State Auditor Questions Shift in O.C. Funds

Six days after filing for bankruptcy in December, Orange County seized $73 million in restricted money due county bondholders and--perhaps illegally--placed it in the county’s own depleted general fund, the California state auditor said Thursday.

State Auditor Kurt R. Sjoberg, whose office is reviewing the county’s books at the request of Gov. Pete Wilson, also questioned whether an additional $209 million was improperly transferred into the general fund from other county funds.

In a highly critical letter to Wilson and legislative leaders, Sjoberg said that because of the irregularities he now doubted “the accuracy and reliability” of the county’s estimate of the amount needed to pay its bills through June 30.

The latest discovery represents yet another blow for the shell-shocked county, already shown to have skimmed at least $70 million from other investors in the county’s collapsed investment pool, while saddling them with part of the county’s losses.

These questionable transfers will aggravate the county’s budget shortfall, Sjoberg said, because the county is legally obligated to return the $73 million set aside for bondholders, and possibly much more.

The state auditor’s letter could prove embarrassing to the Arthur Andersen & Co. accounting firm that has pored over the county books since the bankruptcy filing. One month ago, the firm said the county needed $172 million to cover its expenses through June 30.

Paul Sachs, chief of that accounting team, said he was aware of all the issues raised by Sjoberg’s report, but he does not think they would significantly worsen the county’s cash shortfall between now and the end of the county’s fiscal year. He cautioned, however, that continuing investigation into the county’s financial records and rulings by the Bankruptcy Court could change that outlook. “We don’t believe there’s reason to worry, but future events may change that,” he said.

In discussing the state auditor’s letter, Sachs also revealed that the county’s general fund was $168 million in the red at the time of the bankruptcy, and an infusion of cash was needed to keep county checks from bouncing.

County officials reacted with pained resignation to the possibility of more bad news, with some warning that bondholders may face delays in being paid interest and principal.

“I know this makes the (financial) markets very nervous,” Supervisor William G. Steiner said, “but when you keep adding up the figures and the picture gets more grim, this potential looms.”

Jeffrey Chanin, a financial consultant who works for the creditors committee, said he was troubled but not surprised by the revelations.

“It doesn’t surprise me,” said Chanin. “It’s just one more incident that establishes that the county was not in control.”

In his report to Wilson, Sjoberg said he had been asked to determine if the county’s cash flow analysis for the next six months was accurate, but was unable to complete the task after finding potentially improper or illegal transfers of money into the county’s general fund.

In his letter, Sjoberg stressed that one account emptied by county officials had strict legal limits on its use. The fund, which contained $73 million earmarked to repay bondholders, could only be used for that purpose, he said.

“We will obtain a legal opinion to determine the propriety of this transfer,” Sjoberg wrote.

The other $209 million was transferred from unspecified county funds into the county general fund on the same date. Chief Deputy State Auditor Marianne Evashenk said she could not discuss the questionable transfers in detail, but said they may include money that belonged to some of the 186 cities, school systems and special districts that invested in the pool.

“There is (a total of) $282 million that we are not comfortable with,” said Evashenk.

In addition, state auditors have yet to determine exactly how much the county will have to refund because of alleged improper transfers engineered by former Treasurer-Tax Collector Robert L. Citron.

Last week, Arthur Andersen accountants uncovered evidence suggesting that at least $70 million in interest earnings due other investors in the county investment fund was skimmed into an obscure county fund known as the Economic Uncertainty Fund.

In one month alone--February 1994--Sjoberg said, Citron diverted “more than $10 million in interest from the investment pool that it did not earn.”

“That’s the concern we have, when did (the misallocation of funds) start and to what extent it was done month in and month out,” he said.

Sachs said that the Economic Uncertainty Fund currently contains enough money to cover the approximately $70 million in refunds due other pool investors.

He also said there should be no doubts as to the accuracy and reliability of his firm’s cash-flow analysis for the county.

The county’s general fund has $84 million left frozen in the investment pool because of the bankruptcy. Sachs believes that that money will be freed by the Bankruptcy Court before June 30. That money, he said, could be used to replace the $73 million improperly transferred from bondholders’ accounts.

Sachs conceded that there is no certainty the county will get access to that money because it may belong to other fund investors. Even if the fund does get access, the money may not be available by the end of the fiscal year.

Sachs said county officials believed they were allowed to move into the general fund the $73 million set aside for bondholders, because they had been putting the money aside far in advance of when the payments were due. Officials have since been told that they were not allowed to move those funds.

Sachs acknowledged that his team has not yet fully analyzed how much interest the county improperly diverted from local agencies with money in the investment pool to its own accounts.

There is currently about $70 million in interest remaining in the Economic Uncertainty Fund, he said. If the county owes much more than that to pool participants because of improper diversions, that could make the immediate budgetary gap even wider.

“After we do the reallocation of the interest, if all we have to return is $70 million, then we’re OK,” Sachs said. “If we have to return more, then the general fund will be affected.”

M. Freddie Reiss of Price Waterhouse, the accountants working for the pool participants, raised questions last week about why the account that collected interest earnings for the commingled pool had only $29 million in it at the time of the bankruptcy filing.

The account, No. 683, was a storehouse for interest earnings, and would be disbursed among the 187 pool participants quarterly. Interest accrued since July 1 has not been paid out.

Because of previous revelations that about $80 million in interest due pool participants was improperly diverted into county accounts, Reiss wondered whether millions more might have been improperly removed from Fund 683. “They’re unanswered questions,” he said.

But Sachs said Thursday that his accountants “don’t think there’s any irregularities there.” The total interest due pool participants, he said, includes $29 million that was in Fund 683 and about $23 million that is in other funds.

In other developments Thursday:

* The supervisors finished interviews with two candidates for interim county administrative officer, and made arrangements to meet Tuesday with front-runner Sanford C. Sigoloff as well as William J. Popejoy, the former chairman and CEO of American Savings and Loan.

* U.S. Bankruptcy Judge John E. Ryan ordered the county and county employees organizations back to the negotiating table to come up with a new compromise agreement for employee layoffs. Ryan said the agreement should protect workers’ basic rights to seniority and a grievance process, but satisfy the needs of the bankrupt county to reduce its work force. In court documents filed Thursday, the county proposed to rehire 39 of 152 people laid off earlier this month. Labor groups have rejected those proposals.

* In Sacramento, Assemblyman Louis Caldera (D-Los Angeles) announced plans to introduce a bill to help children who were encouraged by judges to deposit legal awards in Orange County’s troubled investment pool. The measure would require the state to pay the difference between what the children ultimately get back from Orange County and what they would have made in a safer investment fund.