By Steven Greenhut
Columnist, The Orange County Register

Spare me the 10-year anniversary recollections of the Orange County bankruptcy of 1994, which are too self-serving for my tender stomach. I'm still guffawing after former county administrator Ernie Schneider told a fellow Register columnist that he should have followed his instincts and demanded an audit of then-Treasurer Bob Citron's Ponzi-like investment schemes.

Oh, please. A decade ago John Moorlach, our current treasurer, warned, loudly and clearly, about the looming financial disaster.

The instinct throughout county government wasn't to conduct audits and blow the whistle on the scam, but to circle the wagons, protect themselves and their treasurer and treat the bad news bearer as an opportunist who was simply after Citron's seat. The paradigm, of which Schneider was a part, said: "Look, the status quo is good, it's providing good earnings. Citron has been doing this a long time. Who is this guy Moorlach?"

Schneider accused Moorlach of trying to hurt the county's credit rating after Moorlach questioned Citron's investment strategy in a Wall Street Journal article. Some instinct.

I wasn't in Orange County at the time, but as a close observer of government I know that officials tend to defend the status quo. Reporters tend to echo the status-quo view, and most members of the public are happy with the status quo until something hits the fan.

Ten years later, no one blames themselves, except in the most passive way. As Register contributor Sir Eldon Griffiths said recently, "The memory was so embarrassing that they refused to learn anything from it."

That's history for you. Why remember that Moorlach sent a letter detailing the coming crunch to all five county supervisors, with four of them claiming never to have received it and one other claiming not to have read past the first few paragraphs because of its tone?

The letter - sent a few months before the county declared bankruptcy - was eventually described by the Register as "a road map to ruin. ... It warned in exacting detail the dangers of the highly leveraged $7.4 billion pool, especially from rising interest rates, and ended with an admonition: 'Prepare for the worst-case scenario.'"

Following the bankruptcy, Citron said in testimony before the California Senate: "In retrospect, it is clear that I followed the wrong course." In retrospect? The problem is he doggedly followed the course after it became obvious that his scheme was becoming what one financial publication called a "death spiral." Eventually, the county paid a consulting firm $250,000 to get the advice they got for free from Moorlach. By then it was too late.

What was Citron doing?

Here's how Moorlach explains it: Suppose you take a mortgage for a house, then leverage that house to buy the neighbor's house, and then leverage that second house to buy another. It's great as long as the interest rates are low and you can rent out the second and third houses at a profit, or at least to cover the mortgage. But what happens if interest rates increase on these variable-rate mortgages and values on the properties fall?

"Leverage can make you a hero or a goat," said Moorlach."Citron was a hero for a long time, then a goat."

New systems have been put in place to promote disclosure, internal controls and better auditing of county governments. Even more severe controls have been imposed on the corporate sector, following the Enron, Worldcom and other scandals.

But that doesn't mean that similar financial malfeasance isn't taking place. The same forces are at work to ignore a financial scandal that threatens to burden Orange County and trigger a statewide, indeed national, crisis that will make the O.C. bankruptcy seem like a minor bump. One of the few politicians who is now yelling about it is Moorlach. But status-quo-minded elected officials and bureaucratic staff are still ignoring him.

Orange County, the city of San Diego, other California cities and counties, and municipalities across the country have been agreeing to outlandish pension benefits for public employees - first for police and firefighters, and now for everybody.

Citron bet on a best-case scenario for the investment pool even as conditions soured, just as the county is now betting on a best-case scenario to pay for the pension increases even as the economic numbers don't support the rosy scenario. If the numbers don't work, taxpayers could be forced to pay for the miscalculation.

The retired public "servants" will be sitting at their mansions on Lake Coeur d'Alene at age 52, while the rest of us work until we're 90 to assure their comfort.

"We have electeds who seem to believe the line that it doesn't cost anything. But now we have cities up north that are sucking air. They've increased benefits so much, and now they can't afford to pay them. They are looking at layoffs, tax increases and all the stuff we had to do after the bankruptcy." That's Moorlach, speaking to me in August about the latest county pension spikes.

Soon afterward, a majority of the Board of Supervisors (Bill Campbell, Jim Silva and Tom Wilson) voted to hike pension benefits, retroactively, for most county employees, even though Moorlach warned that the promised rate of return was unsustainable, that the new benefit would immediately increase the retirement system's unfunded liability by $300 million, and that the union's promises were not worth the hot air they were uttered in.

Everyone in county government, from interim county executive Jim Ruth to auditor David Sundstrom, sung the praises of this new union-promoted, taxpayer-backed giveaway.

What explains the groupthink that allows bad investments to go forward even though they are so obviously troublesome?

"It all gets back to people," Moorlach said. "There always will be creative people trying to accomplish selfish, greedy goals."

Ten years from now, after the tax hikes and service cuts and moaning and whining about the ramifications of the unsustainable pension spikes for bureaucrats, county officials will be saying the same thing Schneider told the columnist. They should have followed their instincts.

Why not spare us another anniversary of a fiscal crisis and speak out today? That's an idea worth leveraging.