County Administrator Demoted : Crisis: Supervisors remove Ernie Schneider from top job after five hours of closed-door meetings. He suggests he is being made scapegoat. Health chief Tom Uram is interim replacement.

Shaking up the highest ranks of Orange County government, the Board of Supervisors demoted its chief administrative officer and announced a nationwide search for a new executive who would be given broad powers to run a streamlined county administration.

The action against County Administrative Officer Ernie Schneider, the county’s top executive since 1989, came after five hours of closed-door meetings that centered on his performance since the county’s collapse into bankruptcy.

“The board’s decision was based on its conclusion that the county needs to proceed in a new direction in order to develop and implement the restructuring strategies to solve the county’s current financial crisis,” Board Chairman Gaddi H. Vasquez announced late Monday afternoon.

Tom Uram, director of the county’s Health Care Agency, was named interim chief administrative officer. Uram was one of the three members of a management team that helped outline the initial $40 million in layoffs and budget cuts imposed following the county’s Dec. 6 bankruptcy filing.

It was not spelled out what job Schneider was being given, and no details were available on the compromise that left him employed after the board had demanded his resignation earlier in the day. Schneider refused to resign and drafted two statements, one of which he intended to distribute had he been fired. Supervisors reconsidered his dismissal when they weighed his overall 25-year performance with the county and realized they had no legal cause to fire him.

Some members of the five-member board had continued to back Schneider as criticism of his performance mounted in recent weeks. But they withdrew their support amid growing dissatisfaction with the fiscal recovery plans Schneider was cobbling together.

In two separate sessions, supervisors huddled behind closed doors while Schneider was left in the awkward position of sitting in the open board chambers as a throng of reporters and television crews recorded his every move.

“If this is the way it has to end, so be it,” he said with a shrug. “Whatever happens, happens.”

Schneider, 48, hinted to reporters that he was being made a scapegoat for the county’s financial collapse, explaining that his job never allowed him the true authority to oversee the treasurer’s office.

That task was performed for the past 24 years by former Treasurer-Tax Collector Robert L. Citron, who became the financial crisis’ first casualty when Schneider secured his resignation two days before the county filed for bankruptcy.

Citron’s principal assistant, Matthew Raabe, was placed on paid administrative leave this past weekend for refusing to answer questions about the diversion of interest payments into two little known county accounts.

Raabe is said to be in discussions with Orange County prosecutors about their continuing investigation, sources close to the investigation said. Neither Raabe nor his attorney, Terry W. Bird, returned repeated calls for comment.

Two other lower-level treasurer’s office employees were also placed on administrative leave in connection with the diversion of funds, a county official said.

Immediately following Monday’s announcement, Schneider--who is taking two weeks’ paid vacation--disappeared without further comment. When he returns, he is expected to be placed in another county department, possibly in the county’s Environmental Management Agency, which he ran before becoming chief administrator. His $140,940-a-year salary is expected to be reduced.

His attorney, Jennifer Keller, issued a statement, saying Schneider “had no knowledge of or involvement in any irregularities or illegalities that may have been committed by the former treasurer or his staff, and the board has recognized this.”

In other developments Monday:

* A federal grand jury in Los Angeles subpoenaed records of three key county departments: the administrative office, the treasurer-tax collector’s office and the auditor-controller’s office.

Lynne Fishel, an aide to Schneider in the county administrative office, said the subpoenas were delivered by an FBI agent about noon. The subpoenas, issued Jan. 12, require the county to surrender copies of “all documents relating to the issuance, marketing or sale of Orange County securities” by Feb. 24.

The grand jury subpoenas are the second set served on county officials. In early December, the federal Securities and Exchange Commission subpoenaed the personal financial and campaign contribution records of Citron and members of the Board of Supervisors.

* A major rating agency downgraded to “speculative” the bonds of three more Orange County agencies because their funds are tied up in the troubled county investment pool. Standard & Poor’s lowered the ratings of the Orange County Flood Control District, the Placentia-Yorba Linda Unified School District and the city of Placentia.

“These governments’ inability to access cash from the bankrupt pool leaves them with significantly reduced capacity to meet their debt repayment obligations in a timely manner,” S&P; said.

Lower bond ratings make it costlier--or even impossible--for government agencies to borrow money for major public improvements such as a new courthouse or road project.

* A creditors’ committee asked the U.S. Bankruptcy Court to authorize the county to make its February bond payments but cautioned that its members were growing “increasingly concerned that the county may not be doing enough to fulfill obligations” to make good on its bonded debt.

The county recently told the court it would make payments due in February only “on certain financial obligations” and “subject to cash availability.”

* The Newport-Mesa Unified School District is considering whether to apply for a state grant designed for school systems that cannot afford basic materials such as textbooks.

In the light of the county financial crisis, district officials said Monday it is unclear if they will have the cash for a planned purchase of new math textbooks this spring. At its meeting tonight, the school board will discuss possibly seeking the state grant to pay for the books.

“Rather than sitting back and assuming something will happen, I think it’s better that we take action,” said board President Judith A. Franco. “This way, we leave our options open.”

* Three cash-strapped community college districts in Orange County received more than $15 million from the state, four days before they were scheduled to receive regular payments. State Controller Kathleen Connell allowed the release of the emergency money after system Chancellor David Mertes pleaded on their behalf for early funds to avoid a cash-flow crisis.

The $15.1 million will help six campuses in the districts--Coast Community College District, North Orange County Community College District and Rancho Santiago Community College District--offer classes and pay vendors, staff and faculty in the coming months.

The board’s decision to demote Schneider is part of a broader plan, still emerging, to streamline county government and give its top appointed official clout that Schneider and his predecessors have lacked.

The supervisors said Uram would serve as interim chief administrative officer for a couple of weeks until they appoint an interim chief executive officer, who would run county government while a national search is conducted for a permanent chief executive--hopefully someone with financial expertise.

Supervisors said they were currently exploring the possibility of converting Orange County into a charter government, which would effectively abolish some elective offices such as that of the treasurer and the tax assessor.

“We have gone through different phases,” Vasquez said. “We have assessed the losses . . . and now we are talking about the restructuring of county government.”

Schneider’s demotion came after weeks of intense criticism directed at the top administrator.

Members of the board complained that their top-ranking employee failed to provide adequate warnings about the huge risks built into the county’s investment fund, which Citron managed on behalf of 186 school and special districts and other public agencies.

Supervisors Roger R. Stanton and Jim Silva had earlier favored dismissing Schneider, but others advocated keeping him in place until a financial plan could be worked out.

Officials said the move to dump Schneider had nothing to do with Saturday’s disclosure that the treasurer’s office had improperly diverted at least $85 million in interest earmarked for other participants in the county’s investment pool into two special county accounts.

According to records unearthed by the county’s outside auditors, the accounts apparently earned higher yields than the county investment fund itself and contained at least $85 million in interest that should have gone to the county pool’s other investors.

Schneider said he was “stunned” when he learned over the weekend that money belonging to other pool investors had been diverted into county accounts. But he acknowledged that he knew there was a problem with the accounts about a month ago, when he tried to make use of the money in one, the “Economic Uncertainty Fund,” to help ease the county’s cash crunch.

When he asked about tapping into the money, Schneider said, Raabe told him at a meeting with other officials that not all the money belonged to the county.

“He referred to it as an ‘accounting irregularity,’ ” said Schneider. “Nobody really paid much attention to it.”

Schneider said he informed one of the county’s financial consultants, Paul Sachs of the Arthur Andersen & Co. accounting firm, about Raabe’s comment a few days after the meeting.

According to Schneider, the Economic Uncertainty Fund was established with full board approval in 1985. As property tax revenue slid and the county grew increasingly reliant on interest income to fund operations, the board built up the fund in years when Citron produced higher than budgeted investment returns.

The Orange County district attorney’s office is said to be investigating whether Citron ran afoul of fraud laws and committed a felony by falsifying government records and diverting money into the two special accounts.

Times staff writers Debora Vrana, Len Hall, Chris Woodyard, Susan Marquez Owen and Alicia Di Rado contributed to this report.

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