Fund Diversion Report Imperils O.C. Leader’s Job : Finance: Supervisors today will discuss firing county administrator Ernie Schneider over allegations that $85 million was siphoned from investment pool.

In a closed session today, Orange County supervisors will discuss whether to fire the county’s top administrator, whose performance has come under increasing criticism in the wake of the nation’s largest municipal bankruptcy.

A high-ranking county official said the assessment of County Administrative Officer Ernie Schneider was precipitated by Saturday’s disclosure that $85 million in interest earnings may have been illegally diverted from the county’s beleaguered investment pool into an “economic uncertainty fund” supervised by Schneider.

“It was the straw that broke the camel’s back,” said the official, who spoke Sunday on the condition that his name not be used.

The appraisal of Schneider’s performance comes as the supervisors themselves are under a rising tide of criticism for their handling of the county’s finances. The closed session could be the first in a series of personnel hearings involving the county administrator’s office.

“We are reaching some important milestones,” said Supervisor Gaddi H. Vasquez, chairman of the five-member board, whose members are themselves under heavy public pressure to act firmly in response to the fiscal crisis.

Attorney Jennifer L. Keller, who represents Schneider, said Sunday that he is being unfairly blamed.

“I think it’s camouflage,” she said. “It is to make it appear as though responsibility has been assigned” to Schneider to monitor the treasurer’s office.

Discovery of the diversion of interest earned by scores of governmental entities that put money in the investment pool already has resulted in the suspension of Assistant County Treasurer Matthew R. Raabe.

Raabe was placed on paid administrative leave Friday after he refused to answer questions about accounting and record keeping related to the diverted interest.

The money, which normally would have been allocated to all pool participants, instead was shifted by the treasurer’s office to a separate account where it could be spent by the county administrator, officials said.

In the weeks since the Dec. 6 bankruptcy filing, Supervisor Roger S. Stanton repeatedly has expressed a lack of confidence in Schneider’s ability to lead the county out of its fiscal morass, and both he and Supervisor James W. Silva have called for the executive’s removal.

But it is unclear whether they have a majority on the board in favor of replacing the CAO. Indeed, not all the supervisors were ready to criticize Schneider over the disclosure of interest diversions.

“Ernie is not under the cloud of investigation,” Supervisor Marian Bergeson said Sunday. “There’s no cloud as far as his involvement in the $85 million. We’re looking at where we’re going with management from now on.”

However, Bergeson said, the investigation into the economic uncertainty fund could result in more county officials coming under fire, though she would not say who.

“Information continues to come in rapidly,” she said. “If there has been any wrongdoing, those individuals should be suspended. I think it’s premature, though, to judge who is going to be involved in this.”

Records related to the unusual transfer have been turned over to the county district attorney’s office and the U.S. Securities and Exchange Commission, which are investigating the county’s fiscal collapse.

Neither Raabe, former Treasurer-Tax Collector Robert L. Citron nor their attorneys could be reached for comment Sunday.

The Board of Supervisors set up the economic uncertainty fund two years ago at the request of Schneider and former Budget Director Ronald S. Rubino. At the time, the county’s investments earned more interest than was required to help meet budget requirements. The idea was to set aside money in case of future budget shortfalls.

Rubino, who also could not be reached for comment Sunday, told The Times earlier that the pair administered the fund’s proceeds but did not determine what money went into the account.

The evaluation of Schneider comes at a time when some supervisors are facing recall threats, including one by the Committees of Correspondence, a coalition of local organizations that has, among other things, demanded Schneider’s ouster. The group calls Schneider “culpable and incapable.”

Some say the only way for the supervisors to salvage their political careers is to shift to others the blame for the loss of $1.69 billion from the county investment portfolio.

Attacks on the supervisors have also come from Orange County school districts and cities, which have hundreds of millions of dollars at risk in the bankrupt pool. Pressure, too, is coming from county business leaders, who have called for the appointment of a strong chief executive who would have far more power than Schneider.

Also facing possible hearings are members of Schneider’s staff--including Management and Budget Director Fred Branca and Eileen T. Walsh, director of public finance--who worked on bond issues involving assessment districts and real estate development.

In any event, county government is certain to undergo substantive changes in the wake of the mounting disclosures of fiscal woes and alleged misconduct.

“My main question is: Where were the checks and balances?” Bergeson said. “There are a number of requirements as far as reporting, so you have to ask the question: What went wrong?”

Bergeson said news of the diversion gives her more reason to push the supervisors to approve hiring an independent auditor to do frequent evaluations of county finances.

Supervisor William G. Steiner said the board is eagerly awaiting the results of the investigation into the diversion. “There is a desire to see whether the trail leads to any other department,” he said.

Members of the board also insisted that they were as surprised as anyone by the disclosure of the diverted funds. Some had difficulty remembering the details of setting up the economic uncertainty fund two years ago at Schneider’s request.

“My vague recollection without any documentation in front of me is that there were going to be funds set aside from some interest earned by the county on county investments--not from other pool investors,” Vasquez said.

Times staff writer Chris Woodyard contributed to this story.

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