Orange County Probes Legality of $130 Million Transfer Into General Fund : Bankruptcy: State auditor says at least some of the money will have to be returned by June 30, worsening the county’s cash shortfall.

Orange County officials Friday began investigating whether more than $130 million was transferred into the county’s general fund by Auditor-Controller Steven E. Lewis’ office without any legal authority.

The county’s sudden interest in transfers that took place almost two months ago came after the state auditor’s office issued a stinging report that challenged the movement of $282 million from unspecified accounts into the county’s depleted general fund.

Friday, county Counsel Terry C. Andrus could only find a single board resolution authorizing the transfer of about $150 million of the total, and no authorizations for the rest.

Of the balance, at least $73 million came from a tightly restricted bondholder account and, according to the state auditor, may have been transferred illegally.

The county’s financial team and state auditors also say they are unsure whether all the transferred money belonged to the county.

“We’re going to have to go through those funds one by one,” said Thomas Daxon, the county’s acting treasurer.

One fund, the Economic Uncertainty Fund, has been found to contain at least $70 million in interest earnings belonging to other investors in the county’s collapsed investment pool.

Andrus said Lewis does have authority to transfer money between certain funds without the specific approval of the County Board of Supervisors. Many funds, however, are restricted, he said.

“I just have to look to see if he had authority in those cases,” Andrus said. “The more substantive issue is if there were legal restrictions on the (bondholder) fund that prevented it from being moved at all.”

Lewis did not respond to repeated requests for comment.

The new irregularities were brought to light Thursday in the report by state Auditor Kurt R. Sjoberg. Friday, the spotlight fell uncomfortably on Lewis, whose office made the transfers.

Sjoberg, whose office is reviewing the county’s books at the request of Gov. Pete Wilson, said that because of the problematic transfers he doubted “the accuracy and reliability” of the county’s estimate of the amount needed to cover expenses through June 30.

Sjoberg said discovery of the questionable transfers will significantly worsen the county’s cash shortfall, estimated at $172 million, for the balance of this fiscal year. He said the $73 million moved from the bondholder fund, and possibly more, will have to be repaid before the fiscal year ends June 30.

The latest revelations outraged bondholders who were unaware that the county had moved restricted funds.

A bondholders subcommittee called Friday for an investigation of the county’s “reported use of bond repayment funds for other purposes, and an immediate return of all wrongfully diverted monies.”

Bennett Murphy, an attorney at Lathan & Watkins, which represents the subcommittee, said it was “shocking to learn that bondholder money was not safe in county hands, even after the bankruptcy.”

Daniel Harrow, managing director of Chanin & Co., a financial consultant to the committee of county investment pool creditors, said the latest discoveries raise concerns about the county’s credibility and questions about why county officials had not previously disclosed that the funds had been moved.

“How are these (transfers) any different from any other actions that are purported to have happened?” asked Harrow. “If these transfers were considered legitimate, how does this compare to (ex-Treasurer Robert L.) Citron’s actions?

“And how does it sit, in light of the layoffs of the people in the treasurer’s office? The county took some pretty Draconian actions with regard to those people. But this is just as bad.”

Harrow was referring to last week’s wholesale suspension of the 13 employees remaining in the treasurer’s office after the ousters of Citron, his deputy and two other top assistants.

County officials said Friday that they were aware that millions of dollars had been swept into the county’s general fund in early December, but they did not know how much or which funds had been tapped. The general fund was $168 million in the red at the time.

During a special board meeting Dec. 13, the supervisors approved the transfer of about $150 million from three county funds--including the Economic Uncertainty Fund--into the general fund.

Supervisors Chairman Gaddi H. Vasquez said his memory of the transfers was hazy, but he did not believe the county’s finances would be in worse shape as a result.

“I don’t recall who . . . originated the conversations about the funds in question,” he said.

But, Vasquez added, the county’s finance team is researching the transfers and will present its findings to the board within the next few days.

Paul Sachs, head of a team of Arthur Andersen accountants poring over the county’s books, said he had no cause to question the $282 million until the state auditor’s report was issued.

“We weren’t even looking at the transfers,” he said. “We just knew the $282 million had moved from other sources. . . . Based on what the state auditor found, we might be asked” to examine the transfers.

Sachs said he could not rule out the possibility that other investors’ money may be mingled in the funds transferred into the county general fund Dec. 12.

“These things are possible,” he said. “What’s the revenue base for any of the funds? I don’t know.”

State Auditor Sjoberg said Friday that he researched the $282 million transferred Dec. 12 at the request of former state Treasurer Thomas H. Hayes, who until Friday was the county’s financial adviser.

Sjoberg said he received a call Dec. 11 from Hayes, who had just been hired to guide the county out of its financial crisis.

Hayes told him that someone in the auditor-controller’s office had just informed him that the county had found about $300 million to put in the general fund, Sjoberg said.

“Hayes was concerned about that,” Sjoberg said. “He asked that when we started our work, we look to see what that meant.”

Sjoberg said his office found that the money had been shifted from half a dozen funds, which he believes could not be touched without board approval, or at all.

Using records seized by the Orange County district attorney from the treasurer’s office, Sjoberg said, his auditors will attempt to determine whether the questionable transfers involved money belonging to other investors.

“We need to look at what went into those to make up the source of the funds . . . to look at whether some portion of that belongs to other investors,” Sjoberg said.

* RELATED STORY: D1