MOORLACH UPDATE — SB 359 and Cuyahoga County

I still have three bills on the Governor’s desk waiting for his signature.  SB 359 was signed this week (see MOORLACH UPDATE — SB 359 and Group 10).

My witness for SB 359, when it was presented to the Senate Elections and Constitutional Amendments Committee, submitted a letter to the editor with the Daily Pilot and is the first piece.  Our release was provided by the Orange County Breeze and is the second piece.

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25th Anniversary Look Back

The October 12, 1994 edition of The Bond Buyer had the following top-of-the-fold headline:  “Ohio County Halt Fund Amid Losses To Investors” (also see MOORLACH UPDATE — Last Day of Session — September 15, 2019 and MOORLACH UPDATE — SB 598 Moves On — May 16, 2019).  It was written by Karen Pierog.

The piece had a remarkable eeriness to it, as it would be mirrored a few weeks later by Orange County.  I FAXed the article to Gebe Martinez of the LA Times, with the following note: “The parallels are frightening (but predicted!).”  Crickets.

Cuyahoga County would make its mark in history, but it would be eclipsed (see MOORLACH UPDATE — Encyclopedia of Municipal Bonds).  The reporters for the Cleveland Plain Dealer, whose work is referred to in the piece, would be recognized for their journalistic tenacity (see MOORLACH UPDATE — Last Day of Session — September 15, 2019).

Here is most of the piece (commissioners are the same as supervisors here in California):

Commissioners in Cuyahoga County, Ohio, have shut down the county’s local government investment fund in light of revelations about undisclosed investment practices and concern over losses in the fund.

Yesterday, the county began to return principal invested in its Secured Assets Fund Earnings, or SAFE, Fund to its approximately 75 local government investors.  The county also hired financial and legal experts to help determine expected financial losses to the county as a result of  its exposure in the fund.

Roger Deike, the county’s controller, said that the SAFE Fund was terminated for several reasons, including a local newspaper report that the fund had concealed entering into a reverse repurchase agreement as well as borrowing money at low interest rates to buy intermediate and long-term bonds with higher rates in an effort to bolster falling rates of return for investors.

The newspaper report, which indicated the fund’s paper losses had reached $122 million, caused some local government investors to pull their money out of the fund, Deike said.

As of the middle of September, the fund was investing about $1.1 billion of public funds for Cuyahoga County and for about 75 cities, villages, school districts, and other counties in Ohio.

At that time, fund officials told The Bond Buyer that despite the bear market in bonds, the fund had been able to offer governments a return of about 6.6% through investment techniques such as repurchase agreements with dealers and through the arbitrage of proceeds from a taxable note issue sold last year by the county.

County funds make up 35% to 40% of the money invested in the SAFE Fund.

Cuyahoga County commissioner Mary Boyle said yesterday that commissioners took exception to the fund’s investment strategy.  The fund is run by county treasurer Francis Gaul, who agreed to relinquish control of the fund to the commission.

“We sensed that it was sell short and buy long, which was not a good strategy in this market,” Boyle said.

In a press release, the county commission said it would honor its guarantee of principal by returning “every dollar of the amount each [government] has on deposit in the SAFE program.”

Yesterday, the county hired Banc One Investment Advisors Corp. to manage the county’s investments, Coopers & Lybrand to audit the SAFE Fund, and the law firm of Squires, Sanders & Dempsey to provide legal advice.

Bruce Jones, a partner at Squires, said the financial experts will be working to reduce the interest rate risk incurred by the fund’s investment strategy and to determine the degree of losses for the county.

“The county expects there will be significant losses, but we’re not in the position to quantify that at this time,” Jones said.

Despite anticipated losses, the county believes it can meet its financial obligations, he said.

Rating agency officials expressed concern for the county in light of the investment trouble.

Jeanne Wilson, a senior analyst at Moody’s Investors Service, said the agency will be monitoring the situation “very closely.”  While the immediate concern is the county’s financial standing, the agency will have to see if any of the local government investors in the fund will face any financial problems as a result of their investments, Wilson said.

Moody’s rates about $250 million of Cuyahoga County’s general obligation debt Aa.

Officials at Standard & Poor’s Corp., which gave an SP-1-plus rating earlier this year to $246 million of tax anticipation notes sold by the county, said they were waiting to receive cash flow projections from the county to determine the extent of losses.

County Treasurer Gaul, who ran the fund, and Tim Simmerly, the fund’s chief investment officer, did not return phone calls.

A 1993 audit of Cuyahoga County released last week by the state auditor cited the county for not providing documentation showing the money invested by the SAFE Fund, for inadequate documentation of investments for some of its government investors, and for the apparent lack of statutory authority to guarantee principal.


Museum House opponents should cheer legislative action

In November 2016, the Newport Beach City Council, knowing that Line in the Sand planned to challenge its approval of the 25-story Museum House condo tower through a referendum, very intentionally added 3,700 pages to the referendum petition that we were required to carry. This action was taken with the clear intent of undermining the residents’ rights to petition their government — and it failed spectacularly when Line in the Sand obtained the required signatures to reverse the decision.

In Sept 2017, I submitted a complaint to the Orange County grand jury and the district attorney, and both opened investigations into the actions of the council, and both also concluded that it was not against the law for them to have taken this step.

The only remedy remaining was to change the law. In Jan 2019, I approached state Sen. John Moorlach (R-Costa Mesa) and Assemblywoman Cottie Petrie-Norris (D-Laguna Beach) with a request to carry a bill in Sacramento that would prevent this abuse from occurring again.

To his credit, Moorlach had already introduced Senate Bill 359, which would allow referendum proponents to submit a 5,000-word summary in lieu of adding thousands of unnecessary pages to a petition if a future unethical city council tried to take the same action. I was invited to address the Elections Committee as the bill started its process through the Legislature and took the 10-pound Museum House petition with me to show the legislators why this was necessary. The bill sailed through both houses with no opposition and was signed into law on Tuesday.

Anyone who carried the Museum House petition in 2016 will appreciate the fact that good people of both parties still respect the underlying democratic principles of our great nation and are willing to work together to protect our rights

Susan Skinner
Newport Beach

Fair Referendum Practice Bill SB 359 now law

Senator John M. W. Moorlach’s (R-Costa Mesa) fair referendum practice bill, Senate Bill 359, Municipal Referendum Petitions, was signed into law by Governor Gavin Newsom. This bill creates an additional simplified, cost-effective referendum methodology for parties who are interested in overturning an ordinance passed by a city council.

“I am so happy to have the support of the governor and my colleagues in the legislature to right a serious impediment and improve future citizen efforts of the referendum process,” said Senator Moorlach. “The ability to petition one’s government is among the most precious rights we have. This will eliminate certain tactics that discourage citizens from participating in local government by unburdening their efforts.”

Under the current referendum process, city councils can require proponents to include thousands of pages of documents within a single petition. SB 359 allows parties who are interested in overturning an ordinance to now have the ability to choose the existing method in code or this new pathway if it better suits them.

This article was released by the Office of Senator John Moorlach.


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