How Not to Manage Ratepayers’ Money : Santa Margarita Water District Showed Ineptitude in Choosing Bank, Depositing Funds

The latest tales of mismanagement from the Santa Margarita Water District lift the goings-on to a new level by raising questions of fiduciary responsibility. It’s one thing to spend money like a drunken sailor on lavish meals and limousines and claim them as perks. It’s quite another to put public ratepayers’ money at risk.

The new disclosures show that the district purchased a $2-million certificate of deposit in July of 1991 from a bank on the verge of insolvency. The maximum federal insurance for accounts is $100,000, so the district irresponsibly ran the risk of taking a $1.9-million loss if the bank closed.

Another disclosure that raises eyebrows is that the district kept an average daily bank balance of $1 million in accounts that paid no interest. That would seem to defy common sense. Almost anyone knows enough to shop around and see who will pay interest. Otherwise you might just as well stick money under the mattress. While federal and state laws generally bar banks from paying interest on business checking accounts, there are ways to earn more.

One is to ask a bank to invest a public agency’s money in overnight funds that provide a return. Orange County Treasurer-Tax Collector Robert L. Citron says that’s what his department does. He calls it “the usual way to manage money.” Obviously, not at the Santa Margarita Water District, which provides water and sewer service for 84,000 customers in South Orange County.

There are also questions about the district’s shifts of its money in less than three years from Eldorado Bank in Laguna Hills to Mission Viejo National Bank and then to First Los Angeles. What the banks had in common was that each employed a banker whose good service extended to the personal financial affairs of the district’s deputy general manager, Michael P. Lord. While the district had accounts at Mission Viejo National, Lord and his wife obtained a $50,000 loan from the bank. After the account moved, the Lords got a $45,000 line of credit from First Los Angeles. Lord and his boss, Walter W. (Bill) Knitz, were suspended with pay shortly after The Times disclosed their substantial perks and acceptance of thousands of dollars worth of gifts from contractors, bankers, developers and consultants.

Lord’s lawyer says his client has done nothing that cost the district a dime regarding the bank accounts he managed and did nothing illegal with those accounts. But surely there’s a higher standard, like not putting district finances in jeopardy and getting the best return for ratepayers.