MOORLACH UPDATE — Reducing Debt Transparency? — September 25, 2019

One More to Veto

As Governor Newsom considers signing or vetoing hundreds of pieces of legislation before the Oct. 13 deadline, allow me to suggest another veto-worthy bill.  As it relates to adding debt, SB 268 (Wiener) will once again limit government transparency and prevent the public from knowing the true costs of bond measures when they appear on ballots.

It appears that Wiener’s bill comes as a reaction to a good government and open transparency bill, Assembly Bill 195, by Assemblyman Jay Obernolte (R – Big Bear), that required local officials to give more information on the cost of bond measures in the ballot summary.

Because local governments hated the idea of giving voters the true costs of the measures, Senator Wiener introduced SB 268. Here’s what CalMatters columnist Dan Walters said about the legislation now awaiting the governor’s signature (see

“Wiener makes no bones about his intent. He believes that Obernolte’s law would result in fewer tax and bond measures being passed and his legislation would allow officials to bury the required financial data in the fine print of voter guides, where it would be much less likely to be read.

“Thus, officials would be free once again to pump up their one-sided pitches in ballot summaries.”

California government at all levels should be doing more, not less, to ensure government transparency.  If Governor Newsom believes in transparency, he should veto SB 268.

School District Ranking – Group 4 – #283 to #376

Welcome to the fourth of ten groups of 94 of California’s school districts ranked by the unrestricted net position divided by the district’s population served.

For the previous three groups, see:

Group 1 – MOORLACH UPDATE — School District Rankings – Top 94 — September 20, 2019

Group 2 – MOORLACH UPDATE — 2019 Veto-Worthy Bills and Second 94 — September 21, 2019

Group 3 – MOORLACH UPDATE — School District Rankings, Nos. 189-282 — September 23, 2019

Group 4 includes the following four Orange County school districts:

#320 Huntington Beach Union High, down 78

#333 Savanna Elementary, up 75

#352 Centralia Elementary, up 23

#360 Huntington Beach City Elementary, down 3

Taking a cursory look at Huntington Beach Union High, its Other Post-Employment Benefits (OPEBs) liability increased by $30.5 million. The pension liability increased by $32.5 million. This would explain a major portion of this district’s $72.8 million increase to its unrestricted net deficit. Wouldn’t you like to know this type of information from a school district before you voted to approve a bond measure?

Adding liabilities of this nature to the balance sheets of California’s 940 school districts increased the combined unrestricted net deficit by $20 billion in the last year alone.

25th Anniversary Look Back

Now that we’re on the topic of transparency.  On September 26, 1994, Robert L. “Bob” Citron released his annual Treasurer’s correspondence to the Board of Supervisors.  

It had been reported that, due to Mr. Citron’s difficulty with public speaking, the Supervisors recommended a written report instead.  This one would be his last. It was five pages, with a one-page attachment providing cash balances and receipts and disbursements.  

The mailing list of those who received the correspondence was a who’s who of Orange County financial advisers, broker/dealers, city and school district representatives, Orange County Employees Retirement System directors, prominent civic leaders, and County department heads.

Here are a few selected sentences, followed by my commentary:

Our average yield for the fiscal year of 7.74% can be favorably compared to the U.S. Treasury 30-year maturity bond average yield of 6.65% for the same fiscal year period.

Idle funds should be invested in short-term cash equivalents, similar to a money market fund, with durations averaging 90 days or less.  On the short end of the yield curve, the yields are historically the lowest. Claiming that the Orange County Investment Pool (OCIP) was outperforming the 30-year Treasury should have been a major red flag to its participants.

The State of California Treasury with an average monthly balance of $25.449 billion had an average yield of 4.39%.

The State Treasurer’s Local Agency Investment Fund (LAIF) is a popular place for cities and counties to deposit surplus funds.  To claim that the OCIP was outperforming LAIF by 335 basis points, or 76% higher, should have been another major red flag to participants.

In comparing these interest yields, it should be stated that the State investment pool average monthly maturity for the fiscal year was 392 days (one year, one month); whereas, the Orange County Treasury average monthly maturity was 834 days (two years, five months).

Shortly after Orange County filed for bankruptcy, the majority of municipalities around the nation reduced their average weighted maturity to less than 30 days!  Exceeding a safe holding period by nearly 30 times was yet another major red flag.

The total interest earnings received and paid out from investments was an all time high of $665,868,000.

The massive percentage of overall County revenues represented by interest income was another red flag.  It proved that when money talks, the truth is silent.

We continue to use Reverse Repurchase Agreements as part of our investment strategy.  In the fiscal year just ended, we earned an additional $251,334,000 through Reverse Repurchase Agreements which is the equivalent of adding a 2% yield to our portfolio.

Does the warning that higher yields mean higher risks come to mind?

During the past year, concerns have been raised about investment funds taking “paper” losses which represent the difference between the original cost of securities and the current market value of those securities.  In periods of rising interest rates, securities purchased one year ago are worth less today than when they were originally purchased. The losses are called “paper” losses because they are based upon accounting adjustments in which investment portfolios are adjusted to reflect current market values.  An actual gain or loss would only be incurred if the investor sells the security prior to its maturity day.

Some investment funds regulated by the Securities and Exchange Commission (SEC) are required to periodically adjust the cost of their portfolios to reflect current market values which may result in a paper gain or loss.  Governmental accounting standards do not require municipal investment pools to make this periodic adjustment. Therefore, we are not required to record “paper” gains or losses.

An actual investment gain or loss would only occur if we were to sell a security before its scheduled maturity date.  Under our reverse repurchase investment strategy, we hold nearly all of our securities until maturity and rarely have recorded actual gains or losses.

You can hold to maturity if there is no reason to suspect that an early sale will be required.  But, the OCIP had voluntary participants who could withdraw, theoretically, at any time (for how the city of Tustin was treated, see  MOORLACH UPDATE — Presenting SB 689 Plus a Dozen More — April 17, 2019).  And the OCIP had debt that could be called when the value of the investments dropped below the amount of the loan, thus requiring more collateral by the lender (for a discussion on marking to market, see MOORLACH UPDATE — Marking to Market — July 12, 2019).

In a section titled “The Future,” Citron spent two pages, single-spaced with only a few paragraph breaks, explaining the direction of interest rates, including old phrases about economists.  But, the concluding paragraph hinted at cracks in the dike.  

I do not at all in any way, pretend to be a professional economist.  The rather successful high interest yields we have obtained in previous years (as stated here previously) would indicate that we have been able to interpret current and future markets to our advantage.  Like economists, we are not always right. (Do you remember Henry Kaufman?) In last year’s Financial Statement, I said we would have the maintenance of low interest rates, that high interest rates were not sustainable.  I and many others did not foresee the Federal Reserve taking their “preemptive strike.” There was not then, and there is not now, inflationary factors that would require the Federal Reserve to tighten credit by 1.75%, as stated previously by many economists.  Former President Harry Truman once defined that a successful leader or business head made the correct decisions 80% of the time. I believe I and the great majority of those reading this report fall into this category. Where we may differ is that I realize that my decisions could be wrong as much as 20% of the time.  This probability of error keeps me diligent to see that any miscalculations of economic conditions do not have an overly negative effect on our investors. We have constructed a well-balanced portfolio that we believe can withstand the impact of current interest rates. I believe that the many years of consistent positive results of our investment strategy indicates that our decisions have been correct much more than 80% of the time!

Citron’s report was released in mid-October.  The Federal Reserve Board’s rate increases would continue, correlating closely to the 2-year Treasury yield increases occurring at the time.  Being 80% right would morph into 100% wrong within a few weeks.

For my last LOOK BACK, see MOORLACH UPDATE — OC Register Coverage Look Back — September 16, 2019.

RankSchool DistrictPopulationPer Cap2017Chg
283Trinidad Union Elementary2,248($496)30320
284Soquel Union Elementary27,555($497)277-7
285Millbrae Elementary26,211($500)150-135
286Julian Union High4,837($501)33448
287El Monte Union High178,636($501)276-11
288Cottonwood Union Elementary8,764($503)33951
289Delphic Elementary130($505)764475
290Stanislaus Union Elementary31,828($507)31323
291Chula Vista Elementary301,936($511)37483
292Blue Lake Union Elementary2,513($513)237-55
293Cascade Union Elementary15,318($514)412119
294Perris Union High176,496($516)36874
295Mulberry Elementary153($519)218-77
296Shasta Union High102,753($521)3015
297Trinity Alps Unified8,513($521)238-59
298Jefferson Elementary18,436($524)37173
299Briggs Elementary2,810($525)275-24
300Santa Clara Unified155,963($525)31212
301Liberty Union High115,068($532)31514
302San Luis Coastal Unified95,568($535)34947
303Red Bluff Union Elementary20,495($538)35148
304Loleta Union Elementary1,538($538)279-25
305Lowell Joint34,250($539)247-58
306San Dieguito Union High178,802($543)221-85
307Heber Elementary7,656($544)264-43
308Santa Rosa City Schools293,661($546)31911
309Bennett Valley Union Elementary9,917($548)32617
310Emery Unified11,130($554)34838
311San Mateo Union High242,040($557)32817
312Johnstonville Elementary1,083($558)32210
313Bolinas-Stinson Union2,417($558)171-142
314Los Olivos Elementary2,017($561)485171
315Mountain View Whisman71,425($562)36651
316Plumas Unified18,142($564)248-68
317Grossmont Union High488,461($565)32710
318Santa Maria Joint Union High150,667($566)34123
319Salida Union Elementary21,000($566)37051
320Huntington Beach Union High331,367($567)242-78
321Empire Union Elementary27,056($572)39675
322Hughes-Elizabeth Lakes Union Elem3,898($578)39068
323Oroville Union High55,273($580)189-134
324Salinas Union High180,541($581)321-3
325Mountain View-Los Altos Union High115,648($583)36944
326Antelope Valley Union High386,613($587)34317
327Mill Valley Elementary32,070($588)427100
328Soulsbyville Elementary4,764($591)37749
329San Ardo Union Elementary792($591)39869
330Franklin Elementary2,686($593)35020
331Weed Union Elementary3,950($593)206-125
332Tulare Joint Union High82,517($594)283-49
333Savanna Elementary30,982($594)40875
334Keyes Union6,210($597)37945
335Janesville Union Elementary3,184($601)36429
336Redding Elementary35,510($603)39761
337Grass Valley Elementary25,368($603)38043
338McKinleyville Union Elementary15,531($604)35416
339Barstow Unified35,605($605)38748
340Tracy Joint Unified105,348($606)39959
341Maple Elementary569($606)40160
342Happy Valley Union Elementary6,093($606)231-111
344Colfax Elementary5,865($610)460116
345Coronado Unified26,635($614)591246
346Butte Valley Unified1,989($615)562216
347Hermosa Beach City Elementary20,187($615)210-137
348Burlingame Elementary32,107($615)697349
349South Fork Union3,765($616)262-87
351San Rafael City High78,740($617)3521
352Centralia Elementary58,192($618)37523
353Bangor Union Elementary1,304($619)38936
354Placer Union High95,262($620)40450
355Belmont-Redwood Shores Elem43,812($622)243-112
357Black Oak Mine Unified14,168($624)461104
358Roberts Ferry Union Elementary615($625)459101
359Modesto City Schools405,888($626)316-43
360Huntington Beach City Elementary87,839($627)357-3
361Mark Twain Union Elementary9,331($628)251-110
362New Hope Elementary1,703($629)294-68
363Weaver Union13,554($631)42158
364Campbell Union102,791($640)38319
365Victor Valley Union High168,238($641)45186
366Fortuna Union High23,003($642)203-163
367Arcata Elementary14,778($643)40235
368Del Mar Union Elementary44,619($645)654286
369Las Lomitas Elementary12,190($647)225-144
370North Cow Creek Elementary1,607($647)578208
371Newcastle Elementary2,857($650)916545
372McCabe Union Elementary7,075($650)38816
373Leggett Valley Unified601($652)333-40
374Bayshore Elementary6,163($652)35-339
375Pleasant Valley77,159($652)337-38
376Marcum-Illinois Union Elementary868($654)41539

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