Beleaguered Treasurer in Orange County Quits : Finances: Investment pool Robert Citron managed has lost $1.5 billion in value. Federal regulators study records.

By MARK PLATTE, MATT LAIT and SCOT J. PALTROW

Dec. 6, 1994 12 AM PT

TIMES STAFF WRITERS

As federal regulators pored over records of Orange County’s beleaguered $18.5-billion investment fund, county officials Monday announced the resignation of Treasurer-Tax Collector Robert L. Citron after 24 years in office.

Less than six months after celebrating his reelection, Citron quit amid the ongoing fallout from his disclosure last week that the investment pool he managed for the county and 180 other public agencies across the state had lost $1.5 billion in value this year.

“After much thought and soul-searching and with much regret, I have decided for the benefit of the County of Orange to resign my elected office,” Citron wrote to the county’s administrative officer Sunday.

By state law, Citron’s assistants in the treasurer’s and tax collector’s offices were named to the top posts in each department. In January, when Citron was to begin a new term, the county Board of Supervisors will make new appointments to both jobs.

“It’s a sad day, but Bob resigned in the best interests of the county,” said James Kenan, finance director of the Orange County Transportation Authority, the largest single investor in the investment pool. “From a financial market standpoint, I think he just wanted stability to return.”

Supervisors declined to discuss details of their deliberations after a two-hour, closed-door session, saying only that they would hold another closed session today to resume discussions about the financial crisis. In calling Monday’s meeting, they cited the possibility of the county being drawn into litigation over the losses as their reason for barring the public.

In other developments that came to light Monday:

* Officials disclosed that investigators from the federal Securities and Exchange Commission spent the weekend studying the county’s investment portfolio and Citron’s financial documents. SEC officials were said to be concerned over whether the fund was being adequately supervised and whether any payout of money from the pool would be equitably shared among its governmental investors.

Questions also were being raised about possible improper use of securities to collateralize the county’s borrowing. Citron’s office borrowed more than $12 billion in complex transactions designed to heighten the fund’s return if interest rates held firm or fell--the bet that boomeranged on the fund when rates began climbing early this year.

* The city of Irvine broke ranks with the county, announcing that it was withdrawing $25 million in retirement money from the fund and would sue if the county tried, as it has threatened, to withhold 20% to cover eventual losses. Irvine officials said they had decided in October to withdraw money in January, but news of the portfolio’s plunge prompted them to speed up their timetable.

“We decided it would be more prudent to take it out sooner because of what’s occurred than to wait 30 more days,” Irvine City Manager Paul O. Brady Jr. said.

* Prices of bonds issued by Orange County and some county agencies dropped about 10%, and few of the county’s bonds were sold Monday. “The whole Orange County market is off,” said Steve Kelleher, bond trader with Sutro & Co. in San Francisco. “Nobody is buying and nobody is selling. We’re just waiting, because this loss could just be the tip of the iceberg.”

* Moody’s Investors Service announced that it had placed Orange County’s investment pool under review. Standard & Poors, another major rating agency, already had put the county on a negative credit watch, a step before a possible downgrading of the county’s credit rating. Lower ratings would raise the cost of borrowing for the county’s government agencies.

Particularly at risk are four local districts that borrowed as much as half their annual budgets to put in the fund, in hopes of reaping badly needed revenue. Although they say the treasurer’s office lured them into the investment last year with a special guarantee of protection, the districts have never received the promised written guarantee for this year’s investment.

* County officials braced for the impact on county services and projects as a result of the fund debacle. Bert Scott, head of the county’s General Services Agency, said Monday that he was concerned that any ratings downgrade would affect the county’s ability to finance a $94-million law enforcement communications system that the supervisors were expected to approve this month.

With Citron gone, county officials and investors wondered Monday what to do next. Some officials privately expressed fears that only Citron truly understood his own financial game plan, which relied heavily on borrowing money short-term to invest in longer-term bonds, using investors’ funds as collateral.

While interest rates remained low, Citron’s plan worked extremely well, bringing in some of the highest yields paid by any governmental investment pool. But this year proved disastrous for the fund: Interest rates soared, undermining the value of the long-term bonds that Citron had used as collateral for the short-term borrowings and shrinking the worth of the notes he bought with the borrowed money.

Because Citron had leveraged $7.8 billion worth of securities from cities, school districts and other public agencies into a portfolio worth nearly three times that amount, his losses have been magnified. Securities firms that made many of the loans demanded that the county put up more cash as collateral, eating into the fund’s cash reserves, which declined from about $1.5 billion in August to less than $350 million in the last two weeks.

A report by Kemper Securities noted that investors in a $110-million bond issue sold by the county in September could demand their money back on seven days notice--a provision which, if exercised, could add to the county’s cash crunch.

Citron did not attend Monday’s meeting, spending most of the day at his Santa Ana home. Peering through the stained glass bordering his front door, he told a reporter that he had no comment.

Citron, whose campaign 15 years ago to win new leeway for county treasurers made possible the leveraged investments that made his fund the envy of its competitors and then caused his spectacular downfall--will draw a pension of $89,000 a year.

Some officials praised Citron for building a fund that for years outperformed other government investment pools, bringing needed revenues to participating agencies.

“We have made almost $1.4 million in the last 3 1/2 years by investing in the county pool over what we would have made with the state pool--$1.4 million,” said Laguna Beach City Manager Ken Frank, whose city has invested about $7 million in the fund.”

But others were less complimentary.

“My concern is that Bob has all the information and knows what is going on,” said Peer Swan, chairman of the Irvine Ranch Water District, which earlier threatened to withdraw the district’s remaining $300 million if it does not get a voice on a proposed financial advisory board that would oversee the pool’s operations.

“We must have access to that information,” he said, adding that “it is critical that Bob be on our side.” Experts have speculated that the county has little choice but to make more big investments in so-called derivatives to counterbalance its bad bet on interest rates--a step that could prove politically unpalatable, if financially necessary, under current circumstances.

Most city finance officials said they were sitting tight and refraining from withdrawals that they feared might cause a “run on the bank” and jeopardize their cities’ investments. They said they could not afford to take the 20% loss that county officials are projecting.

The officials added, however, that they did not intend to continue making deposits into the now-controversial fund.

Irvine on Monday became the first city to demand the return of a large chunk of its investment, announcing that it was withdrawing $25 million of the $209 million it has invested in the pool.

City Manager Brady said the City Council will meet Wednesday to consider taking legal action if the county insists on the 20% penalty it has said it will impose on withdrawals.

“We do not believe it is legal,” Brady said, adding that if the penalty were assessed “we may want to test that in court.”

Huntington Beach City Treasurer Dan Watson said the news of Citron’s resignation left him more concerned than before. “If I thought he had good solutions or potential solutions or (could) work his way out from under this, I’m not sure he would have offered his resignation.” The city has about $43 million invested in the county pool.

Watson said Huntington Beach was not withdrawing money, but would no longer have property tax revenues automatically deposited in the pool. The last such deposit was made Tuesday, he said.

The Securities and Exchange Commission, meanwhile, sent investigators to Citron’s offices in Santa Ana to sort through documents.

SEC investigators were said to have turned up some preliminary indications that securities may have been improperly used as collateral for the fund’s loans. While these securities were supposed to have been set aside as security for just one borrowing, they may have been used simultaneously, and illegally, to secure other loans. But the sources offered no details.

SEC investigators also were said to be exploring the possibility of other types of wrongdoing by the fund, although sources said no firm evidence had been uncovered so far. For example, the SEC was attempting to rule out that borrowed money may have been used to pay investors who made withdrawals from the fund, or that borrowed money may have been used to meet margin calls on derivatives in the funds’ portfolio.

The officials said that any of the investors in the fund might file a lawsuit, asking a court to put the fund into receivership. In a receivership, a court-appointed official would be assigned to supervise the fund and make decisions about how money is paid out and invested.

Citron’s political opponent in his June race for reelection--a certified public accountant who repeatedly had warned that the portfolio was highly leveraged--was astonished by the news of the longtime treasurer’s resignation.

“I didn’t anticipate he would do it,” said John M.W. Moorlach, of Costa Mesa. Citron won the June 7 election with 61.1% of the vote.

Moorlach, who has stayed in the center of the controversy in recent days and offered his assistance to the county on Monday, would not say whether he would seek the position himself. “I just have to trust the supervisors to do what’s best for the people and if they want to ask me, I would certainly consider it,” he said.

Platte and Lait reported from Orange County; Paltrow reported from New York. Times staff writers Jodi Wilgoren, Debora Vrana, John O’Dell, Mark Landsbaum, Chris Woodyard, Rebecca Trounson, Len Hall, H.G. Reza, Leslie Berkman, Susan Marquez Owen and Gebe Martinez and correspondents Russ Loar and Leslie Earnest contributed to this story.

* LOSS OF CONFIDENCE: Value of Orange County bonds sinks. D1