MOORLACH UPDATE — 23rd Anniversary of Chapter 9 — December 6, 2017

It’s December 6th, the 23rd anniversary of the County’s official filing for Chapter 9 bankruptcy protection. Today I have two books, Reinventing the Administrative State and Financial Management Theory in the Public Sector. Orange County has become a classic case study and is still taught in college classes today. In fact, just a few months ago, one of my college-age nephews was quite surprised to hear his uncle’s name mentioned in a lecture.

December 6 is not a happy anniversary. But, it is a lesson for voters to be vigilant. They need to elect individuals that will represent them, not the public employee unions and not vendors who will make a large profit on transactions with government.

We are commemorating this occasion today with an Open House at my District office at 4 p.m. this afternoon (see MOORLACH UPDATE — Homeless Persons’ Memorial Day — December 4, 2017).

BONUS: For a quick personal account of the 1994 OC bankruptcy in a podcast, please go to https://goo.gl/VRwYNm.

Reinventing the Administrative State

by Michael E. Norris

University Press of America

2000

The author seems to take on the “reinventing government” movement, espoused in a best-selling book of the same name by David Osborne and Ted Gaebler. They called for “competitive, decentralized, results-oriented government that would use market principles to meet the needs of ‘customers’ rather than those of the bureaucracy.”

Anyone who served in Orange County management following the bankruptcy filing will recognize the buzz words of “decentralizing” and “results-oriented government” (affectionately known as ROG).

In Chapter 6, “Bureaucratic Barriers,” the 1994 bankruptcy filing is addressed in an almost cursory manner as the opening paragraph for the subtitle “The Orange County Dilemma.”

The difficulties and paradoxes in regulatory reinvention are illustrated well by the case of the failure of the Orange County public investment program administered by Robert Citron. Despite his reputation as a successful public sector entrepreneur, Citron, operating in a public administration environment influenced heavily by Osborne and Gaebler’s notion of relaxed legal and regulatory constraints, was left holding the bag on December 6, 1994, when the county–one of the nation’s wealthiest–declared insolvency under Chapter 9 of the U.S. Bankruptcy Code. Its $20 billion investment pool, representing more than 180 county and municipal agencies, had experienced $1.7 billion in unrealized losses due to the fund’s heavy reliance on investments called “derivative securities” that fell in value as interest rates rose in 1994. Informed of these losses, concerned creditors then liquidated $11 billion in collateral on loans they had made to the county so that it could finance its investment program, which had gone well beyond the traditional mix of relatively safe instruments that are usually purchased by public investment managers such as state and county treasurers as a matter of law, if not prudence. Citron had been re-elected in June 1994, six months before the crisis, after a campaign in which his opponent, certified public accountant John Moorlach, had criticized the county investments’ vulnerability to fluctuating interest rates.

Financial Management Theory in the Public Sector

Edited by Aman Khan and W. Bartley Hildreth

Praeger

2004

This book is a collection of eleven white papers. The second chapter, titled “Information Asymmetry in Public Investment Management,” is cowritten by Brian K. Collins and Aman Khan. And I found the entire chapter online! See https://www.researchgate.net/publication/277020208_Information_Asymmetry_in_Public_Investment_Management.

This is a thorough treatise on the Orange County Chapter 9 Bankruptcy and a good read for today, the 23rd anniversary of the filing.

Under the subheading “Moral Hazard in the Collective Choice Arena,” the three moral hazards are discussed. The second moral hazard starts on page 36 and ends on page 37. Since you have access to these pages, I’ll provide the following two paragraphs:

Baldassare (1998) suggests that the 1994 election was a referendum on the investment policies that Bob Citron had followed for nearly two decades. Those policies had been extraordinarily successful for two decades, but at an inordinate risk to the public fisc. In the 1994 election, John Moorlach mounted a fierce campaign that specifically highlighted the impending losses of OCIP and risk exposure of Citron’s management. Moorlach’s claims did not resonate with the public or press because they were attributed to partisan sniping, but some Wall Street firms stopped lending to Citron, and some cities began to withdraw their deposits.

Some local governments even complained that the election rhetoric hurt their credit ratings, which showed the credibility of Moorlach’s claims. Just before the election, Moorlach even wrote to the Board of Supervisors about Citron’s policies, but the board dismissed the letter as a publicity stunt in a losing election effort. Citron won the election with 61 percent of the vote, but OCIP would collapse soon after the election ended. The reality was that Moorlach was correct in his assessments, and he was eventually appointed county treasurer after Citron resigned.

This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District. If you no longer wish to subscribe, just let me know by responding with a request to do so.

Also follow me on Facebook & Twitter @SenatorMoorlach.