Advertisement

Drastic Acts to Curb O.C. Crisis Foreseen

Share
TIMES STAFF WRITERS

Orange County’s acting treasurer said Monday that the ongoing financial crisis is so severe that to save money county officials will be forced to consider politically unpopular actions, such as releasing inmates from the county jail.

“I’m not advocating that, but we need to look at this situation in a very sobering manner,” said Thomas E. Daxon, who replaced former Treasurer-Tax Collector Robert L. Citron. He said the county must be prepared to take “some extraordinary actions” to fully recover its financial health.

To cope with the county’s financial plight, made worse by the discoveries in past weeks that the county had seriously shortchanged other participants in its investment fund, Daxon suggested that “we let the prisoners out of jail” and said elected officials will soon be “faced with things that nobody will say are permissible.”

Advertisement

County leaders quickly branded Daxon’s statements as unacceptable.

“He said that?” County Supervisor Jim Silva asked. “I don’t feel that way at all. I think our No. 1 obligation is public safety. And keeping prisoners locked up comes under the heading of public safety.”

Sheriff Brad Gates said the Board of Supervisors has pledged to make public safety a priority and won’t back down on that promise.

“I don’t foresee that happening,” said Gates, one of a three-person management team that proposed broad cuts in services following the county’s bankruptcy. “It’s too early to determine right now. There’s a tremendous hole, but I don’t agree with (Daxon’s) point of view. Other things would go first.”

Although Daxon may have been exaggerating about the early release of jail inmates merely to make a point, he said the county may have to shoulder a much greater share of the $1.69 billion in losses to the county’s investment pool than previously thought.

Some financial experts say the county may ultimately be responsible for $1 billion, or 59%, of the total loss if county officials keep their pledge to pay schools 100% of its investment. Earlier loss estimates for the county were nearly half that sum.

The added burden comes as a result of discoveries in recent weeks that Citron shifted at least $140 million in losses to other pool participants, at the same time that the treasurer’s office skimmed into a county account at least $85 million in interest that should have gone to other investors. Those two actions alone will substantially increase the county’s losses, officials say.

Advertisement

And the disclosures have made investors more determined than ever to get all their money back.

“I don’t think the county holds any cards any more,” said Jim Kenan, finance director for the Orange County Transportation Authority. “Their credibility is gone. Now, everyone has the right to stand up and demand 100% of their funds. There’s been a tremendous breach of trust here.”

In other developments as the bond crisis ended its second month:

* Investigators from the district attorney’s office announced it had seized 11 personal computers from the office of the county administrative officer “in an effort to review and protect all documents and information related to the county’s handling of bond financing and other treasurer’s office communications stored in the county’s computer systems.”

In a statement, Assistant Dist. Atty. Wally Wade said that acting County Administrative Officer Tom Uram “offered complete consent and cooperation” with investigators who took the computers from the county’s budget office and bond finance unit.

Investigators removed the computers “as part of a continuing process to review and protect all information and documents within the county structure,” not because authorities believed that any county official engaged in “possible illegal or inappropriate activity.”

* U.S. District Judge Gary L. Taylor sided with Orange County against Merrill Lynch & Co. Inc., ruling that the county’s $2-billion damage suit against the firm should remain in Bankruptcy Court to ensure a speedier and less costly legal process.

Advertisement

County attorneys hailed the ruling as a victory for the county over the Wall Street giant, which wanted the case moved from Bankruptcy Court to U.S. District Court.

Merrill Lynch spokesman James Wiggins said he believes the judge’s ruling leaves open the possibility of revisiting the issue as the case unfolds, and called the county attorneys’ claims of victory premature.

“This is a procedural and not a substantive ruling,” said Wiggins. “This is the first step in a very long process. . . . We’re confident that on the merits of this case we will prevail.” The county’s suit against Merrill Lynch alleges that the firm violated state laws by giving massive extensions of credit to the county and encouraging it to make risky investments.

* Irvine City Manager Paul O. Brady Jr. said that a creditor committee representing cities, schools and special districts plans in the next few days to release its own proposal, which will probably call for the return of 100% of the money creditors invested in the collapsed county pool.

“We are actively creating our own (plan) . . . of what we see as a viable option for bringing this to a close,” Brady said.

Brady refused to disclose details of the plan, which is still being prepared. He said the creditors committee is in regular contact with county officials about the proposal. He said he hopes the situation can be resolved through negotiation rather than litigation.

Advertisement

“We feel this can be negotiated in a way that makes economic sense” to both the county and the creditors, he said.

* Daxon confirmed that he has picked an interim successor for former county Assistant Treasurer Matthew Raabe, who was placed on administrative leave Jan. 20 after refusing through his attorney to answer questions about the improper diversion of $85 million into two little-known county accounts. Daxon will present his candidate, Keith Johnson, a manager for Trinity Financial Services of Colorado, at a Board of Supervisors meeting today for a confirmation vote.

Johnson, a certified public accountant with a law degree from the University of Denver, manages 150 employees for Trinity Financial Services in Irvine. TFS is a contractor for the Resolution Trust Corporation, the federal agency charged with resolving the nation’s savings and loan crisis. Daxon worked with Johnson in 1993 for the Resolution Trust Corp., he said. Johnson said he met informally with supervisors Saturday and has been told by Daxon that he has the support of the board.

Daxon issued a statement through his office Monday saying that he did not expect Raabe back in the near future, and anticipates that that Johnson will remain in the position permanently if Raabe does not return to the job.

Meanwhile, Daxon was in closed meetings for most of Monday with two senior staff members from state Treasurer Matt Fong’s office and treasurers from three other California counties to discuss what kind of help Daxon needs to run his troubled office, according to the county public information officer, Sheriff’s Lt. Dan Martini.

Treasurers Larry Monteilh of Los Angeles County, Phil Franey of Kern County and Wayne Watts of Riverside County are pledging to send whatever support Daxon wants, including staffing, later this week, Martini said. The three made the offer after Fong contacted them last Friday, he said. Daxon suspended his regular staff of 14 last Friday after accountants from Arthur Andersen & Co. uncovered evidence that the office under Citron shifted at least $140 million in county losses into pool accounts shared by other public agencies. The treasury workers will remain on administrative leave until they are cleared of possible wrongdoing by the district attorney’s office, Martini said.

Advertisement

Meanwhile, the offers of help will free accountants from Arthur Andersen, which is working in the treasurer’s office to review all remaining transactions made under Citron, Martini said.

Financial analysts believe that the county will have to bear the brunt of the $1.69-billion investment losses to the pool.

County officials had hoped to spread the losses equally among some 185 pool participants by slashing each principal investment by 22%. Under that scenario, the county would lose about $520 million on its $2.7-billion investment.

But events in recent weeks now have the county facing more than $1 billion in losses, officials confirmed Monday.

And assuming that school districts get 100 cents on their investment dollars, which a majority of supervisors support, the county will have to absorb further losses of about $230 million.

Additionally, the county’s financial advisers have disclosed that two separate “accounting irregularities” in Citron’s books have caused the county more financial pain.

Advertisement

According to accountants, about $85 million in interest earnings was placed in a county-held account after it was skimmed from other investors. That money will have to be reimbursed to the investors, county officials said.

Accountants also discovered that the treasurer transferred about $140 million in investment losses from a separate county account into the commingled investment pool so the pool investors, in addition to the county, absorbed the losses. County officials said that money will also have to paid back the investors.

Times correspondent Shelby Grad contributed to this story.

Advertisement