ROBERT CITRON : County’s Money Juggler Tells Why He Expects Recession

Robert Citron, Orange County’s treasurer-tax collector for the past 27 years, arrives for work no later than 7:30 each morning and immediately turns his attention to 10 color-coded telephones lining his office wall.

The phones are linked directly to bond dealers at major West Coast banks and Wall Street brokerage houses. Operating much like a corporate treasurer, Citron shops for the highest interest rates he can find for the county’s deposits.

Citron’s job is to make county tax dollars work as hard as possible. Before the money is spent on schools, roads and jails, Citron deposits it in banks and savings & loans all over the country, sometimes for fewer than 24 hours at a time.

Last week, for instance, Citron netted $122,700 for the county by investing $640 million in a single overnight transaction. From July, 1986, to June, 1987, Citron earned $161 million on the county funds he handled.

Although most of the money is invested in relatively mundane securities , such as U.S. government notes, Citron boosts the county’s earnings with sophisticated overnight investments known as repos and reverse repos.

These investments allow Citron to use government notes as collateral for overnight loans from banks. The cash from the loans is reinvested in other securities at higher interest rates, providing more earnings to the county.

Although Citron spends his days dealing with financiers, he hardly looks the part. Decked out in turquoise jewelry and an inexpensive suit, Citron is anything but pin-striped and buttoned-down.

In fact, in an area dominated by conservative Republicans, it’s a bit ironic that the county’s financial wizard is a dedicated Democrat. Last year, for instance, Citron lambasted the Sheriff’s Department for spending money on helicopters at a time when the county was cutting back on social services.

He is equally outspoken in his assessment of current economic conditions. Citron believes that the nation is headed into a recession and that the stock market will continue to head south.

Citron discussed his investment strategy and economic expectations in a recent interview with Times Staff Writer Eric Schine.

Q: What is your outlook for the economy?

A: The current business cycle has already extended far beyond the average length of three to four years, to over five years. And there’s little doubt that a correction is rapidly approaching in the form of a recession.

Q: How about inflation?

A: Careful consideration of all the facts shows that it has steadily been creeping upward in ways that are not adequately reflected in the statistics used by economic forecasters. The large growth of the ‘80s was not based upon growth of industry and business, but on non-growth factors such as manipulation of the money supply and excess funds in certain segments of the economy.

Q: Are you talking about deficit spending?

A: Deficit spending, yes, certainly . . . and the infusion by the federal government of billions of dollars of funds into the financial system. Continental (Illinois) Bank being the first one. A lot of smaller banks and institutions followed. The issuing of securities by the the Federal Savings & Loan Insurance Corp. to finance the bad debts of a group of savings and loans, and so on.

Q: When can we expect to see a recession?

A: Events in the summer months of 1988 will indicate the beginning of a recessionary period. Chief among these will be attempts by the Federal Reserve . . . to adjust key factors in the economy such as the money supply and interest rates. The justification for these (attempts) will be to forestall a recession. However, the net result will be just the opposite, in my opinion.

Q: Just how bad is the deficit in your opinion?

A: When Ronald Reagan took office in January 1981, there was $934 billion in debt through the last term of President Jimmy Carter. In 3 1/2 years, that debt grew by $649 billion. Now, if you added up all the deficits that the government incurred in the Civil War, the Spanish-American War, the First World War, the Second World War, the Korean War, and the Vietnam conflict . . . including all the deficit spending from the so-called big spenders of the Democrat administrations . . . (all that) would not equal $649 billion.

Q: How does the state of the economy affect your job?

A: I mainly manage short-term funds. I manage funds for 173 different and separate county taxing agencies, of which the County of Orange general fund is just one. I also manage funds for 30 separate school districts and four separate community college districts . . . water districts, sanitation districts, and the transit district. Only about 17% of the funds that I manage are for the county general fund.

Q: What is the total dollar amount of the funds under your management?

A: We’re managing an average $2.5 billion dollars.

Q: How are those funds invested?

A: I buy U.S. Treasuries (bills and notes), U.S. agencies (such as Federal Home Loan Board notes), certificates of deposit, commercial paper, banker’s acceptances and medium-term notes, as well as time deposits with banks and S & Ls.

Q: Do you invest in the stock market?

A: County and city treasurers by state law are not permitted to invest in the equity markets or corporate bonds.

Q: So your money managing decisions revolve around the kinds of notes or bonds you’re willing to buy?

A: Yes. I have around $900 million in U.S. government securities, from two to five years in maturity.

Q: Do you actively trade, based on fluctuations in interest rates?

A: I’m not a trader. . . . I buy and hold, and I do matched reverse repurchase agreements. . . . It’s not trading, because the spread is always locked in.

Q: How much money has this technique earned you?

A: Through the first seven months of the fiscal year, we have earned $4.5 million on reverse repos alone.

Q: Is this unique, or do other counties use this technique as well?

A: L.A. County used to do it, but they had a change of treasurers there a few years ago, and they got very conservative and stopped. But other large counties do it: San Diego, Ventura. I think Santa Clara does it.

Q: How do you keep track of your funds?

A: Back in 1974, I thought up the idea of a computer software system that could keep track of all the money coming in and going out of the county treasury. Then I found a person who knew what I was talking about and designed it.

The program is called Money Max, and it’s now used in California, New York, New Jersey, Florida and a bunch of other states. It’s also in some corporate facilities with some variation.

A: What does this program do for you?

Q: It predicts the amount of receipts within 2% accuracy, and the amount of disbursements within 4% accuracy, from 173 agencies. . . . It is no different than your corner independent bank. I’ve got money coming in, and I’ve got money going out. . . . With accurate record keeping, we know how long that money is going to be with us and how long we can lend it out for and how to protect ourselves so we’ll always have money to pay the bills. That’s what the system does.

Q: How much has this program helped you improve your investment performance?

A: From July 1, 1986, to June 30, 1987, we earned 8% on all the funds. If we hadn’t been doing reverse repos, our return would have been only about 7.2%.

Q: How does that 8% return compare to other counties?

A: The state of California has a local agency investment fund in which any local agency, county, city or special district can invest money. . . . (The fund) had an average yield of 7.4% for the fiscal year.

Q: What’s your outlook for interest rates?

A: We are in a volatile market, so we’ll have strong swings. But on average, I think rates will go up.

Q: Why?

A: Because of inflationary pressures. The Fed will react by doing more tightening than loosening.

Q: So we are going to see a recession with rising interest rates?

A: Yes.

Q: Is the Fed going to succeed in dampening inflation with this restrictive monetary policy?

A: Yes, in the summertime.

Q: Financing--raising money for the county--is another important aspect of your job. How does this work?

A: I’m on a four-member committee that recommends to the Board of Supervisors who should get the county’s business as well as the timing of coming to market (with debt securities), based on interest rate movement.

Q: You mean what underwriter you should use?

A: Underwriters and bond counselors.

Q: How much money do you expect to raise this year?

A: That’s hard to say, but I can say we will issue in the next five years 1,000% more debt than we have issued in the last 50 years.

Q: And why is that?

A: This county has, I think, as of Jan. 1, only $12 million of indebtedness. We’ve always been conservative and have paid as we go along out of our cash flow. But the county has unfortunately, because of budgetary constraints, put off capital improvements, and we have now been forced to make them. Those include jails, parking facilities and roads.

Q: And there isn’t enough tax revenue to pay for all this?

A: No. Revenues have not been anywhere sufficient to provide the money that that we need. Property tax revenues to the county government and every other taxing district amounts to only 27% of our total revenues. So we’re dependent on monies that the state and, particularly, the federal government, provide for welfare and health care.

Q: So now the county needs a lot of bond financing. Will this extra borrowing hurt the county’s credit rating?

A: The credit rating is good, although I’m told it could go down. But you have to remember that we have a limited amount of revenues for the amount of needs that we have. . . . A good credit rating means you get a lower rate when you issue the bond, but you’ve still got to pay back the principal and interest. And a jail, for instance, is not a revenue-producing facility.

Q: Is going deeper into debt a dangerous trend for the county?

A: It’s a trend that’s inevitable. As far as comparing our bonded indebtedness to other like communities, we’re nowhere near (their level of debt). L.A. County is of course a much larger county, but still they have a very huge bond indebtedness. So it’s a matter of efficiently managing that debt and trying to do what you can to provide the necessary facilities that the public or the law demands.

Q: What is the county’s credit rating now?

A: Double-A. That’s considered very high for a county. The highest is Triple-A.

Q: If the credit rating is lowered, that will lead to higher interest expenses on top of greater indebtedness. That means the county will be poorer down the road, right?

A: Yes. But even more important than that is setting our priorities. You know, last year there was a hue and cry by the county that they (county officials) were going to have to lay off 327 people and couldn’t give salary increases. At the same time, the county sheriff wanted to buy a new helicopter, which would have cost something like $1.5 million a year just in maintenance.

But if the county is broke and you have to lay off people, that doesn’t seem like a prudent thing to spend money on.

As it turned out, the county never did lay off anyone, and workers ended up getting a 4% salary increase . . . because the county used a special reserve, which I also don’t think is very prudent. . . . If a catastrophe should happen in this county--an earthquake, floods, that sort of thing--the county would not have sufficient reserves for those kinds of emergencies. And that’s the danger that we’re getting into.

Q: You have worked at this job for 27 years, so you have a unique perspective on the county’s economy. How has the county changed?

A: The average family income 10 years ago was around $27,000. And now it’s one of the highest in the nation at $47,000. Unemployment, which is now 3.5%, is like full employment. And even during the ‘82-’83 recession, when the United States was 8%-plus and the state itself was 7%-plus, we were down at about 5%.

Q: And yet, even with this rapid economic growth in the economy, the county government itself is getting more and more into debt?

A: Yes, because even though the county will continue to prosper . . . there will be a lack of revenues.

Q: After 27 years on the job, do you ever consider stepping down?

A: No. I plan to stay on as long as my health holds up and the public keeps electing me. I enjoy this office and will run again in 1990.