlach.  “After three years, employees come and complain that they haven’t had a raise for three years.”


That’s what unions do.  But Moorlach believes that the unions eventually will collapse on their own success, but not until taxpayers are up to their ears in debt and higher taxes to pay for decades-long commitments made by city councils and supervisors too gutless to do the right thing and just say no.


August 16


The Orange County Business Journal’s Rick Reiff, in his “OC Insider” column provided the following insight:


The plan by a majority of county supes to increase public employee pensions in lieu of hiking wages has OC Treasurer John Moorlach predicting another financial train wreck.  “The claim that it will be cost-neutral is an obvious fallacy.  The immediate up-front cost is $300 million,” says the man whose warnings of the OC bankruptcy went unheeded.  “It’s ironic that while the private sector is eliminating defined benefit plans, the public sector is piling on massive benefits.”  Adds taxpayer watchdog Reed Royalty, “This contract doesn’t make sense.”


LA Times reporter Stuart Pfeifer stayed on topic with “O.C. Treasurer Warns County of Pension Risk—John M. W. Moorlach says plans to raise benefits for retirees put voters at risk of having to bail out the fund if investments fall short.”  At a luncheon speech today, one guest asked me if it felt good to finally be in vogue on the topic of public employee pensions.  The following selections from the article should confirm his observation.


Now, a decade later and still the county treasurer, Moorlach is sounding the voice of caution again, this time focusing on the county’s pension system and plans to increase retirement benefits for county employees.


Moorlach said he is concerned that the proposal to have employees pay for the increased retirement pay is based on an assumption that the pension fund’s investments – primarily stocks, bonds and real estate – will return 7.5% on average over the next 30 years.  If the fund, now at $5 billion, fails to meet those expectations, then the county would have to make up the difference, Moorlach said.


“Somebody is going to have to guarantee it, and it’s going to be the taxpayers,” Moorlach said.  “For a county that was so badly burned to get this close to that kind of fire again is a little unnerving to me.”


“What’s forcing us to be so generous?” Moorlach asked.

In a worst-case scenario, the county could be forced to raise taxes to make good on its promises to workers, Moorlach said.


“You’ll probably see something on the ballot, ‘We’re going to cut our sheriff and fire services in half unless you pay for this parcel tax,’ obfuscating what the real issue is,”Moorlach said.


“As a member of the county team, my concern is the county does not suffer from inappropriate financial decisions,” Moorlach said.  “Why give away everything in one fell swoop and then leave it to another board or two or three down the road to figure out how to fix it?”


August 21


The Long Beach Press Telegram had the following editorial for their Sunday edition, titled “Political self-service:  Improving pensions is a direct conflict of interest.”


But, as County Treasurer John M. W. Moorlach points out, if pension-fund investments were to tank, taxpayers would have to make up the difference.  (Moorlach, by the way, also has a conflict of interest, but unlike most politicians, he opposes the pension increases.)


August 24


The OC Register’s lead editorial, “A pension spike to the county’s heart—The Board of Supervisors seems intent on approving costly retirement benefits,” started off with a bang.  It is below, along with a few selected clips.


Orange County Treasurer John Moorlach, who was vilified by county leaders when in 1994 he predicted, correctly, dire financial consequences from the county’s investment policies, is once again being vilified by county leaders for pointing out the shaky financial situation underlying a retirement plan proposed for county employees.


Mr. Moorlach is standing virtually alone against the tide within county government.  The result has been as predictable this time around as it was in 1994.  The union’s leader told the Register the union would unleash the “hounds of hell” if supervisors didn’t agree to this pension enhancement.  Chairman Tom Wilson, a reliable supporter of organized labor, last week unleashed his own intemperate, ad hominem attack on Mr. Moorlach in a memo that pretends to tell the “truth” about the retirement spike.


“These commentators have adopted a ‘sky is falling’ position absent real information,” Mr. Wilson wrote in his memo.


Mr. Moorlach is not uninformed, nor is he a political opportunist.


As Mr. Moorlach notes, virtually everyone bargaining for this deal (on both sides of the table), giving advice on it and voting on it stands to gain financially from the increased pensions because they are all covered by the county retirement system.  No one has an interest in saying “no” and looking out for the taxpayer.


In the final analysis, this adds up to one more sad example of current leaders pleasing a powerful voting bloc and pushing a problem off to the future, burdening younger employees for the benefit of older employees and showering long-term employees – who are at the bargaining table – with a windfall.


The board can still do the right thing, listen to Mr. Moorlach and put the interests of the county’s taxpayers above the interests of the government bureaucracy and make the financially prudent choice.  We remember 1994 all too well, when board members rationalized their earlier bad decisions with the phrase, “we were responsible, but we weren’t irresponsible.”


Sorry, folks, leadership that chooses to ignore salient information regarding important decisions of the day is . . .  irresponsible.


August 25


You know the results of that historic Board of Supervisors vote on August 25.  Here is some of the coverage.


You’ll see an emphasis here on a 7.5 percent interest rate assumption.  If you lower this assumption, you increase your annual employer contributions.  Ironically, not too long after this vote, the retirement board voted to raise the interest rate assumption to 7.75 percent, with my dissenting vote in the minority, thus lowering the county’s annual employer contribution.  (And, thus, deferring a much larger train wreck into the future.)


Stuart Pfeifer of the LA Times had this headline:  “O.C. Workers Win on Pensions—Supervisors’ 3-2 vote lets employees sacrifice now to gain later.  But some see a fiscal danger.”


Moorlach’s concern was that the employees’ contributions into the retirement system are based on the assumption that the system’s investments earn an average of 7.5% over the next 30 years.  If the system fails to meet that goal, he fears, the county could be on the hook for millions.


Norberto Santana, Jr., of the OC Register had a similar headline:  “Board approves county workers’ contract—Workers accept a 2-year wage freeze in exchange for better benefits in retirement.  Critics cite long-term risk.”


Union members who packed the supervisors’ chambers for four hours stood after the vote, giving supervisors a standing ovation.  In a nearby building, county Treasurer-Tax Collector John Moorlach said the decision made the hair stand on the back of his neck because of its long-term implications.


Moorlach, who also serves on the retirement board, believes the deal poses ominous risks.


Moorlach notes that the contract’s investment return assumption of 7.5 percent could cause the $300 million debt estimate to spiral if the retirement board votes to lower it next May to reflect recent lax investment performance.  Such an action would require additional contributions from either the county or employees to make up any added liability because the retirement benefits are now permanently expanded.


“It’s a lobster trap,” Moorlach said.  “You’re in, but you can’t extricate yourself.”


The OC Register’s lead editorial, “Union politics trumps taxpayers’ interests—By a 3-2 vote, the Board of Supervisors approves a costly new retirement benefit,” had this to say:


Three supervisors cast aside the critical data from an independent actuary report and dismissed warnings by Treasurer John M. W. Moorlach and others who are concerned about county taxpayers and not simply about placating the union workers who filled the supervisors’ chambers Tuesday.


Even Daily Pilot reporter Deirdre Newman got into the act with “Treasurer balks at county pension decision—John Moorlach questions whether an increase in benefits will incite city workers to want the same.”


In voting 3 to 2, the board agreed to significantly raise retirement benefits for most of the county’s 17,000 workers.  The decision is retroactive, so these employees will get their retirement benefits increased using the new formula for the entire time having served the county, County Treasurer John Moorlach said.


                The change means workers with a salary of $100,000 will get $81,000 a year starting in July 2005, Moorlach said.  Under the old plan, they would have gotten $50,100, Moorlach added.


“That’s an increase overnight of [about 62%],” said Moorlach.


“[Employees] in the local cities are going to say, ‘We work for the planning department; why don’t we work for the county instead?’” Moorlach said.  “You’re not being competitive, so everyone has to increase their pension benefits, and that could be really detrimental, especially if the market doesn’t give the returns that CalPERS is trying to achieve.”






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