25th Anniversary of the OC Bankruptcy
The OC Register provides two more pieces, this time reflecting on the positive improvements and the players from Orange County’s filing for Chapter 9 bankruptcy protection (see MOORLACH UPDATE — Marking to Market — July 12, 2019).
Workers’ Compensation Audit
The California Globe sounds the alarm on the rather mundane topic of a workers’ compensation reserve audit I requested and provides the data and recommendations from Elaine Howle, California State Auditor, and me (also see MOORLACH UPDATE — Audit Results and Cities 337 to 384 — November 25, 2019).
The Sacramento Bee provides more details on Gov. Brown’s budget approval to build a new annex providing offices for the California State Legislature (see MOORLACH UPDATE — Gov. Brown’s Final Budget — June 15, 2018). I serve on the Joint Committee On Rules, chaired by Assemblyman Ken Cooley, which oversees this project. I was pulled into the piece thanks to the size of my snug Capitol office.
25th Anniversary Look Back
There was a media focus on my letter to Orange County Board of Supervisors Chair, Tom Riley (see MOORLACH UPDATE — Budgeting Millions of Dollars — May 31, 2019), and my encouragement for the city of Costa Mesa to withdraw from the Orange County Investment Pool in the nick of time (see MOORLACH UPDATE — OC Register — December 10, 2009).
O.C. bankruptcy 25 years later: Finance fiasco changed national rules for public accounting
But first, Orange County became a punchline.
By TERI SFORZA
As if losing $1.64 billion in public money wasn’t humiliating enough, bankruptcy turned Orange County into an international laughing stock.
“From now on, all Orange County investments will be made on the advice of Wayne Newton, Burt Reynolds and Willie Nelson,” said one Top Ten list called “Changes in Orange County Due to Bankruptcy.” Other laugh lines included “Ethiopia to make food drops over Orange County,” and “South Coast Plaza converted to giant Pic ‘N Sav.”
Twenty-five years ago — on Dec. 6, 1994 — Orange County filed what was then the largest municipal bankruptcy in U.S. history. The legal maneuver was supposed to shield the county’s highly-leveraged investment pool from massive losses triggered by the treasurer’s wrong-way bets on interest rates. But it didn’t work. Wall Street soon sold off Orange County’s collateral at fire-sale prices nonetheless, making “paper losses” all too painfully real.
Eventually, about 1,600 county jobs were slashed, while some county-owned properties were sold for cash. And many public programs — everything from library hours to aid for the poor and homeless to education spending — were reduced.
That one of America’s wealthiest counties could go bust — largely because nobody in power seemed to understand the county’s own investment strategies — shocked the nation, and still stings.
But, long-term, it wasn’t all bad. Today, public treasuries, locally and around the country, are safer and more transparent because of reforms triggered by Orange County’s financial face plant.
“It’s a chapter we’re not proud of, but we came out of it as a much better, much stronger government,” said Orange County Executive Officer Frank Kim, whose first job offer, in 1994, was rescinded in the bankruptcy’s immediate, chaotic aftermath.
“Our policies have become standard in other large urban areas,” Kim added. “… (And) the board is focused on making sure none of the things that happened in ‘94 happen again.”
Orange County’s credit rating has returned to sterling. Fitch, Standard & Poor’s and Moody all give top grades to the county’s fiscal health.
But observers note that threats, locally and elsewhere, still loom.
Financial illiteracy remains a huge problem for elected officials around the country. And as the slow-motion crisis of public pensions unfolds — with many communities having promised to pay retirees far more than they may be able to pay — officials who handle public money will need to know what they’re doing.
“The land of Disney has given the nation a modern moral: Don’t wish upon a star with taxpayers’ money.” -USA Today
Then an upstart certified public accountant from Costa Mesa, John Moorlach was dismissed as “Chicken Little” when, in 1993 and early ’94, he publicly rang alarm bells about the investments being made by then long-time county Treasurer Robert Citron.
Today, Moorlach is a state senator representing the 37th district. And his car has a license plate that reads, ‘SKY FELL.’
In the bankruptcy’s aftermath, after Citron resigned, Moorlach was appointed county treasurer. In that role, he shepherded many still-existing accounting guidelines to prevent another collapse. But he says he might be most proud of a rule known as “marking-to-market,” which is now required of every public treasury in the nation.
Simply put, it means that government treasurers must disclose losses and gains in their investment portfolios in real time, as market prices fluctuate.
Citron refused to do that. He said at the time that he “didn’t believe in taking paper losses and paper profits.” Today, his strategy wouldn’t be an option. Mark-to-market is now required by the Governmental Accounting Standards Board.
If the rule had been in place 25 years ago, Orange County’s fiscal story might have turned out quite differently.
“Mark to market did became a key component in accounting for investments,” said Orange County’s current treasurer, Shari Freidenrich, who chose to work in the public sector because of the bankruptcy.
“It meets the objective of consistency, objectivity and transparency. The County of Orange now obtains market values on a daily basis and calculates compliance with the investment policy on a daily basis, using fair values.”
Other local reforms have caught on in the state and nation. Citizen oversight committees now scrutinize what the treasurer, auditor and public financing folks are doing. And governments now publish their investment policies to explain the philosophy and mechanics of where and why and how treasurers may sink public dollars. In Orange County, that policy is updated and approved annually.
Also, borrowing money just to invest in the market and boost interest earnings — a strategy Citron disastrously employed in an attempt to replenish public coffers drained by the passage of Proposition 13 — is forbidden.
And, today, elected treasurers in California must have basic qualifications in accounting before they’re entrusted with investing public money — something never required of Citron.
“This has made a big difference,” Moorlach said of how public accounting has changed in the wake of the county’s bankruptcy.
“We haven’t seen another Orange County. And I’ve been looking.”
Threats still loom
“How could such fiscal chaos reign in the former heartland of Reaganism and seeding ground of American free-market values?” – the Independent in London
But in many places, treasurers are still elected, something that some experts say is bad for the public because it turns a highly technical job into a political popularity contest.
Also, county, city and some state governments still invest in complex investment products, such as interest-rate swaps, something that became clear when many governments suffered during the 2007-’09 recession. Other exotic investments, such as reverse repurchase agreements, also remain in use, though on a far more limited basis than the way Citron used them, Moorlach said.
And while today’s transparency is a great leap forward — anyone can see public investments with a click of a mouse, as opposed to the laborious public records requests and giant stacks of paper that were the norms in Citron’s day — some worry about a false sense of security.
“If the people in charge of authorizing those investments have no real understanding of what they’re authorizing, transparency doesn’t solve the problem,” said Paul Nussbaum, one of the bankers who in the mid-1990s helped former county Chief Executive William Popejoy rebuild the county’s finances.
“You had five elected supervisors who had no clue what a reverse repo was. And, to this day, do they have any idea what this transparency is affording them?” added Nussbaum, who today is president of the Los Angeles Museum of the Holocaust.
“If people don’t understand the risks embedded in these instruments, what difference does transparency make?”
Mark Baldassare, president and CEO of the Public Policy Institute of California, has similar concerns about the lack of financial literacy among elected officials. He was a professor at UC Irvine during the chaos, and wrote “When Government Fails,” a book about the Orange County bankruptcy.
“There is still a lot of other kinds of risk-taking,” Baldassare said. “If certain things change with the economy, things could go in the wrong direction very quickly, similar to what O.C. experienced.”
Many of these threats stem from the pricey pensions governments have promised public workers, but which their investments might not be able to fund.
“There are always new things to worry about,” Baldassare said. “Some of the things that happened with OC, they wouldn’t happen again. But that doesn’t mean everyone’s fiscal’s house is in order.”
Baldassare supports the idea of requiring elected officials to study municipal finance. Nussbaum thinks increasing oversight from experts in the private sector can help.
John Moorlach was an upstart CPA running against Citron in 1994, warning of the coming doom. He was scolded by officials for hurting investors’ confidence and dismissively dubbed “Chicken Little.” When his predictions came to pass, he was appointed Treasurer Tax Collector. His license plate says, “SKY FELL.” He went on to become a county supervisor and state senator. (File Photo by Rose Palmisano, Orange County Register/SCNG)
Still, Moorlach notes that there’s always a new financial risk.
“People just kind of assume, as Citron did, that we can control these things, that we understand how this works.
“But you don’t.”
The Orange County Public Affairs Association will revisit what happened before, during and after the nation’s third-largest municipal bankruptcy on Wednesday, December 11, from 11:30 a.m. to 1:00 p.m. at The Pacific Club, 4110 MacArthur Blvd., Newport Beach. Speakers will include Moorlach, Kim and former county supervisor William Steiner. Information: 888-246-7424.
What became of key players from Orange County’s 1994 bankruptcy?
Retrospective luncheon slated for Wednesday, but here’s the skinny on the fallout from Orange County’s historic bankruptcy
By TERI SFORZA
Twenty five years ago this month, Orange County went broke, filing what was, at the time, the biggest municipal bankruptcy in U.S. history.
Here are some of the results and key players from that event:
• After the county’s $1.64 billion bankruptcy investigators poured into Orange County to scrutinize accounts and made a shocking discovery: Earnings had grown so astronomically high that the treasurer was skimming money off the top – reporting lower-than-actual returns to cities, schools and special districts – so as not to alarm them and trigger a run on the bank.
• The skimmed money – $89 million – went into the county’s coffers to fund public services, not into anyone’s pocket. Treasurer Robert Citron pleaded guilty to false accounting, was fined $100,000 and sentenced to one year in jail. He served his sentence at the jail commissary, processing orders for toothpaste and candy bars from the inmates.
• Assistant Treasurer Matt Raabe was convicted of fraud and misappropriation of public funds. His conviction was overturned because the district attorney had a conflict of interest and should never have prosecuted him (all county departments, including the D.A.’s, suffered budget cuts after the bankruptcy). Raabe moved to Northern California and started a new life. He did not return calls for comment for this story.
• Citron died in 2013 at age 87. To the end, he insisted he did not cause the bankruptcy. If he hadn’t been forced to resign, Wall Street wouldn’t have panicked and sold off the county’s collateral, he often said. The Board of Supervisors made the decision to declare bankruptcy – a move he considered ill-advised and unnecessary – not him.
• The county vowed to repay the public agencies that lost money seeking beefy returns. It issued $1 billion in bonds to raise the cash to make that happen, which cost $1.5 billion to repay over the next 20-plus years. Bankruptcy debt payments consumed some $60 million a year – money that could have funded street improvements, libraries, health care and myriad other public services.
• The county sued Merrill Lynch and other Wall Street players, ultimately recouping $837 million.
• All remaining bankruptcy-related debt was paid off in 2018, and the case was finally closed in federal court.
The Orange County Public Affairs Association will revisit the madness of what happened before, during and after the nation’s third-largest municipal bankruptcy on Wednesday, December 11, from 11:30 a.m. to 1:00 p.m. at The Pacific Club, 4110 MacArthur Blvd., Newport Beach.
Speakers will include folks on the front lines of the crisis 25 years ago, including Sen. John Moorlach, County Executive Officer Frank Kim, former County Supervisor Bill Steiner and former Costa Mesa City Manager Allan Roeder. For more information, contact 888-246-7424.
Senator John Moorlach (Kevin Sanders for California Globe)
CA State Auditor Finds State Agencies Overpaying Millions for Workers’ Compensation Insurance
Agencies could have saved the State more than $20 million in 2017-18
By Katy Grimes
The State Auditor reported total costs of $5.8 billion for 32,043 claims open more than two years.
The California State Auditor just released an audit finding at least 10 state agencies purchasing Workers’ Compensation Insurance from State Compensation Insurance Fund (State Fund), a nonprofit enterprise established by the California Legislature in 1914, are paying millions of dollars more than necessary to provide benefits to their employees.
Authorized by the Joint Legislative Audit Committee to perform the audit, State Auditor Elaine Howle’s assessment focused on insurance used by state agencies, and which agencies are paying millions more than they should to provide benefits to employees.
State Fund’s Master Agreement and Insurance Claims Open as of January 1, 2019. (CA State Auditor)
Sen. John Moorlach (R-Costa Mesa), the only CPA in the California Legislature, requested the audit based on a Workers’ Compensation Closing Project he conducted in Orange County while he was a County Supervisor. The goal was to close as many lingering open workers’ comp claims. As evidenced by the findings of state audit, Sen. Moorlach was spot on to address open claims.
Sen. Moorlach had recommendations regarding the stunning state findings:
“First, the California Department of Human Resources (CalHR) should provide a benefit analysis comparing the cost of obtaining workers’ compensation insurance through the Master Agreement vs purchasing directly from State Fund. I commend CalHR for agreeing to implement the Auditor’s recommendation.”
“Second, the California Legislature should grant CalHR the authority to obtain the necessary data to compare insurance versus master agreement costs,” Moorlach said.
“Third, State Fund needs to create a policy for ‘to provide settlement authorization requests to agencies at least 30 days before settlement conferences.’ State Fund failed to achieve this for eight of the 15 claims the auditor reviewed. I call on State Fund to reconsider this request and implement the policy.”
“Lastly, a review of rates paid to qualified medical evaluators should be considered.”
State law allows state agencies to decide how to provide workers’ compensation benefits to their employees. According to the Auditor, almost 90 percent of them choose to do so using a master agreement that the California Department of Human Resources negotiated on their behalf with the State Compensation Insurance Fund. Under the master agreement, State Fund administers, processes, and pays employee benefits for participating state agencies, and the agencies reimburse State Fund for the actual costs of services rendered. However, 32 agencies opted to purchase insurance directly from State Fund. That is where the overspending occurred.
The State Auditor found each of 10 of the 32 agencies that purchased insurance directly from State Fund in 2017–18 consistently paid more in insurance premiums than it would have if it had provided benefits by using the master agreement. “We estimate that from fiscal years 2013–14 through 2017–18, these 10 agencies collectively paid an average of $5.7 million per year in premiums but they could have saved the State more than $20 million during the period we reviewed if they had used the negotiated master agreement.”
Elaine Howle, CA State Auditor
The Auditor also found “that State Fund does not always provide state agencies with enough time to review settlement authorization requests (settlement requests) before the mandatory settlement conferences (settlement conferences) in which State Fund and injured employees attempt to come to agreement to avoid seeking a trial. State Fund should provide 30 days to review settlement requests before the settlement conferences. However, for eight of the 15 claims we reviewed, State Fund did not do so. When State Fund does not make settlement requests available for agencies to adequately review before settlement conferences, it may delay the settlement authorization process and may lead to agencies’ having to pay additional expenses if the cases go to trial.”
The Auditor made several recommendations including:
- Cal HR should provide a cost‑benefit analysis every five years that compares the cost of purchasing this insurance through State Fund with the cost of obtaining coverage through the master agreement.
- the Legislature should give CalHR the authority to obtain that information.
- State Fund should create and follow a policy by May 2020 to provide settlement authorization requests to agencies at least 30 days before settlement conferences.
Notably, the Auditor reported 32,043 claims open more than two years, $3.3 billion benefits already paid, $104,200 was the average claim paid, $2.5 billion is the estimated cost not yet paid, and the total is $5.8 billion.
The Auditor’s review of 15 claims at CAL FIRE, Social Services, and Caltrans “found that in many cases, State Fund did not provide agencies with at least 30 days to respond to the settlement requests before the settlement conferences, which may have limited the agencies’ ability to effectively resolve the claims through stipulations or compromise and release agreements in some instances.6 State Fund provided less than 30 days for eight, or 53 percent, of the 15 claims that we selected.”
At the end of the audit, State Fund provided a response to the audit which the Auditor found “misleading.”
“Although State Fund is correct that the guidelines it mentions establish a time frame for completing settlement requests, State Fund has consistently failed to comply with these guidelines,” the Auditor said. “We reviewed 15 settlement requests and found only one instance in which State Fund sent the settlement request within 30 days of receiving the maximum medical improvement (MMI) report.”
The agencies overpaying workers’ comp insurance claims are: California Department of Food and Agriculture, California Department of Pesticide Regulation, California Department of Transportation, California Department of Veterans Affairs, California Military Department, Commission on Peace Officer Standards and Training, Governor’s Office of Business and Economic Development, Secretary of State’s Office, State Council on Developmental Disabilities, and the State Treasurer’s Office.
You can READ the entire audit here.
Every lawmaker gets a window.
Inside a new $423 million, no-bid
BY HANNAH WILEY AND <a href=”mailto:aashton
In a rush to rebuild lawmakers’ offices, state officials last year waived a standard government construction process to put up a $423.6 million building in downtown Sacramento without soliciting bids from multiple contractors.
The result has California state government constructing a new tower, deemed the Capitol “swing space,” in near-record time, accommodating special requests from lawmakers to design a structure that can temporarily house their offices, the governor’s suite and committee hearing rooms.
The effort ensures that every lawmaker’s office will have a window, and avoids moving the Legislature during an election year, when members are occupied by campaigns. It also uses an expedited environmental review not available to most other California construction.
City officials say the speed comes with a cost.
The new structure at 1021 O Street won’t immediately have the features city leaders have been seeking in downtown buildings, such as retail space and restaurants, raising worries that the tower is a missed opportunity to rebuild Sacramento’s skyline with the city’s interest in mind.
“O Street is a disaster,” said Councilman Steve Hansen, who represents Sacramento’s downtown grid. “It will be a dead zone if that building doesn’t have any ground floor activation. It’s sort of prioritizing state operations over the community’s best interest.”
Hansen’s irritation stems from the Legislature’s vote last year to gut the so-called Capitol annex, a 67-year-old warren of offices that many regard as a death trap because of its limited emergency exits, lack of fire sprinklers and narrow hallways.
Assemblyman Ken Cooley, D-Rancho Cordova, the brains and heart behind the project, worked for years to make a case to replace the annex.
His efforts culminated last year, when former Gov. Jerry Brown approved a $1.2 billion plan to tear down the annex, temporarily house the Legislature in a new state building and construct an upgraded structure attached to the Capitol for legislative work.
“You have 120 people who have taken this oath of office to build the future. They embody this office. Therefore, their work is an extension of what they are personally able to accomplish,” Cooley said.
Cooley, who’d waited years for the opportunity to realize his vision of an annex reflective of California’s rich history and diverse culture, seized the opportunity afforded by the state’s recovery from the Great Recession.
He mapped a plan to build the temporary office space on O Street by 2021 and the full Capitol Annex by 2025.
But the tight schedule pressured the Department of General Services to work faster than ever to build a new state office building.
To save time, the Legislature gave the department the authority to skip the normal bidding process, a provision tucked into a budget bill in 2018.
Instead, the department offered the opportunity to Hensel Phelps, the second place-bidder on another downtown project.
Hensel Phelps was not promised the work when the Department of General Services invited the firm to develop 1021 O Street. The firm had to draw up the plans in close coordination with the state, and both sides had to agree on a price, said Jason Kenney, deputy director of the real estate services division the Department of General Services.
They settled on $423 million for a 472,000 square foot building that is expected to become a general state office building after the Legislature moves out. That price is about what Brown budgeted for the building before the state began negotiating a contract.
That so-called “progressive design model” let the state break ground on the building after just months of planning. Normally, that takes two years.
It was something the department had never done before.
“It’s not really something the state has had the authority to do” in the past, Kenney said.
It’s something the Legislature plans to do one more time when it prepares to pick a contractor to build a new visitor center for the Capitol annex.
WHY THE RUSH?
Cooley hoped to find the least-disruptive window for the move. Relocating the governor, 120 lawmakers and their staff — 1,250 people in total — was not going to be easy.
“The Legislature operates on a biennium,” Cooley said. “What’s the best time time to move 120 people to minimize disruption? Fourth quarter of the odd year.”
That “sweet spot” of an off-election year at the end of the legislative cycle only comes around so often, Kenney said. And with money already on the table, the department had to move quickly.
Contracting directly with Hensel Phelps shaved about 14 months off what a project of the swing space’s scope and size usually demands, said Jeffrey Wellenstein, project manager of the construction group which includes HOK and Dreyfuss + Blackford.
“It lets you go faster,” Wellenstein said, because “you’re selected based on qualifications” rather than using required criteria to draft a proposal to then wrangle for the contract against other bidders.
At its peak, around 400 personnel will work on-site to finish construction. Two cranes are working on it now.
But the streamlining didn’t set well with some of Cooley’s colleagues, particularly among Republicans frustrated by the Legislature’s decision to exempt the project from the state’s rigorous environmental reviews and bidding regulations.
“I find it extremely hypocritical that we tell local governments that they must comply with the state contracting code for their requirements, but then we exempt ourselves from our own largest project,” said Assemblyman Jay Obernolte, a Republican from Big Bear Lake, during a floor vote to approve the measure.
When they move in to their temporary digs, lawmakers will find some perks. Each one will get a window office, a benefit all of them do not receive now. Fourteen Assembly members do not have windows in their personal offices, according to Debra Gravert, chief administrative officer for the chamber.
They’ll also get some additional space to accommodate visitors and employees with disabilities. The modern exterior will match a contemporary interior, with California-minded sustainability features that aim to limit greenhouse gas emissions and energy use.
“State-of-the-art” technology, heightened security measures and comfortable hearing rooms are also on deck, with a grab-and-go third-floor cafe, outdoor terraces in the “heart” of the building and pedestrian-friendly walkways decorated by fresh greenery and benches as a bonus.
The 10-story swing space will include one floor for the governor, according to interviews with the project’s construction team and details included in documents obtained by The Sacramento Bee through the California Public Records Act.
Other features include:
- Senate and Assembly offices will average 985 square feet, according to DGS, though they’ll likely range in size to consider staff numbers and the lawmaker’s ranking. A freshman member, for example, as well as Republicans who tend to get smaller offices, shouldn’t expect more space. Current offices range in size according to party and prominence. For example, Republican Sen. John Moorlach’s office is 803 square feet, according to the records. Sen. Hannah-Beth Jackson, a Democrat, has an office more than twice that size.
- The two largest hearing rooms will be on the ground floor of the building, with two more a floor above.
- Assembly Speaker Anthony Rendon and Senate President Pro Tem Toni Atkins are expected to move into the temporary spot, Cooley said. They’ll also maintain office space in the Capitol, though a portion of their current suites could be sectioned off for caucus rooms to be used during floor sessions.
- There will also be a three-floor parking garage to accommodate 135 cars, DGS confirmed.
With logistical headaches like purchasing furniture baked into the design team’s contract, legislators can expect just a “box move,” said Joel Griffith, capital outlay program manager for the Department of General Services.
SACRAMENTO’S CHANGING SKYLINE
About $4 billion in state government construction is expected in the Sacramento region over the next five years, with big projects downtown and along Richards Boulevard.
To city leaders, the investment offers a chance to remake Sacramento’s downtown into a walkable streetscape where people will want to linger after the workday.
At least for now, 1021 O Street will not have ground-level features like restaurants, a childcare facility and retail space originally floated in early design conversations for the building.
The swing space will be converted in its “second life” to a standard government building after lawmakers move back to the Capitol in 2025, which could open discussion to additional amenities.
In the meantime, Kenney said, existing restaurants already sprinkling the periphery of the Capitol should serve the area well.
Hansen, the city councilman, said the building at 1021 O Street is an example of the “creative tension” the city experiences with state agencies.
“DGS has a very linear approach to this stuff and we’d like them to be more holistic,” Hansen said. “We have a good working relationship but they don’t always take our feedback.”
Hansen said he’d also like to see the state invest in transportation corridors surrounding the new buildings, a sort of financial courtesy to Sacramento and a hat tip to the city’s responsibility for maintaining the flexibility of its roads.
“We want to make sure it’s done in a way that’s complementary to the city to keep the roads safe, support infill housing in the core and meet our climate goals. While they are creating this legacy that is really important for us and the state, ultimately the challenges that will result from not always being able to do this holistically will land in the city’s lap,” Hansen said.
Throughout the development of the project, Cooley, who speaks of the annex’s history with particular romanticism, maintained another, more ceremonial vision for the project.
Should all go according to plan, Gov. Gavin Newsom would have the opportunity to christen a new executive suite in the annex at the start of his final year in office.
“It’s my job to get it done while Gavin is still around,” Cooley said. “Newsom will be able to preside over the people’s house his entire last year of office. Make it a sort of yearlong, California celebration. And that also means that the Newsom team would have the privilege of deciding how they want an executive suite organized.”
The construction team said they met with Newsom’s office following his election to gather notes on his expectations for his swing space office. Due to security measures, Griffith said, details of that meeting are not publicly available.
While it’s premature to design floor patterns, square footage and other details, Newsom’s office said the team would focus on being “good stewards of public funds.”
The goals are to “address the current infrastructure challenges,” spokeswoman Vicky Waters wrote in an emailed statement, to “ensure legislative and executive staff can continue conducting the people’s business; and preserve public access to this wonderful piece of history.”
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