MOORLACH UPDATE — Marking to Market — July 12, 2019

The Epoch Times used a quote of mine from earlier this year concerning the integrity of the state’s voter rolls (see MOORLACH UPDATE — Casting Shadows — January 4, 2019). I believe Orange County’s rolls are meticulously maintained by Registrar of Voters Neal Kelley. However, the piece below does raise concerns about some of the other 57 counties.

25th Anniversary Look Back

Twenty-five years ago, I wrote a letter to Assemblyman Curt Pringle with legislation suggestions. It was several pages long, so I’m providing it in segments. For the first segment, covering city investment policies, see MOORLACH UPDATE — Housing and Banking — July 4, 2019.

The second segment of my correspondence to Assemblyman Pringle focused on marking to market, as accounting misstatements occurred due to not accurately representing the actual market values in the audited financial statements of the County of Orange. The Wall Street Journal addressed this issue during the campaign(see MOORLACH UPDATE — Senate Bills 511, 584, 598, 496 and 640 — April 15, 2019). Here are three pertinent paragraphs from The Wall Street Journal piece:

Unlike mutual funds, pension funds, hedge funds and most other money managers, who have to recognize losses and gains in their portfolios as market prices move, Mr. Citron says he doesn’t have to mark his portfolio to market values.

“I can hold to maturity,” Mr. Citron says. “We don’t believe in taking paper losses and paper profits.” Hedge funds are unregulated private investment partnerships that wager huge sums in global currency, stock and bond markets in search of quick profits.

Mr. Moorlach says he isn’t impressed by Mr. Citron’s comment. “Mutual funds and everyone else marks to market, and if I’m county treasurer, I will mark investments to market,” Mr. Moorlach says. Not marking to market is just a way of concealing losses, he charges.

The Government Accounting Standards Board (GASB) would issue Statement 31 shortly after the County’s Chapter 9 bankruptcy filing to make sure the practice of reflecting accurate values of investments in comprehensive annual financial statements was observed (see MOORLACH UPDATE — GASB — July 21, 2011, MOORLACH UPDATE — We’re Out! Sort Of — July 2, 2017, and MOORLACH UPDATE — Carpool Christmas — December 6, 2014).

For more on GASB 31, see I take ownership of this GASB pronouncement, as I initiated the need for its issuance.

The second portion of the letter was extremely prescient (see sentences in bold) and is provided below:

In Orange County, the Treasurer has converted his Pool from what should be a money market mutual fund to an intermediate-term, highly leveraged, bond mutual fund. Any knowledgeable investor knows the amount of lost value that has recently occurred to these types of investments.

Awkwardly, Orange County’s Pool still reports like a money market fund. A money market has a net asset value of $1.00 per share. This makes a money market fund similar to a bank account. However, a mutual fund’s net asset value is based on the day’s closing values of the investments owned at the end of that day by the fund. We call this exercise “marking to market.”

The Orange County Pool has approximately $22 billion in cost basis purchased investments per its MoneyMax portfolio listing. The bond market has been crashing since mid-October of 1993. It is safe to say that his portfolio is down at least five percent and is probably down ten percent. This translates into a $2.2 billion book loss.

The pool has approximately $7.3 billion in participant contributions, i.e. funds being invested by the County for some 180 municipalities. The difference between the $22 billion and the $7.3 billion represents some $14.7 billion in borrowing (or leverage). Accordingly, the participants no longer have $7.3 billion in market value but have $5.1 billion. This represents a thirty percent loss on their investments (so go the joys of leveraging up three times.)

What makes the scenario interesting is that the Treasurer does not mark to market. If Tustin wants their $4 million investment, they get $4 million back. If the fund marked to market, Tustin should only have received about $2.8 million. By not marking to market, the Treasurer is obfuscating the true losses and is setting up the County for a major financial fiasco. Let me elaborate.

Should the City of Costa Mesa pull out its $14 million in funds, it would lose no principal. However, it received $4.2 million too much. And that distribution has to be borne by the remaining participants in the Pool. This is theoretically possible, but statistically improbable.

The treasurer has to hope for two things:

1. That interest rates return to their recent historical lows. Unfortunately, this is unlikely based on recent inflation concerns, declining values of the dollar, and increasing employment trends. (Rest assured that I personally hope they do go down soon for our County’s sake.)

2. That all the participants stay in the Pool and make no withdrawals.

During my campaign our Federal Reserve Board Chairman, Alan Greenspan, increased interest rates four times. I’m sure this caused Mr. Citron more consternation than my challenging him did. But to keep participants in the Pool he had to publicly vilify the City of Tustin for its withdrawal. Needless to say, we caused a lot of grief for Mr. Citron because we were exposing his financial debacle to the public.

Any experienced investor would see the problem and get their funds out intact. Doing so would cause the pool to implode as investments would have to be sold below cost, thereby causing true losses. Since the Pool doesn’t mark to market, who would eventually bear the losses? The other participants? They never agreed to that arrangement and law suits would start flying. The County of Orange? This would seem to be the case, but how could they fund losses of such a magnitude? The State of California? This could be the financial guarantor of last resort, but where would it get the money?

As you can see, the taxpayers become our speculative Treasurer’s bad investment decision guarantors. The County of Orange would be reeling for decades as it tried to replenish the lost funds.

That is why I stated in my campaign that I would mark to market immediately after being elected, should that occur. It would force the participants to take an immediate loss and give them three choices:

1. Keep their funds in the Pool in the anticipation that interest rates would go back down and, thereby, restore the market value of the portfolio up to their cost basis. Or
2. Remove their funds now at a significant loss only to their municipality and no others. Or
3. Do something in between by holding until market conditions improved to recoup some of their book losses.

The State of California needs to approve legislation that requires County Pools structured like Citrons to be “marked to market.” And in Citron’s case it needs to be enacted retroactively.

Now that we are on the topic of GASB and their issuing pronouncements after the damage has already been done, let me introduce other statements they’ve issued that are important (but late). Not that I can claim ownership on them, but I have been agitating those involved with GASB over the last two decades.

GASB Statements 43 and 45 started the addressing of Other Post Employment Benefits (OPEBs) (see Unfortunately, it only required the inclusion of retiree medical liabilities for the shortage in the annual required contribution amount, if any.

GASB 68 finally required the inclusion of defined benefit pension plan liabilities on the balance sheets of municipalities (see This mandate occurred some three decades after the for-profit industry was required to do so by the Financial Accounting Standards Board (FASB). This became effective a few years ago.

GASB 74 updated GASB 43 and 45 by requiring the entire OPEB liability to be reflected in the balance sheet (see It became effective with the June 30, 2018, audited financial statements. The implementation may be difficult, as I am still waiting for the Comprehensive Annual Financial Reports for many cities, school districts, counties, and states.

I have received all of the CAFRs for California’s Community College Districts (see MOORLACH UPDATE — Recognizing Movement — June 7, 2019). My rankings for 2018 will show you how significant and material this pronouncement has been on a number of the Districts.

GASB 87, addressing lease accounting, will be the next major pronouncement to impact the for-profit and municipal industries. It requires capitalizing leases. Let me give you an example, instead of just showing an auto lease payment in the expense section of the income statement, in the future GASB will require reflecting the auto in fixed assets section and the supposed loan (lease) in the liability section.

I’m not sure I agree with GASB 87. And, industry is having a difficult time adjusting to it, as this will also be a significant modification to their balance sheets. Two bills are moving through the Legislature to address this major change. I have become a coauthor on both to assist the authors on the technicalities as they move through the process. They are AB 412 by Assemblywoman Sharon Quirk-Silva and AB 295 by Assemblyman Tom Daly.


Nearly 1 Million Californians Registered to Vote Are Ineligible, Says Non-Partisan Group


A non-partisan group has reported that there are still several counties in California where the number of registered voters is greater than the number of eligible citizens, with the total nearing one million people.

The Election Integrity Project California (EIPCa) stated in a release on July 8 (pdf) that if voter problems are not promptly addressed by state officials, fraudulent election activities may continue to haunt the state.

Using the state’s own data on active and inactive status registrants, the organization found that eight counties have not cleaned up their inactive registrant lists, despite a 2018 legal settlement that requires California counties to properly maintain their voter rolls and remove inactive voters according to federal law.

According to EIPCa, there are currently 991,411 people registered who are ineligible to vote. This is a staggering increase of 928,035 persons over the group’s 2017 report.

As the number of names with inactive status continues to grow, the organization noted that these excess registrants open up the doors to fraud.

Voter registration rates that exceed the eligible population range from 103% in Ventura, San Benito, and Plumas counties to 115% in San Diego. Other counties include San Mateo at 104%, Solano and Santa Cruz at 107%, and Los Angeles at 109%.

Just months ago, the state’s Department of Motor Vehicles (DMV) acknowledged making 105,000 registration errors, with at least one noncitizen claiming the DMV improperly added him to the voter rolls.

In an interview with The Epoch Times, EIPCa Chief Analyst Ellen Swensen confirmed that the DMV’s practices still need improvement, although the EIPCa doesn’t have a way of finding out who is or isn’t a citizen by just looking at their voter registrations.

In addition to the errors made by the DMV, she said, people who are ineligible to vote might also be getting registration forms from people who are paid to register voters and who might be unaware of the law.

“This can harm [immigrants’] future chances of gaining citizenship, so it’s important that non-citizens become educated about this,” she said. Furthermore, there are “thousands of duplicated [and ineligible] registrations” that can be used during elections “with or without the person’s knowledge.”

Recently, nine people were accused of offering cash or cigarettes in exchange for forged signatures on voter registration forms and petitions in Los Angeles. Prosecutors claim the group was active during the 2016 and 2018 election cycles, targeting the homeless to help them register fictitious persons.

EIPCa says this type of abuse may have been enabled by the state’s voting laws.

“Because California does not require an ID for a person to vote, and because some counties include the names of inactive registrants on their publicly-displayed Election Day rosters, anyone can claim to be the inactive registrant and receive a ballot,” Swensen said.

“All that is required is an oath (verbal or signed) that they are who they say they are.”

Swensen said officials need to do more to fix this problem.

“EIPCa would like to see counties become more proactive with list maintenance by mailing a card to every registrant on the list, not just those with inactive status,” she explained.

“This would allow all registrants to update their information and would, for those who have moved, died, etc., begin the lawful [process of inactivation and cancellation]. This would go a long way to reduce the almost 1 million ineligibles currently on CA’s list.”

In early 2019, the Sacramento Bee reported that Secretary of State Alex Padilla’s office was investigating whether noncitizens had voted in the June 2018 primary. At the time, Padilla admitted that voters were losing their trust in the system due to registration errors, echoing others such as State Sen. John Moorlach (R-Costa Mesa), who said that despite his “high level of confidence in California’s election systems,” he knew that the state should “do more to assure the voters that the system doesn’t have holes in it and that the boat isn’t leaking.”

Meanwhile, in November 2018, San Francisco became the largest city in the United State to give noncitizens the chance to vote in a local election. While the city’s move did not impact any election in the state or federal levels, some believe that the trend could spread to the rest of the state, and errors could continue to occur.

“Noncitizen voting is a very contentious issue,” said Robin Hvidston, executive director of We the People Rising, a Claremont organization that lobbies for stricter immigration enforcement, at the time, according to the Los Angeles Times. “The move to extend voting rights to those illegally residing in San Francisco has the potential to backfire among citizens with a moderate stance on illegal immigration.”


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