Orange County first revealed its intention to borrow up to $320 million from the county treasury to pre-pay ballooning pension and retiree benefits in a Bloomberg interview on January 27, 2011. Moorlach, Chairman of the Board of Supervisors and former treasurer stated: “When you think of the concept of borrowing from ourselves, we ask, ‘Why not?’… “Who’s a better credit than yourself?” But Moorlach had inside information that the county only had half the total cash and only 13% of the liquidity necessary for the county to secure the transaction alone. He knew that if the county wanted to do a big deal, they would need to use the cash that local schools and other governmental agencies had deposited into the county treasury and under control of the treasurer. Despite known concerns about safety and liquidity risks, the Orange County Treasurer bought $287,872,000 of unsecured Pension Obligation Bonds yielding just 1.82%. SEC filings now confirm that Orange County made $15.1 million profit on this deal with their Treasurer.
By: Chriss W. Street
Like the Titanic a hundred years ago that ignored warnings and ran full-speed into a massive iceberg, Orange County is taking enormous financially risks rather than addressing their gaping cash-flow deficit. The county quietly entered into $518 million of illiquid and unsecured interest rate wagers, mostly financed from
the payroll and savings accounts of local schools and other government agencies. With spending rising as revenue is falling and financial officers exiting as liquidity is drying up; the danger of hitting another iceberg is becoming extreme. John Moorlach, Chairman of the Board of Supervisors, warned last year: “The County of Orange, which went bankrupt in 1994, is a bankruptcy candidate again.” He should know as Chairman, he is steering the ship.
Despite falling property and sales taxes, Orange County inexplicably increased spending by $145.8 million for their fiscal year that runs from July 1, 2011 to June 30, 2012. By late November the county’s cash position was so dangerously low, the County Treasurer skimmed off $73.5 of property taxes dedicated to local schools and community colleges to preserve liquidity.
My last report (here) detailed that three weeks after the schools’ money was hijacked, the Orange County Auditor-Controller made material financial disclosures in the county’s 2010-2011 Comprehensive Annual Financial Report filed on December 16, 2011, stating Orange County had a $30,146,000 shortfall in “Reserves for Contingencies.” Fifteen days later, he resigned.
In response to a legal demand served on the Orange County Auditor-Controller’s office under the “California Public Records Act”, an internal memo was obtained titled: “Second Report – General Fund Level Available Financing.” The document dated March 28, 2012, is an internal communication from the Orange County Assistant Auditor-Controller to the County Executive Officer, with copies to the Board of Supervisors. The chart below taken from the document divulges in green that snatching $73.5 million from schools positively increased county total “cash” by 63% to $200 million. But in red cautions that the county’s “Fund Balance Available”, which is the source of liquidity to pay the county’s $65 million bi-weekly payroll, is expected to sink by to $23.6 million by June 30, 2012. As the Assistant Auditor-Controller sternly warned:
“Any future use of reserves could potentially worsen today’s difficult cash situation.”
Two days later, he retired.
On August 28, 2011, Moorlach warned Orange County was insolvent in an editorial he wrote for the Orange County Register: “The net investment in capital assets doesn’t even cover this debt”. Regardless of bankruptcy risks, Orange County sold another $229,880,000 of Pension Obligation Bonds on January 18, 2012 yielding .85%. According to the Orange County Treasurer’s latest monthly report, the Treasurer bought at least another $72 million bonds. The prospectus for the bond sale makes no mention of Chairman John Moorlach’s bankruptcy concerns. The financial projections states that Fund Balance Available will increase from $41 million to $42 million, whereas we now know that the Fund Balance Available will fall to $23.6 million.
Captain Edward John Smith of the Royal Mail Ship Titanic knew the night was dark and the water was cold, but he continued run at such high-risk speed that when his lookouts spotted the iceberg there was no time to turn away and spare the lives of 1514 people. Orange County knows the dangers of financial engineering, yet their leadership is once again willing to take high risks with taxpayer’s money intended for children’s educations. Readers of this article may scowl that this type of gross incompetence and irresponsibility can only happen in Orange County. But I suggest you might look into any financial shenanigans happening in your county.
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