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 gapping cash-flow deficit. To stay afloat the county resorted to making $518 million illiquid and unsecured interest rate wagers funded mostly from the payroll and savings account funds from the local schools and other government agencies under their control. 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. The 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, since 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 million of property taxes belonging to local schools to rescue the county’s 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. However, the red cautions that the county’s “Fund Balance Available”, referred to as check-book-cash, available to pay the county’s $65 million bi-weekly payroll will to sink to $23.6 million by June. As the Assistant Auditor-Controller warned: “Any future use of reserves could potentially worsen today’s difficult cash situation.”
Two days later, he retired.
Orange County acknowledged its scheme to borrow $320 million from the county treasury at low rates to pre-pay some of their $3.7 billion unfunded pension liabilities in a Bloomberg interview on January 27, 2011. John 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 you?” But Moorlach had inside information that the county only had half the total operating “cash” and only 13% of the liquid cash necessary for the county to secure the transaction. He knew the county would need to leverage the local schools’ and governmental agencies’ cash required by law to be deposited into the county treasury. The Treasurer knew the safety, liquidity, and conflict of interest risks of borrowing the schools’ money. Nevertheless, the county Treasurer bought all $287,872,000 of Orange County’s 2011 unsecured Pension Obligation Bonds at a bargain interest rate to the county of only 1.82%. According to SEC filings, Orange County will pocket $15.1 interest rate profit off this deal.
On August 28, 2011, John Moorlach warned in an editorial in Orange County Register that Orange County was insolvent: “The net investment in capital assets doesn’t even cover this debt”. Regardless of the bankruptcy risks, Orange County sold another $229,880,000 of Pension Obligation Bonds at an even lower .85% interest on January 18, 2012. The prospectus for this latest deal conveniently makes no mention of Chairman John Moorlach’s concerns about insolvency or bankruptcy. Neither does the prospectus make any financial disclosure that the Assistant Auditor-Controller was warning that “future use of reserves could potentially worsen today’s difficult cash situation.” In spite of being an insider with full knowledge of the county’s evaporating liquidity, the county Treasurer bought another $72 million of county bonds.
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 education. 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 for any financial shenanigans that might be happening in your county.
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