O.C. Treasurer Says Critics Peril County's Credit Rating

TIMES STAFF WRITER

Orange County Treasurer Robert L. Citron charged Thursday that his political opponents have embarked on a "dangerous" course to undermine the county's financial standing with an influential Wall Street credit rating service.

Citron said the political attack has been led by Chriss Street, a Newport Beach contributor to the treasurer's opponent in the upcoming election, financial planner John M. W. Moorlach. Street acknowledged that in several recent phone calls to Standard & Poors Ratings Group in New York, the Wall Street Journal and Forbes magazine, he has expressed concern about the safety and stability of the county's $7.5-billion portfolio, managed by Citron's office.

Citron's political opponents said they saw nothing wrong with the contacts.

But Citron said Street's allegations could damage the county's credit rating, which could in turn force 187 school districts, cities and other public agencies--all members of the county investment pool--to pay millions more in interest costs to borrow money in the future.

"It's like somebody passing on false information about a financial institution, causing a run on the bank," Citron said. "These kinds of people are dangerous."

Citron, facing the first opposition for his seat in 24 years, has been under intense attack from Moorlach in recent weeks over his investment strategies. His allegations in an interview Thursday marked his first major offensive in the increasingly bitter campaign.

His comments came one day after it was disclosed that the city of Tustin has pulled out its entire $4-million stake in the county's investment pool because of potentially risky investments. The city's move was coordinated in part by Tustin Councilman Jeffrey Thomas, a political ally of Moorlach who serves on his campaign finance committee.

Street, himself a former candidate for the county treasurer, confirmed Thursday that he has made at least half a dozen calls to Standard & Poors to discuss Citron's management of pool funds, specifically $50 million in bonds borrowed by the Newport-Mesa School District.

Moorlach said he talked with Street about his inquiries, adding that he believed Street acted out of concern for his own community and in support of the campaign against Citron.

"I believe there is some synergy there," Moorlach said.

Street, chairman of a local health care company that operates 10 hospitals around the country, said he fears that a risky investment strategy used by the county could endanger the bonds and leave the Newport-Mesa school district in default.

"If (Citron) would like to sue me for slander," Street said, "then tell him to come on down. But I'm looking at the possibility of my kids going to schools with no teachers. I'm concerned about the schools in my community. In the event of a default on these bonds, who takes the loss?"

The school district borrowed the bonds last year and gave them to the county pool to reinvest in hopes of earning a higher rate of return. Street said he told Standard & Poors of his fears about the county's use of an investment strategy called a "reverse repurchase agreement." He said the strategy could endanger the school funds during a time of rising interest rates and fluctuating stock markets.

Under the complex strategy, the investor typically borrows U.S. Treasury bonds against existing collateral and then sells them to invest in higher-yielding bonds. As long as the investor borrows at a lower rate than the return on the security in which it invests, the strategy remains profitable.

Citron said he has been using the tactic for at least 15 years without failure and promises Newport-Mesa that it will earn $1 million on its investment by June 15.

However, Street, who declined to comment about his discussions with reporters at the Wall Street Journal and Forbes magazine, said Citron's techniques should be the subject of greater scrutiny, especially during uncertain financial times.

"There's nothing worse than a gambler who goes to Vegas and wins the first time," Street said in reference to Citron. "The next time he's back with all the money."

Diane Brosen, of Standard & Poors' municipal finance department in New York, said she spoke with Street at least three times in the past two months but remains fully confident in the Orange County accounts.

Brosen said she had been in close touch with Orange County officials during the past few weeks, adding that the county's credit rating remains "very high and very strong" with Standard & Poors. Orange County maintains a AA credit rating, with AAA the highest mark.

"We have confidence in Mr. Citron," Brosen said. "We have confidence that the notes issued by Orange County will be paid in full."

While carrying some risk, reverse repurchase agreements are widely used as investment tools by managers of public funds, financial analysts said.

The treasurer's race has become a most unlikely venue for the recent string of political charges and countercharges exchanged so far this season. It is traditionally a low-profile office that attracts little or no attention at campaign time.

Citron, the 68-year-old treasurer, is the only Democrat holding elective office in county government, and he described the recent developments as part of a "grand political scheme" by local Republicans to discredit him.

The machinations, he maintained, included the city of Tustin's recent decision to withdraw about $4 million from the county investment pool.

City officials said they ordered the pullout, citing concerns for the county's use of reverse repurchase agreements as investment tools. Councilman Thomas, the Moorlach ally, played a role in the decision to withdraw, but Tustin Treasurer Ronald A. Nault said politics was not involved in the ultimate transfer of funds.

Nault said the city's decision was not meant as a comment on Citron's ability but only a reflection of the city's extremely conservative financial philosophy.

Nonetheless, Citron and Assistant Orange County Treasurer Matthew R. Raabe said they have spent much time recently answering questions about the county's portfolio from reporters, Wall Street firms and a range of government officials. Those questions, officials believe, have been prompted by charges from Moorlach's campaign.

"The only way they can win is to try to convince people that we are doing something wrong," Citron said. "Your credit rating is a reflection of your position in the marketplace. These are very dangerous attacks these guys are making. . . . The sky isn't falling."

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