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Chriss Street: Orange County’s Iceberg Dead Ahead

Contributed by Chriss Street. Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. Chriss lives in Newport Beach, CA.

Like the Titanic a hundred years ago that ignored warnings and ran full-speed into a massive iceberg, Orange County is taking enormous financial risks rather than addressing its gapping cash-flow deficit. The county quietly entered into $518 million of illiquid and unsecured interest rate wagers, mostly financed from payroll and savings accounts of local schools and other government agencies. With spending rising, revenue falling, and liquidity drying up, the danger of hitting another iceberg is becoming extreme.

Despite falling property and sales taxes, Orange County inexplicably increased spending by $145.8 million for this fiscal year, which ends on June 30, 2012. In an exceptionally selfish move to bail-out the county’s gapping budget shortfall, the Orange County Treasurer in November skimmed off $73.5 of property taxes that belonged to local schools and community colleges.

My last report (here) detailed how 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, stating that 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 from the document divulges in green that snatching $73.5 million of schools’ revenues positively increased the county’s total "cash” by 63% to $200 million.



But it also cautions in red 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 to $23.6 million by June 30, 2012. The Assistant Auditor-Controller sternly warned: “Any future use of reserves could potentially worsen today's difficult cash situation.” Two days later, he retired.

January last year, Orange County first revealed its intention to borrow up to $320 million from itself to pre-pay pension costs because its expenses for retiree benefits had ballooned. “When you think of the concept of borrowing from ourselves, we ask, ‘Why not?’” said John Moorlach, Chairman of the Board of Supervisors and former treasurer. “Who’s a better credit than yourself?”

Yet he already had inside information that the county only had half the total cash and 13% of the liquidity necessary to secure the transaction alone. He knew the county would have to rely on deposits from local schools and others governmental agencies controlled by the county treasurer, in order to have the cash to complete the transactions. Despite the safety and liquidity risks, Orange County placed $287,872,000 of unsecured Pension Obligation Bonds yielding 1.82% in the county treasurer’s comingled investment account and locked in a $15.1 million profit for itself. Then, on August 28, 2011, Moorlach warned, “The County of Orange, which went bankrupt in 1994, is a bankruptcy candidate again.”

Regardless of these 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 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.

It’s time to stop the reckless financial engineering in Orange County so that Moorlach is not proven right. Captain Edward John Smith of the Royal Mail Ship Titanic knew of risks but continued to run at such high speed that when his lookouts spotted the iceberg there was no time to turn away and spare the lives of 1514 people. Orange County also knows of the dangers of its financial engineering, yet its leadership is once again willing to gamble with taxpayer money intended for children’s educations. Readers may scowl that this type of gross incompetence and irresponsibility can only happen in Orange County. But I suggest you might want to look into any financial shenanigans happening in your county.

Cross-posted from Chriss Street's blog www.chrissstreetandcompany.com

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Reader Comments (5)

Didn't they do the same thing in 1991 when the OCIP went belly up.
April 16, 2012 | Unregistered CommenterCarey Hyson
The County of Orange filed the largest municipal bankruptcy in American history on December 5, 1994 after an interview I did with Alan Ableson at Barron's. The amazing similarity is that in 1994, the Board of Supervisors increased spending in a County election year, while property and sales taxes were falling. The OC is doing the same thingh again.
April 16, 2012 | Unregistered CommenterChriss Street
When put into perspective one now understands the many attacks on Chriss Street. This is an election year and the unions have been quick to demand their county 'representatives' pony up. This is shake down and fleecing of Orange County tax payers with the end result being financial collapse not just for OC but for additional counties in California who are equally as strapped for cash. It appears there will be a domino effect that will have world wide financial implications. All this just in time for the November elections. Do you think there maybe a relationship? Many have looked back at the 1994 bankruptcy as a 'Cloward & Piven' strategy move which proved effective in the 1996 election when Democrats were swept into power in California's Assembly and Senate. Since 1996 California has never been a two party state with the Democrats dominating all aspects of state government. Given the Democrats performance since 1996 one has to wonder what California will look like following the next OC bankruptcy filing. Richard Cloward (now deceased & husband to Piven) and Francis Fox Piven must be very proud that their second 'strategic' move will redistribute more of Orange County and California wealth.
April 17, 2012 | Unregistered CommenterPaul Preston
To see a detailed, dismal, up-to-date fact sheet comparing CA with the other states (with substantiating URL's), go to:

WARNING: Don't read and drive. No road rage, please.
April 19, 2012 | Unregistered CommenterRichard Rider
Thanks Richard, pretty gruesome conditions we have here in CA...
April 19, 2012 | Registered CommenterWolf Richter

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