| Sunday, December 5, 2004
Ten years after: Have we learned anything?
Just as it did a decade ago, the county is betting
on financial returns that seem unsustainable - this time to fund
employee pensions. And once again, John Moorlach is sounding the
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.
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
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.
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.
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."
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?
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.'"
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?
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
"Leverage can make you a hero or a goat," said Moorlach."Citron was a hero for a long time, then a goat."
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.
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
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
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."
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.