Supervisors OKd Citron Requests Without Debate

Even after former Treasurer Robert L. Citron’s risky investments had been publicly questioned in a bitter election campaign last spring, the Orange County Board of Supervisors rubber-stamped his requests for more than $1.3 billion in borrowings from June to September.

All of Citron’s requests were granted by the supervisors, without discussion or debate, on a single motion to approve everything appearing on the board’s “consent calendar,” which lumps together things such as grant applications and minor equipment purchases.

A request on June 14 for authority to issue $600 million in taxable notes was approved, even though Citron did not provide any detailed explanation of how the money would be used, records show.

On Sept. 20, the five-member board also approved an unusual and risky agreement that allowed Citron to issue $320 million in pension obligation bonds backed solely by the county. A portion of the issue, $110 million worth, allowed bondholders to demand redemption of the bonds for cash on just one week’s notice.

These bonds, known as “seven-day floaters,” left the county vulnerable to rising interest rates, as well as to the whims of nervous bondholders. The county defaulted on the bonds Dec. 8 after investors, unnerved by the first signs of the county’s financial troubles, demanded their money back.

On the advice of his attorney, Citron has declined to comment on the bankruptcy controversy after making a few statements early last week.

Federal agents are scrutinizing the bond deals, including the June $600-million issue, to see if the investment fund’s risks were properly disclosed to investors.

A high-ranking county official said Citron routinely received approval from county supervisors to sell huge sums of notes without providing any explanation of how they would be used.

“I think that’s typical of how business was done,” said the official, who spoke on the condition of anonymity.

The official said the $600 million was part of Citron’s steadfast bet that interest rates would drop. It was a speculative “arbitrage deal,” the official said, adding, “That money wasn’t for anything. The purpose was for the money to be invested to earn interest.”

Wednesday, three of the five supervisors said that without referring to their records, they could not recall approving any of Citron’s requests to issue the more than $1.3 billion in notes.

Supervisor William G. Steiner said the consent calendar sometimes contained 60 or 70 items. But, he said, the bond issuances in question were approved “based on the recommendation of the treasurer. I think a lot of people relied on the recommendation of the treasurer--to everyone’s misfortune.”

Supervisor Roger Stanton said that in 1992, after the supervisors unknowingly approved a $37.7-million contract, then-board Chairwoman Harriett Wieder directed that all items involving more than $500,000 be put on the agenda for discussion. Wieder could not be reached for comment.

If bond requests totaling $1.3 billion were put on the consent calendar, Stanton said, “it would be a stimulus for rage.”

Supervisor Gaddi H. Vasquez said he could not remember any discussion on the specific bond requests, but he said “as a matter of general process we review these things.” He said he would look for a recommendation of the county administrative officer, Ernie Schnieder, indicating that it was in compliance with budgets and policy.

“I never picked up from the CAO’s office that there was anything to be concerned with,” Vasquez said.

But a growing number of critics, such as defeated treasurer candidate John M. W. Moorlach, say the campaign controversy over Citron’s investments certainly should have caused the supervisors to question the flood of bond requests.

“It’s disingenuous of them to say they didn’t know,” said Moorlach, a Costa Mesa accountant. “If you are going to say ‘We rely on staff,’ then you better get better staff. . . . It was like moving furniture around on the Titanic (last summer).”

Argued Fullerton accountant Snow Hume, after poring over the 1994 agendas of the Board of Supervisors: “They may have been given reassurances that things were OK. They may have said they didn’t understand the issues. But it seems to me if they had any questions at all, they should have yanked it off the consent calendar.”

Dave Kiff, an executive assistant to Supervisor Thomas Riley, said that while staff members review consent calender items for each supervisor, the board relies heavily on the advice of the county administrator’s office or the county department heads in approving agenda items.

The county administrator’s office decides whether an item belongs on the consent calendar. “If it’s on the consent calendar, it generally means the CAO did not believe it to be significant for discussion,” Kiff said.

But Kiff said that does not absolve the supervisors of failure to question Citron’s requests to sell more than a billion dollars in notes during four months last summer.

The supervisors had an even earlier warning that they should be keeping a closer eye on Citron.

More than a year before the county’s bankruptcy, county Auditor Steve L. Lewis warned supervisors in an internal audit, kept off of the board’s agenda, that Citron was making “risky and unusual” transactions without consulting a committee charged with oversight and violating government codes to maximize returns.

None of the supervisors said they remember receiving the Aug. 5, 1993, audit, although Supervisors Steiner and Riley unearthed it in their offices after being questioned about it last week.

Even if they had not seen the audit, the supervisors would have been hard-pressed to ignore the hubbub surrounding Citron’s investment strategies during the election campaign last spring.

In his Feb. 7 speech announcing his candidacy and in dozens of campaign appearances that followed, Moorlach focused on Citron’s continual downplaying of ever-rising interest rates, which jumped four times during the course of the campaign.

Moorlach also criticized Citron’s devotion to a controversial investment strategy, using investors’ holdings as collateral to get short-term loans at what were then low interest rates, and then buying long-term bonds paying a higher rate. As long as Citron could renew the short-term loans at low interest rates, the fund’s investors realized a profit. But when the Federal Reserve Board hiked interest rates, the fund began losing money.

Rising interest rates forced the pool to post $215 million in added collateral during April and May alone.

After Moorlach and several brokers reviewed the financial records for the fund in May, Moorlach wrote a lengthy, detailed letter to Riley, with copies to all the supervisors.

Moorlach said he was reacting to a quote by Riley in The Times that said, “I don’t how in the hell (Citron) does it, but he makes us all look good.”

In his letter to Riley, Moorlach said the supervisor’s quote “displays an ignorance that prompts me to write so that you may, in fact, understand what your current treasurer is doing. Especially since he is doing it with your tacit approval.”

Moorlach pointed out that the pool already had declined in value from $7.5 billion to $6.3 billion and Citron continued to bet on stable or falling interest rates.

“The pool has borrowed short-term and loaned long-term, analogous to the savings and loan fiasco,” Moorlach wrote.

A week after the supervisors received Moorlach’s letter, they approved--without discussion or debate--the first of Citron’s requests to sell notes.

On June 7, the supervisors approved Citron’s request to issue $250 million in taxable notes “to be used for any purposes the county is authorized to use monies” and $200 million in tax and revenue anticipation notes. Both requests were on the consent calendar.

A week later, again in a consent calendar item, supervisors approved Citron’s request to borrow $600 million for unspecified purposes by selling taxable notes.

On July 19, the supervisors approved Citron’s revamping of part of the June 7 deal, approving $111 million in taxable notes and $70 million in tax-exempt notes.

A month later, on Sept. 20, again without discussion, the supervisors approved Citron’s request to issue $320 million in pension obligation bonds, partly issued in variable rate bonds. The Bond Buyer, a trade newspaper, said the following day that Orange County was the first to issue pension obligation bonds using a variable-rate structure.

A few months later, the $110 million in variable rate bonds was at the core of the county’s cash flow crisis.

In October, the supervisors accepted without discussion Citron’s annual report, in which he downplayed the pool’s “paper losses” and noted that his office “continues to use reverse repurchase agreements as part of our investment strategy.”

Citron said he did not want to be “a Cassandra regarding the economy,” and said he fit President Harry S. Truman’s description of a successful leader--one who makes “correct decisions 80% of the time.”

“This probability of error keeps me diligent to see that any miscalculations of economic conditions do not have an overly negative effect on our investors,” he wrote.

Times staff writers H.G. Reza and Anna Cekola contributed to this story.

* BANKRUPTCY COVERAGE: Related Orange County stories inside. A3, A24-A25, D3

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Gaps in Supervisors’ Oversight

Even as interest rates were rising and questions were raised about Treasurer-Tax Collector Robert L. Citron’s performance, county supervisors were giving him the go-ahead on investments.

* Aug. 5, 1993: Auditor-Controller Steve E. Lewis warns supervisors that Citron is running his office without adequate controls and--to maximize returns on the county investment pool--is violating government codes designed to safeguard investments.

* Feb. 4, 1994: Federal Reserve Board, expressing concerns about inflation, raises federal funds rate (the rate banks charge each other on overnight loans) from 3% to 3.25%.

* Feb. 7: Accountant John M.W. Moorlach announces he will run against Citron for treasurer-tax collector and complains of problems with the county investment pool.

* March 22: Federal funds rate is increased from 3.25% to 3.5%.

* April 18: Federal funds rate is increased to 3.75%.

* May 17: Federal funds rate is increased to 4.25%

* May 31: After reviewing investment pool records he had long fought to obtain, Moorlach sends a letter to all supervisors detailing problems with the pool, says its value has already declined from $7.5 billion to $6.3 billion and points out that Citron is betting on stable or falling interest rates.

* June 7: Without discussion or debate, supervisors approve Citron’s request to issue $250 million in taxable notes “to be used for any purposes the county is authorized to use monies” and $200 million in tax and revenue anticipation notes. Both requests were on the “consent calendar,” meaning discussion was not deemed necessary.

* June 14: In another consent calendar item, supervisors approve Citron’s request to borrow $600 million for unspecified purposes by selling taxable notes.

* July 19: Again in a consent calendar item, supervisors approve Citron’s revamping of part of the June 7 deal, approving $111 million in taxable notes and $70 million in tax-exempt notes. Citron estimates that “based on current cash flow projections, the county needs to borrow an additional $64 million from Aug. 1, 1994, to July, 1995.”

* Aug. 16: Federal funds rate is increased for the fifth time since February, to 4.75%.

* Sept. 20: Without discussion, supervisors approve a Citron request to issue $320 million in pension obligation bonds that holders could redeem on just one week’s notice, a dangerous feature during periods of rising interest rates. A portion of the bond issue, $110 million, also has a feature that allows interest rate paid by the county to change weekly, exposing it to rising rates. According to the Bond Buyer publication, “this is believed to be the first pension obligation bond issue to use a variable-rate structure.”

* Oct. 18: Supervisors accept without discussion Citron’s annual report, which notes that he “continues to use reverse repurchase agreements as part of our investment strategy.” Reverse repos add to the county’s exposure to rising interest rates. Citron downplays “paper losses” the county has taken.

* Nov. 15: Federal funds rate is increased from 4.75% to 5.5%, the largest increase of the year.

* Dec. 6: Four days after disclosing that its investment pool has suffered at least $1.5 billion in losses, county files bankruptcy.

Source: Times reports