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In another abrupt surprise, the highly respected Chairman of the Orange County’s Treasury Oversight Committee resigned on Monday, April 16, 2012. It seems he was being asked to read into the public record at a meeting of the Orange County Board of Supervisors, a letter written by county Treasurer, Shari Freidenrich stating that she had complied with the county’s rigid Investment Policy Statement mandates. The local community was already reeling from discovery that the county secretly borrowed over a half a billion dollars from local schools and others at a predatory yield to fund illiquid and highly conflicted interest rate wagers. In an ongoing display of county’s dangerous abandonment of transparency, Orange County continues to conceal the debt issuance and refuses to disclose the resignation of the Treasury Oversight Committee Chairman.
John Moorlach as Chairman of the Board of Supervisors of Orange County likes to say: “Facts are stubborn things.” That statement has come back to haunt the county regarding securities disclosure laws. In a September 7, 2011 newspaper interview he stated: “The County is not going out to borrow from Wall Street any time soon, so don’t worry about that canard.” At the time, Moorlach knew that statement was materially false and misleading. Sources confirm that he had been actively involved since 2010 in preparations to issue large amounts of bonds with Wall Street underwriter Morgan Stanley. As Vice Chairman, he had a leadership role in the county’s surreptitious issuance of $276 million worth of “TAXABLE PENSION OBLIGATION BONDS, 2011 SERIES A” on March 15, 2011. Shortly after his public representations that the county would not “borrow from Wall Street anytime soon”, John Moorlach as Chairman of the Board of Supervisors led the county’s sale of another issue of $230 million worth of “TAXABLE PENSION OBLIGATION BONDS, 2012 SERIES A” on January 10, 2012.
Despite revelations from last week’s report exposing the stubborn fact that Orange County covertly borrowed $518 million to help fund a $145.8 million increase in county spending, the Orange County “Finance and Budget” website continues to conceal the new county borrowings:
Source: County of Orange Finance and Budget Website
In an effort to distract further investigation of Orange County’s shrinking liquidity, Chairman Moorlach announced that the Orange County was just awarded a AA+ credit rating by Fitch:
“I am very appreciative that Fitch Ratings has acknowledged Orange County with a strong credit rating. They were also very candid about our fiscal challenges. Although recent alarmist-type blogs about the County’s fiscal situation have been written based on inaccurate information, it is always nice when cooler heads step in and provide a professional opinion.”
Such a strong rating from a competent firm would ordinarily breed confidence; but the county never disclosed to Fitch the internal cash-flow projection document obtained last week through a California Public Records Act. The memo warns that Orange County’s will only have $23.6 million in check-book-cash by the end of June to cover their $65 million bi-weekly payroll. In fact, Fitch did not rate the 2011 and 2012 pension bonds. But they did rate the $54.7 million of Pension Obligation Bonds issued by infamous Orange County Treasurer Bob Citron to fund his leveraged investment strategy. When Citron ran out of liquidity to make payroll, the pyramid fund he managed collapsed and Orange County filed the largest municipal bankruptcy in American history. There is nothing illegal or unethical about selling pension obligation bonds if the borrower has the liquidity on hand to make payroll and fully discloses its financial condition. But Orange County appears to again be following Bob Citron’s dangerous playbook of borrowing money to make leveraged investments.
Orange County is the expert in Securities & Exchange Commission (SEC) requirements for full transparency when issuing bonds to make speculative investments. After the collapse of Orange County’s investment fund in 1994 caused a $1.7 billion loss and forced the county into bankruptcy, the SEC issued enforcement actions against Orange County, its bond underwriter, financial adviser, legal counsel following the bankruptcy. The SEC also issued a Section 21(a) investigative report which found the Orange County Board of Supervisors “failed to assure fair and accurate disclosure under federal securities laws.”
The abrupt resignation of the Chairman of the Treasury Oversight Committee follows the abrupt exits of the Orange County Auditor-Controller and Assistant Auditor-Controller. This may just be a coincidence or it may indicate the Treasurer violated the Investment Policy Statement and the Treasury may become illiquid. The stubborn fact is Orange County concealed its borrowing and investment activities. Orange County’s irresponsible risk taking activity may have been technically legal, but we have all learned that a cover-up by politicians is definitely illegal.
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