Citron’s Track Record Falls Short of Reputation : Orange County: Earnings were more modest than believed in comparison to other funds over the years.

Despite a wall full of accolades and an entrenched reputation as a financial wizard, former Orange County Treasurer-Tax Collector Robert L. Citron’s investment record is more modest than his legend suggests, records show.

And although Citron supporters have intimated that he probably earned an extra $2.02 billion for the county during his 22-year tenure--an amount that would equal the portfolio’s spectacular loss this year--an analysis of his track record shows that at best, he netted the county’s 187 investors less than half of that sum.

Since the pool’s collapse plunged the county into bankruptcy, many public officials have tried to justify their entering the county’s riskier investment pool--as opposed to a more conservatively run state pool--by citing Citron’s reputation as a savvy money manager who had outdone his peers for two decades. But the revelation that his reputation may have been exaggerated raises questions about whether the substantial risks were worth the sometimes handsome, but often modest gains.

A review of county financial documents reveals:

* During the past 22 years, Citron significantly outperformed the state’s Local Agency Investment Fund eight times. Five times the state pool posted a better return. In the other nine years, Citron’s pool was better, but the difference was less than 1%.

* Citron earned the now-bankrupt county fund more than $3.6 billion in interest from July, 1972, to June, 1994. If the money had been placed in the safer state-operated investment pool--which bought less-volatile securities--it would have earned about $2.9 billion over that period. Even adjusted for inflation, the extra earnings equal less than half of the recent $2.02-billion plunge.

* The amount of public money poured into the county’s ill-fated pool more than doubled, from $2.9 billion to $7.2 billion, between 1991 and 1994, the period when Citron enjoyed some of the best above-market returns, but also when he took his greatest risks. This suggests that the attraction to the pool may have been more mercenary than officials have admitted.

* Numerous times, Citron told investors--in his annual reports--exactly what he was doing and why. In his 1990-91 annual statement, he reserved nearly a full page to detail how one of his complex transactions, involving the purchase of $90 million in mortgage notes, had worked. This underscores recent assertions that Citron--contrary to the position taken by many of his investors--did inform pool members of his riskier-than-average tactics.

*

Citron and his attorney, David Wiechert, reviewed The Times’ analysis, but the ex-treasurer, who resigned days before the county filed for bankruptcy on Dec. 6, had no comment, his lawyer said. Wiechert sought to emphasize Citron’s rates of return over the past three years, saying the numbers spoke “for themselves.”

“One’s wizardry is generally viewed not when it’s easy to make money, but when it’s hard to make money,” Wiechert said, noting that the county pool experienced some of its best above-market returns between 1991 and early 1994 during a downward trend in interest rates established by the Federal Reserve Board.

“You look at (1993-94) and I think the performance is phenomenal. Bob posted excellent numbers, especially when interest rates were low.”

Reaction to The Times’ analysis by investors in the county pool and other public officials ranged from shock to assertions that it was meaningless.

“It looks as though he might have been a legend in his own mind,” Supervisor Roger R. Stanton said after reviewing Citron’s record. “Clearly, the results didn’t justify the means, a few good years here and there,” he said. Stanton said people were “lured into (the investment pool) by a false mystique.”

“It surprises me,” said Cynthia L. Pendleton, treasurer for the city of San Juan Capistrano. The tiny community is one of only two cities in the county that elected not to participate in the treasurer’s pool because city officials believed it was too risky. “I’m going to have to go back and look at what we were investing in 1986, ‘87, ’88 and ‘89, because we were doing better than Bob Citron.”

Through the years, Citron has received numerous local, state and national awards for his investment prowess. Before the county pool’s unraveling, investment brokers from San Francisco to Syracuse lauded Citron’s knack for negotiating the many land mine-laden paths along Wall Street. When his opponent in June’s election, John M.W. Moorlach, accused Citron of taking undue risks with billions of public dollars, Citron’s peers up and down the state defended him with praise.

Yet, a comparison of Citron’s overall record to other public investment pools raises questions about whether investors may have lent Citron’s track record too much weight in deciding whether to participate in the county’s riskier pool.

Though the state investment pool was restricted to using shorter-term, lower-yielding securities, it had a 22-year average rate of return of 8.2%, just 1.2% less than Orange County’s 22-year average.

During the past 12 years--three of which were Citron’s best--the city of Sacramento’s investment pool had yields higher than Orange County’s half the time. Sacramento’s 12-year average yield was 9.295%, while Orange County’s was only slightly better at 9.31%.

Over the past 21 years, the city of Riverside did better than Orange County on its investment yield six times, and it came within 1% of Orange County’s yield seven more times. Riverside’s average yield during the two decades: 9.35%--only 0.07% less than Orange County’s.

Sacramento Treasurer Tom Friery said his investment pool is not leveraged and contains no derivatives--the complex financial instruments that are credited with contributing to the stunning downfall of Citron’s $7.4-billion pool. Yet, Friery’s average rate of return over the past 12 years was nearly identical to Citron’s.

“People think that what Bob does is normal operating procedures in government funds. It’s not. It’s not done,” Friery said. “Rate of return is the second issue. The first issue is making sure you have liquidity, and it appears to have been totally overlooked in that (Orange County) portfolio. I think we have very good numbers, and we don’t have to sell any investments, and all our cash needs can be met.”

In Riverside, Treasurer Barbara Steckel suggested that investors in Orange County’s pool may have been influenced by Citron’s recent returns since 1991, which, though markedly better than average, came as a result of what were, in effect, bets on the direction of interest rates.

Of the estimated $714 million--approximately $850 million in today’s dollars--in interest that Citron reaped above what the state pool would have netted the county between 1972 and 1994, more than $500 million came in the past three years through methods that eventually led to the county’s financial undoing.

“I don’t think anybody was going back and looking over the long run,” Steckel said. “They had to be looking at what his current returns were.”

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If Citron enjoyed a reputation as one of Wall Street’s gurus, it is an image he helped cultivate through the years, records show.

His annual reports to the Board of Supervisors and investors are peppered with self-congratulatory assertions masked in humble-sounding language.

From his 1978-79 annual statement: “Although it is true that I personally invested 99% of the ($15,141,000,000) cash flow . . . and even though I get to work every morning around 7 a.m., and many times because of market conditions place investments from my home beginning at 6 a.m., I would still not be able to apportion the time to do these investments plus my many myriad of functions . . . without the assistance of the true professionals in my department.”

Year after year, Citron consistently called his investment strategies “aggressive” and his yield rates “exceptional.” And he was candid about the secret to the successes he enjoyed: “Our very high investment rate,” he wrote in 1986, “was obtained by using investment strategies not used by the majority of other investment funds.”

In his 1982-83 annual statement, Citron said: “We believe the average interest earning rate is again one of the highest, if not the highest earning rate in the nation.”

That year, Orange County’s fund had a 12.79% rate of return; Sacramento’s was 14.37%.

Supervisor William G. Steiner acknowledged that Citron’s performance in the early 1990s may have given many pool participants a false sense of security.

“When he produced extra interest, it was at a time when the county and others were under significant financial pressures because of the recession. I think there was a tendency to remember the last five years as opposed to the last 15,” Steiner said.

Still, other officials who invested with Citron contended that his overall history was irrelevant.

Irvine City Manager Paul O. Brady said he never investigated Citron’s past yield rates, even in 1993 and 1994 when his city took the unusual step of borrowing $60 million to buy taxable notes and place the proceeds into the pool.

“I didn’t do it, it’s not my role to do it. Whether my finance people did it, I’m not aware of it,” Brady said. “You look at what is current, not what’s in the past. You look at what the market rates are and where you get the most bang for the buck.”

One place that had consistently and substantially lower yields than Citron had been able to produce was neighboring Los Angeles County.

The county’s treasurer-tax collector, Larry Montielh, agreed that local governments have been under growing fiscal pressure in recent years, making Citron’s high yields attractive to those agencies shopping investment pools. “Memories would be short,” he said.

Montielh said he was “getting pressure from people in our investment pool about why our rates were so low.” But “our objective,” he said, “was not to enhance yield, but to protect the security and be liquid.”

Citron’s official investment policy listed the same priorities.

Orange County’s Bankruptcy

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