MOORLACH UPDATE — California’s Tardy CAFR — June 3, 2019

Although serving on the Budget Conference Committee is a massive time commitment, I do get to speak to numerous direct and indirect components of California’s proposed spending plan for next year. More importantly, many are watching, as it is streamed live and repeated on the California Channel.

Thursday’s opening meeting was being monitored by The Bond Buyer. But, something was lost in the translation.

Although not super critical, I was not quoted correctly on the state’s unrestricted net deficit of $168.5 billion

(see MOORLACH UPDATE — Budget and Legacy Priorities — January 11, 2018) and the $91 billion retiree medical unfunded liability (see MOORLACH UPDATE — Happy Independence Day Week — July 1, 2018) . Unfortunately, confirming with my office did not help the reporter in clarifying the numbers. I did submit the following correction, but it was too late.

Here is how the piece reads:

“It’s May 30 and we haven’t received the CAFR for California,” said Sen. John Moorlach, R-Costa Mesa, Thursday during the state’s joint Senate and Assembly budget conference committee hearing. “Will we receive it before we approve the budget?”

Moorlach pointed out that the state’s Department of Finance has reported a $21.5 billion surplus, but the most recent CAFR for year-end June 30, 2017 showed $91 billion in unfunded liability on retiree medical benefits and $165.5 billion for state employee, teachers and judges pensions.

“I don’t want it growing to $1 trillion,” said Moorlach.

Here’s how it should read:

“It’s May 30 and we haven’t received the CAFR for California,” said Sen. John Moorlach, R-Costa Mesa, Thursday during the state’s joint Senate and Assembly budget conference committee hearing. “Will we receive it before we approve the budget?”

Moorlach pointed out that the state’s Department of Finance has reported a $21.5 billion surplus, but the most recent CAFR for year-end June 30, 2017 showed an unrestricted net deficit of $168.5 billion and up a $91 billion in unfunded retiree medical liability benefits for state employee, teachers and judges.

“That’s a quarter-trillion dollars,” said Moorlach.

As for the long delay in the publication of the state’s Comprehensive Annual Financial Statement (CAFR), I wanted to know if the Department of Finance and the Legislative Analyst were aware of the delay, if they were going to address the accounting software called Fi$Cal, and would we find any surprises if it was released after the budget was approved (see MOORLACH UPDATE — Fi$Cal Frustrations — March 28, 2019).

The Government Accounting Standards Board’s (GASB) Statement 75 has been the untold story of the June 30, 2018 CAFRs. We are accumulating the CAFRs from the 50 states, 58 counties, 482 cities, 944 school districts, and 72 community college districts. The increase in Other Post Employment Benefits (OPEBs) has been staggering and mind blowing. I hope to release the results soon.

25th Anniversary Look Back

On June 1, 1994, the OC Register had a Letter to the Editor which impacted me, as I immediately required checks from taxpayers to be made out to the Orange County Treasurer-Tax Collector after my appointment in 1995. I remember one individual informing me during the campaign that she could not vote for me because she worked for a property management company and had a “Robert L. Citron” rubber stamp for manual check writing purposes. The letter came from Steve Brow of Anaheim. Here are the last two paragraphs:

What would we think if an employee of a business asked us to make a check payable directly to him instead of his employer? Yet we are instructed to make our checks payable not to the Orange County Tax Collector but directly to Bob Citron.

I have made these concerns known to the tax collector’s office in the past. Shortly, I’ll take them directly to Bob Citron at the ballot box.

Also on June 1, 1994, Kevin Johnson of the LA Times reacted to my letter to Supervisor Riley in “Treasurer Candidate Says County Portfolio Value Down — Politics: Moorlach blames Citron strategy for $1.2-billion decline. Official says figures wrong.” So, what are the correct figures? Why don’t reporters ever ask this question. Since you saw my letter and its eerie precision, I’ll only provide the paragraphs with reactions:

Riley, who has endorsed Citron’s reelection bid, said he had reviewed Moorlach’s analysis but retained his confidence in the incumbent.

Assistant Treasurer Matthew R. Raabe said Moorlach’s figures are in error. He described the challenger’s study as a “last-minute chance to get publicity for his campaign.”

On June 2nd, The Tustin News endorsed “Democrat Bob Citron.”

The recent flurry caused by our Tustin councilman, who supports [Citron’s] opponent, did not convince us to change our opinion.

On June 3rd, Chris Knap of the OC Register weighed in with “Moorlach fires another salvo at Citron — Politics: The incumbent county treasurer calls the attack the ‘dying gasps’ of his challenger’s campaign.” Since Chris Knap would come under intense criticism after the investment pool imploded, I’m providing the complete piece below. The major theme would continue to be the partisan angle — oops. The incumbent just told you he was earning 300 basis points more than the market — danger!! Why no one put a business reporter on the case is the journalism tragedy of this sad chapter. Twenty-five years later, and still very few business reporters digging into the financial affairs of government.

Costa Mesa accountant John Moorlach has renewed his attack on incumbent county Treasurer Robert L. Citron, comparing Citron’s investment of public funds to the “savings-and-loan fiasco” that cost taxpayers billions.

Moorlach, who wants to knock the 23-year Orange County treasurer out of his seat during Tuesday’s election, said an eight-page investment critique he sent to county supervisors Monday was meant as a wake-up call.

“Regardless of who is elected on June 7, Orange County has a bleak future for its fiscal assets,” Moorlach said. “The supervisors need to know that their goose is no longer laying golden eggs.”

But Citron dismissed the attack as “the dying gasps of a candidate who started out on this track and has been greatly derailed.”

Citron said the county’s $8 billion investment pool “is in no way in the same position as the (failed) savings-and-loan institutions. The pool is still making tremendous returns. In March we earned 7.61 percent, and in April it was 7.59. In the same period, the state’s investment pool returned 4.33 percent.”

Moorlach’s campaign, the first challenge that Citron has faced in more than 20 years, was fueled by partisan rancor over Citron’s support of a fellow Democrat four years ago, and local Republicans have not tried to hide it.

Moorlach’s recent campaign statements show contributions from GOP Assemblymen Mickey Conroy of Orange and Gil Ferguson of Newport Beach and county GOP chief Thomas Fuentes, among other prominent Republicans.

But the most acrimonious debate has been generated over an intensely complicated and highly speculative subject: the complex investment strategies that have allowed Citron to bring in double the earnings of other, more conservative public finance pools.

After initially coming on strong, including pointed attacks on Citron’s investment strategies printed in national financial publications, Moorlach fell silent last month.

He acknowledged Tuesday that his campaign was hurt when state Sen. Marian Bergeson, R-Newport Beach, pulled back her endorsement in late April, saying she was worried that his attacks had threatened the financial stability of county investments.

But Moorlach said he remains convinced, after more than a month of analyzing public documents, that Citron has gambled dangerously on the belief that interest rates will stay low.

By investing in short-term “reverse repurchase” arrangements, and using the money to buy long-term bonds, Citron has earned an arbitrage, or differential profit, that even Moorlach says gave the county “incredible performance numbers.”

But if interest rates continue to rise, as they have in the past six months, Citron will be stuck with billions of dollars worth of bonds returning less-than-market rates, Moorlach said. If he’s forced to sell the bonds in a down market, the losses could cut into principal.

“I’m not trying to cry wolf or scream fire in a theater,” Moorlach said. “All I’m saying is, `Board of Supervisors, look, this is risky.’ If interest rates rise, based on how he’s grown his garden, the harvest isn’t going to be very attractive. Win, lose or draw, the problem’s still there.”

Citron said Moorlach’s dire scenarios are based on speculation. “We don’t believe that situation will crop up,” Citron said. “If interest rates do go up, not all of the securities we have will (lose value) in that way.

“We may not be earning the very high interest rates, but we are still predicting that we will earn no less than 6.5 percent in the fiscal year that begins July 1.”

For my letter that generated the pieces above, see MOORLACH UPDATE — Budgeting Millions of Dollars — May 31, 2019. For the Look Back that provides my first engagement with The Bond Buyer, see MOORLACH UPDATE — The Week That Was — April 26, 2019.

California lawmaker raises questions about tardy CAFR

Keeley Webster

California lawmakers are weighing decisions on the $214 billion budget this year without the benefit of the state’s audited financial documents.

California Controller Betty Yee said the state’s comprehensive annual financial report for the fiscal year ended June 30, 2018 won’t be released until Wednesday. It was due out April 1.

“When I was a county supervisor for Orange County, we used to get our CAFR in December — and here we are in June,” said state Sen. John Moorlach, R-Costa Mesa.

Yee attributed the delay in an emailed response to “interface delays” with FI$CAL, the state’s new digital accounting system, and implementation of GASB 75, a change to the accounting rules that requires that the full liability of other post-employment benefits, such as retiree medical, be included on government balance sheets.

The FI$CAL system was designed to create a comprehensive budget program to replace a patchwork of outdated accounting programs. The project was supposed to be completed by July, but has experienced delays.

The delay means lawmakers will only have the audited financial report available for the final ten days of the budget process.

“It’s May 30 and we haven’t received the CAFR for California,” said Sen. John Moorlach, R-Costa Mesa, Thursday during the state’s joint Senate and Assembly budget conference committee hearing. “Will we receive it before we approve the budget?”

Moorlach pointed out that the state’s Department of Finance has reported a $21.5 billion surplus, but the most recent CAFR for year-end June 30, 2017 showed $91 billion in unfunded liability on retiree medical benefits and $165.5 billion for state employee, teachers and judges pensions.

“I don’t want it growing to $1 trillion,” said Moorlach.

Part of budget discussions have been over how much money to dedicate to paying down pensions and other long-term debt as opposed to placing more money in the state reserves.

Moorlach asked the state’s legislative analyst, Gabriel Petek, if he was planning on doing further analysis of problems related to implementation of FI$CAL.

“I want to make sure, we don’t get surprised by the numbers,” Moorlach said. “If you can help with that, I would appreciate it. When I was a county supervisor for Orange County, we used to get our CAFR in December — and here we are in June.”

The state has unaudited financial documents for year-end fiscal 2018 posted on the Municipal Securities Rulemaking Board’s EMMA site under disclosures for the state’s bonds.

“The unaudited financial figures are complete and submitted to the state treasurer,” Yee said. “I have no concern that a later fiscal year 2017-18 CAFR will harm the state’s financial position.”

That response is much different from what Yee wrote in a March 22 letter to lawmakers where she said that if departments were forced to submit estimates to the controller’s office, it “increases the risk that the CAFR could receive a modified opinion from auditors.”

The controller also noted that California does not have a statutory deadline for completing the CAFR.

California regularly releases its CAFR roughly two months later than the average for U.S. states even when it hits its April 1 deadline, according to data from Truth in Accounting, a Chicago-based think tank.

“It’s significant that California is slower than other states, if you think all governments are slow in releasing them, which we do,” said Bill Bergman, director of research for Truth in Accounting. “It is not that significant if you consider how much larger and more complex California is than other states.”

While financial statements are a valuable check on the accountability of governments, the value of that check diminishes the longer it takes to get the information, Bergman said.

Much of the financial information states put out regularly is cash-based and doesn’t take into account the accrual of long-term liabilities like pensions, OPEB or bond debt, Bergman said.

“I think for most people’s purposes the unaudited financial documents are inadequate,” said Marc Joffe, a senior policy analyst with the Reason Foundation. “I think it reflects poorly on the state’s credit when they can’t get a CAFR out on time.”

Two Fitch Ratings senior directors, Karen Ribble and Karen Krop, who co-rate the state, didn’t see the late CAFR as an issue, primarily because the state puts out so much “robust” financial information throughout the year.

“CAFRs are important, but in the best case, the fiscal year ends in June and they are released in November, so that information is six months old,” Ribble said.

For California, in particular, the interim data is sufficiently robust for Fitch to do a rating, Krop said.

California received the Government Finance Officer Association’s certificate of achievement for excellence in financial reporting for its 2017 CAFR.

In order to win the award, governments have to release their CAFR’s within six months of the end of the fiscal year. California asked for a six-month extension from GFOA for this year and was granted one, said Michele Mark Levine, director of GFOA’s Technical Services Center.

State and local governments across the United States facing pension solvency challenges are at the early stages of exploring various means of leveraging assets—primarily through transfer, lease or sale—for the purpose of shoring up underfunded retiree benefit systems.

Though timeliness is a criteria for the award, Levine said GFOA has a “tightrope to walk, because we understand information needs to be as timely as possible, but we are aware of the challenges governments face in getting out the information on time.”

“Sometimes there are a shortage, or backlog of firms, who are interested in doing government audits, and the actuarial information needs to be prepared. There are a great variety of reasons governments might be late, but we do think timeliness is important,” Levine said.

The new accounting regulations around reporting on OPEB has been a challenge for other states, she said.

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