MOORLACH UPDATE — SB 598 Moves On — May 16, 2019

SB 598, The Open Financial Statements Act, was one of my two bills that made it out of the Senate Appropriations Committee today (see MOORLACH UPDATE — SB 496 and SB 598 — March 6, 2019, MOORLACH UPDATE — Open Transparency — March 8, 2019, MOORLACH UPDATE — The Week That Was — April 26, 2019, and MOORLACH UPDATE — Senate Bills 511, 584, 598, 496 and 640 — April 15, 2019).

The other was SB 184 (see

Regretfully, the Committee decided to hold back two of my other bills, SB 241 and SB 584 (see MOORLACH UPDATE — The Week That Was — April 26, 2019 and MOORLACH UPDATE — SB 584 Goes To Natural Resources — April 21, 2019). We’ll see if we can move them forward early next year.

CalMatters printed my editorial requesting the Senate Appropriations Committee release SB 598 and move it forward for further discussion and legislative approval in the process of getting it to the Governor’s desk. This is an initiative the country is watching and I appreciate the support and encouragement I have received from the State Treasurer’s office.

The second piece, hot off the press from Bloomberg Tax, provides a component of my Senate Floor speech this morning in support of SB 531 (Glazer). I am infuriated by municipal “easy money” schemes. Robert Citron provided one by running a hedge fund that eventually imploded (see the 25th Anniversary Look Back below). A total of 187 different municipalities suffered immense embarrassment when the collateral was called.

Then there came Redevelopment Agencies (RDAs) that provided an incremental property tax revenue source for cities to address blighted areas. If it is a good idea for a segment of the city, then why not the entire city? RDAs imploded in 2011. Two cities in Orange County had to explain embarrassing decisions.

Then came interest rate swaps. A variation of the Citron yield curve play. It usually is a small component of a larger borrowing deal. Using this vehicle, utilizing the short-end of the yield curve, thus lowering interest costs, made the borrower a genius. Until the short-end of the yield curve rose to unprecedented heights, like during the liquidity crisis of 2008, bankrupting Jefferson County, Alabama. This county’s $4 billion financing package was entirely comprised of interest rate swaps and it choked on weekly payments of 8 percent-plus, versus the 1 percent they were accustomed to. Oops.

Now it’s sales tax trade offs that give a host city higher revenues at the cost of reduced sales tax revenues to neighboring purchase destination cities. Get ready for another “oops” in the near future. And, just like it is difficult to explain why you fell for the Citron or RDA or interest rate swap schemes, it will be difficult for a number of cities to explain to its residents why it still has to pay the owner of a warehouse a massive incentive after the income stream spigot has been turned off.

25th Anniversary Look Back

On May 12, 1994, I sent the portfolio, along with specific questions, to the reporters covering my campaign for Orange County Treasurer-Tax Collector
(see MOORLACH UPDATE — Shining a Light — May 8, 2019).

Question number 5 was: “The pool has already paid out more than $300 million in margin calls to cover its outstanding loans. If rates continue to soar, couldn’t the size of the calls top $1 billion?”

Question number 8 was more eerily on point and the predictor of what was to come: “If rates continue to increase, ultimately isn’t it possible that the fund will experience significantly decreasing cash flow on its derivatives, huge margin calls (topping $1 billion), and rising short term borrowing costs, all at the same time that the value of the total portfolio will be decreasing? Isn’t it this possible scenario that keeps most other municipal fund managers from employing such strategies utilizing so much leverage to buy such unpredictable instruments?”

With my three-page letter in hand, Kevin Johnson of the LA Times provided the reaction below on the May 13th, titled “Treasurer Candidate Reiterates Concerns.”

Before you read the piece, which is a concise version of the entire campaign and spells it all out for everyone to see, there are a few comments I would like to share.

1. Kevin Johnson was the husband of fellow LA Times reporter Jody Wilgoren
(see MOORLACH UPDATE — SB 584 Goes To Natural Resources — April 21, 2019 and MOORLACH UPDATE — State of the State Reaction — February 13, 2019). Jody Wilgoren had researched concerns raised by Newport Beach resident Chriss Street and concluded that he was not accurate in his assessment of Newport-Mesa Unified School District’s involvement in the Investment Pool and its willingness to borrow money to increase its participation. So, the skepticism transferred to her husband.

2. I put myself through college. One of the jobs I held was working the evening shift of the Pacific Coast Coin Exchange in Long Beach. While employed there, it moved its offices to Newport Beach and rebranded its name to Monex International. Their building was the only one on Birch Street when I was in college. The area around John Wayne Airport doesn’t seem to have an empty lot now. While working there, I was trained in margin calls. Investors would purchase a bag with $1,000 of silver dimes and quarters (when I was a kid, these coins would receive a sandwich of copper and nickle and pure silver coins would slowly disappear from circulation). The investment would be in the silver, not in the numismatic value of the individual coins.

If you purchased a bag worth $1,200 with a down payment of $400, you would pay interest on the $800 loan (margin). If the value went up to $1,300 in a month, and you sold, then you made $100 on your $400 investment. Making 25 percent in a month is rather satisfying. However, if the value went down to $1,000, Monex would contact you and demand a $200 margin call. It’s equity needed to stay at $800 to properly cover (collateralize) the loan. You could meet the collateral call or you could sell. Taking a $200 loss on a $400 investment is a tough 50 percent hit. I learned about borrowing to invest. If you’re right, you’re a hero. If you’re wrong, you’re a goat.

I fully appreciated collateral and margin calls because I had been marinated in them at Monex. Market swings happen. But, how could I possible expect a non-business reporter to understand this concept. Difficult math calculations are hard to explain, just like defined benefit pension plans, retiree medical liabilities, unfunded actuarial accrued liabilities, and unrestricted net deficits are not easy subjects to fully absorb.

3. I found it incredulous that not one reporter did a piece on the fact that I had to use the California Public Records Act to obtain data. Newspaper publishers to this day demand it. They went silent in 1994.

4. There were 187 outside investors in the Investment Pool. This should warn you,those working in the public sector are not financial wizards. That’s why I have opposed Secure Choice (see MOORLACH UPDATE — Retire Secure Choice — December 19, 2017) and why implementing Single-Payer scares me to death (health care managed by the DMV, are you serious?).

5. Citron did not respond to reporter questions. Consequently, it seemed like my opponent was his Assistant Treasurer Matt Raabe. Although I cannot confirm this assumption, but it is possible Mr. Citron ran again in order to win and then retire, handing the reins over to Mr. Raabe. Knowledge of my impending candidacy may have prevented a clean run in 1994 by Mr. Raabe. The subsequent bankruptcy of Orange County had a devastating impact on Mr. Raabe. He moved up to the Bay Area and literally disappeared into the woodwork.

6. Kevin Johnson simplified things, but they were accurate overall. He could have mentioned that the short end of the yield curve could rise and be higher than the four-year section. We are in a similar situation today (see MOORLACH UPDATE — May Revision 2019-20 — May 10, 2019).

7. I raised legitimate finance-related concerns, as I continue to do today. I have always told you the truth based on the facts presented. The joys of being a Certified Public Accountant and Certified Financial Planner.

8. Other than the piece below, my letter would be received by radio silence for nearly the rest of May. Not one reporter did a darn thing to follow up on the concerns my campaign delivered up to them on a silver-platter. Not one Orange County reporter broke through for what could have been a Pulitzer-prize winning story. By contrast, Timothy Heider and Joel Rutchick of the Cleveland Plain Dealer were awarded the prestigious Loeb Award for their journalistic efforts in exposing an identical financial scheme by the Treasurer of Cuyahoga County, Ohio, occurring in the same year (see MOORLACH UPDATE — GASB — July 21, 2011 and MOORLACH UPDATE — OC METRO — March 1, 2010).

Completing his analysis of county Treasurer-Tax Collector Robert L. Citron’s investments of public money, political challenger John M. W. Moorlach on Thursday reiterated his claim that Citron has been pursuing an overly risky strategy and has left the county’s investment pool vulnerable to rising interest rates.

“After reviewing the portfolio, it becomes clear that the possibility of loss is real,” Moorlach said. “I don’t think that anyone could come to a different conclusion.”

Moorlach, a Costa Mesa certified public accountant, had been studying the county’s management of a $7.5-billion portfolio for several weeks after obtaining treasurer records requested under the California Open Records Law. The portfolio contains contributions from more than 180 government agencies.

Citron is facing his first challenge in 24 years to the elected post of county treasurer, and Moorlach has waged an increasingly contentious campaign against him in recent weeks as the June 7 election nears.

Citron was unavailable for comment, but Assistant Treasurer Matthew R. Raabe said the candidate’s conclusions differ little from his past criticisims of Citron’s investment management strategies.

“He has the right to say what he wants,” Raabe said. “But there are plenty of people who think that what we are doing is exactly the right strategy. He’s been making the same claims for the past six weeks. I thought he would have something different to say by now.”

Moorlach’s recent review again takes issue with Citron’s frequent use of “reverse repurchase agreements” to enhance investment returns.

The strategy relies heavily on using the county investment pool’s U.S. Treasury bills and bonds as collateral to borrow short term at low interest rates, and investing the borrowed funds in corporate bonds and securities that pay a higher rate of return. This can yield large returns while interest rates remain low and stable. But the strategy can also fail when interest rates rise, as they have in recent months.

Since January, Moorlach said, the county has had to post an additional $300 million in collateral because the value of the securities used to borrow the money has declined as interest rates have increased.

Raabe confirmed Moorlach’s findings but indicated that the office was not concerned about the developments because the county investment pool is protected by about $1 billion in liquid assets.

Moorlach, however, said county officials are ignoring a potential problem.

“If rates continue to soar, couldn’t the size of the calls top $1 billion?” Moorlach asked rhetorically. “My problem is, why aren’t people making a connection here? I have not been screaming fire in a theater. I have legitimate concerns.”

To catch up with the rest of the string of Look Backs, go to MOORLACH UPDATE — Tax Cuts and Jobs Act — May 4, 2019.

This legislation would pry open hard-to-find government data

By John M. W. Moorlach, Special to CALmatters

Good government is open, clear government. There was a day when taxpayers had to purchase a paper copy of their city’s audited financial statements, known as the Comprehensive Annual Financial Report.

Now, these annual reports are free on most cities’ websites. But this still does not provide search capabilities or comparative analyses with the Comprehensive Annual Financial Reports of neighboring cities.

That’s why I introduced Senate Bill 598, the Open Financial Statements Act.

For all state and local governments in California, SB 598 encourages the adoption of a digital reporting standard. It goes by the initials, iXBRL. Please excuse the computer speak, but that stands for Inline eXtensible Business Reporting Language.

Its terrible name notwithstanding, Inline eXtensible Business Reporting Language means the financial information can be read by machines and–thank goodness–humans.

I’m a certified public accountant and love to dig into a Comprehensive Annual Financial Report. But citizens who are not accountants also should be able to easily read government financial documents.

That’s my goal with SB 598. By tagging categories in the financial reports, they would become searchable just like websites.

And the bill would require that the data be easily uploaded so people could produce comparison charts and graphs, and readily see how your city or school district budgets compare to those nearby.

A decade ago, the U.S. Securities and Exchange Commission required publicly traded companies it regulates to adopt an earlier version of the standard, called just XBRL. And last year the commission moved to the improved iXBRL.

It’s like migrating from film to digital cameras.

The Securities and Exchange Commission explained the new “format will bring disclosure data to life: computers will have the ability to parse the data in a timely manner, while humans can continue to view … that data within the same document.”

Why do I believe it is this necessary to adopt this private industry standard for governments?

Over the past year, I have issued reports on the financial soundness of California’s 944 public school districts, 482 cities, 58 counties and three higher-learning systems, as well as all 50 states.

It took weeks for my staff and me to comb through documents on the internet.

We only looked for one key balance sheet data point, the unrestricted net position, which should be positive (good) and not negative (bad).

This helped me write commentaries on the school districts in several counties. One in the Orange County Register was on the 27 districts in Orange County, finding all but one district bleeding red ink.

And just before teachers went out on strike in January in the Los Angeles Unified School District, I wrote a commentary in the Los Angeles Daily News. It detailed the terrible fiscal condition of the LAUSD, whose most current unrestricted net deficit was a staggering $19.6 billion, or $4,180 per person living within the district’s borders.

Obtaining this number for all of California’s school districts would take seconds if the Comprehensive Annual Financial Reports were iXBRL compatible, not weeks.

The unrestricted net position was just one data point. But if we had SB 598 in place, you easily could access dozens of other data points of these nearly 1,500 government bodies; and not just for one year, but many years.

The iXBRL standard has been adopted internationally, providing significant cost savings for accounting data publication. It’s free. And conversions are simple and result in significant cost savings.

SB 598 also would advance California’s reputation as a high-tech citadel. Florida passed a similar bill last year. So our computer state should seize the initiative and sprint in front of the crowd.

Such new fiscal transparency could also help cities, counties and school districts get their fiscal houses in order. Those in great shape, such as Irvine and its positive unrestricted net position of $442 million, could be held up as doing what’s right.

The Senate Appropriations Committee will consider SB 598 on Thursday.

It would open the books to easy analysis by everyone. An immense power to improve government would be given to legislators, local officials, credit rating agencies, bond investors, journalists, researchers and citizens.

John M. W. Moorlach is a Republican from Costa Mesa who represents Senate District 37,  He wrote this commentary for CALmatters. Read his previous commentary here.

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Apple, Best Buy Tax Perks Reined In Under California Bill

By Laura Mahoney

Deals that allow California cities to give millions of dollars each year in sales tax revenue to online retailers that locate warehouses or sales centers within their boundaries would be banned under a bill passed in the Senate.

S.B. 531 by Sen. Steve Glazer (D) targets a practice among some cities to give a portion of the sales tax that consumers pay back to major companies including Apple Inc., QVC Inc., and LLC. Cities would be allowed to keep existing deals in place, but would be barred from entering into new ones.

Glazer said retailers are unfairly leveraging a 1 percentage point share of the state’s 7.25% sales tax that cities receive based on the location of a sale, and not the location of the customer. They negotiate with cities to receive a share of that revenue when choosing where to locate their warehouses or designate their statewide sales.

“This results in a rigged process driving cities to accept increasingly onerous tax sharing agreements in exchange for online retailers building or locating in their jurisdiction,” he said.

The Senate passed the bill May 16 by a vote of 27-8. It now moves to the Assembly, where it must pass by Sept. 13 to reach the desk of Gov. Gavin Newsom (D). He hasn’t taken a position on the bill.

Hundreds of Millions

Bloomberg Tax investigation found that some cities agree to give about half of their 1 percentage point share back to retailers every year for decades. About 10% of the state’s 482 cities are using the deals, giving hundreds of millions of dollars back to retailers annually.

An agreement between QVC and the city of Ontario could mean $112 million for the retailer over 41 years. Cupertino gives Apple 35% of its sales tax revenue from sales to businesses in California, and retail sales at its two stores in the city. The city has said the amount Apple receives is confidential.

The cities—some of them economically distressed—negotiate the deals to lure warehouses and call centers for retailers racing to meet demand from online shoppers. In some cases they’ve been used to keep existing jobs in town.

City officials say the agreements are one of few economic development tools they have left following the legislature’s repeal of other long-standing incentives, and that they generate additional tax revenue even with some of the money going back to the companies. But some city officials oppose the deals, saying they only benefit the retailers while pitting the cities against each other.

‘Profiteers’ Play Role

Glazer and Sen. John Moorlach (R) were also critical of consultants who profit from negotiating the deals between cities and retailers. A Bloomberg Tax investigation found one lawyer who could receive $20 million for brokering three deals.

“Bloomberg News just did a big story on the profiteers that have used [the tax rules] to manipulate arrangements with cities and taken profits for themselves,” Glazer said. “It was a great expose. I am certainly interested in trying to stop that.”

Moorlach was the only Republican to vote for the bill. Sen. Melissa Hurtado was the sole Democrat to vote against it. She represents Dinuba, a city in California’s Central Valley that has a 40-year agreement to share revenue with Best Buy.

The California League of Cities and the California Labor Federation support the bill. The California Retailers Association, and the cities of Fresno and Perris, oppose it.

To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at

To contact the editors responsible for this story: Jeff Harrington at; Karen Saunders at


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