O.C. Officials Draw Withering Fire of Senate Committee : Hearing: Schneider, Lewis and Andrus endure caustic questioning about what they did--or didn’t--do as county sank into bankruptcy. ‘It’s anarchy,’ one senator says.

Top Orange County officials underwent a blistering cross-examination Thursday by members of a state Senate committee who accused them of bungling their public duties and withholding key information from their bosses as the county’s billion-dollar investment pool sank into bankruptcy.

“You’ve got a real problem in Orange County,” state Sen. Quentin Kopp (I-San Francisco) said to former County Administrative Officer Ernie Schneider. “It’s anarchy.”

Lawmakers grew increasingly frustrated as they grilled Schneider, County Auditor-Controller Steve E. Lewis and County Counsel Terry C. Andrus about what they did--and did not--tell county supervisors. And they skewered board members for failing to take charge and ask the right questions.

State Sen. Lucy Killea (I-San Diego), co-chair of the Senate Special Committee on Local Government Investments that is investigating Orange County’s bankruptcy, said county supervisors “give being out of the loop a whole new range of meaning.”

Added state Sen. Cathie Wright (R-Simi Valley): “I feel the problem in Orange County must be dealt with by the Board of Supervisors. They are the elected officials. They are the policy makers, and I find it absolutely crazy that we can sit here and think that the Board of Supervisors could sit there over the years and not have control over their employees.”

Thursday’s hearing was the third of four scheduled to delve into the roots of Orange County’s financial debacle. A special legislative session on the Orange County bankruptcy, called by Gov. Pete Wilson, begins today.

Again and again throughout the day Thursday, the senators learned that no one in the county’s government seemed to be making any decisions. Schneider complained that he had all the responsibility he could handle but none of the authority he needed. Andrus said he attended an inquiry by the Securities and Exchange Commission last spring, but never informed the supervisors because he didn’t think the matter was serious enough to warrant a mention.

And Lewis said he never warned anyone about the large infusion of cash being pumped into the county’s Economic Uncertainty Fund--money that turned out to belong to other investors in the county’s investment pool--because it didn’t seem unusual.

“These were everyday normal transactions that were initiated by the treasurer’s office,” Lewis said.

Lewis came under the heaviest attack by committee members.

Appearing nervous and fumbling for his words at times, Lewis defended his role as the county’s longtime auditor-controller, saying he was not given enough information from the treasurer’s office to discover any impropriety.

“We thought things were OK,” he said.

But the situation “was not OK,” Sen. Rob Hurtt (R-Garden Grove) snapped at Lewis.

“I think we can all agree there has been a massive breakdown,” Hurtt said. “Do you have a plan on how to correct that?”

Lewis said he would audit his own office to determine where improvements could be made.

Hurtt, frustrated by the answer, asked: “Is there anybody who can terminate your service?”

“The people can,” Lewis said in a quiet voice. “We believe we did our job. We did more than many.”

Ex-Citron Supporter

Lewis drew the severest criticism from Kopp, who said he was shocked that Lewis supported Citron during his reelection campaign last June.

“How can you claim to be independent . . . ?” Kopp asked.

“Like many others, I believed Mr. Citron was the best man for the job at that time,” Lewis said.

“Don’t you really think you betrayed the trust of the people of Orange County?” Kopp asked.

“Not based on what I knew at the time,” Lewis responded.

“Based on what you know now, don’t you think the honorable thing for you to do is resign?” Kopp asked.

“No, I do not,” Lewis said.

During his testimony, Schneider complained that he had very little power to do anything in county government and was constantly being thwarted by department heads making end-runs around him.

After listening to Schneider, Kopp concluded that the former county administrative officer--demoted last month--was nothing more than another glorified department manager.

“Mr. Schneider was just another department head and the Board of Supervisors wanted to jealously guard their dominion over every department,” Kopp said.

Schneider said he wasn’t even involved in the decision to declare bankruptcy.

“I’m sorry to say nobody asked me for my opinion,” he said. “Not a soul.”

Asked what he would have said if asked for his opinion, Schneider said, “I don’t think I’m qualified to say whether it was a good idea or not.”

At one point, Sen. John R. Lewis (R-Orange) asked Schneider if he had ever threatened to take away county business from anyone supporting Citron’s election opponent, John M.W. Moorlach, a Costa Mesa accountant. Schneider denied making threats, but said he raised concerns, in several conversations with Republican activists last spring, about Moorlach’s criticisms of Citron potentially hurting the county’s credit rating.

Specifically, Schneider mentioned Thomas A. Fuentes, chair of the Orange County Republican Party and a major Moorlach supporter, and Fuentes’ boss, Robert L. Bein, whose engineering firm has many county contracts.

“The conversation I had with Mr. Bein was what Mr. Moorlach was doing would cost the taxpayers tens of millions of dollars in airport bond issues, park bond issues, jail bond issues--everything,” Schneider said. “That is a concern I expressed to Mr. Moorlach myself.”

Bein and Fuentes could not be reached for comment.

Missing at Dinner

Again and again, the senators returned to a Dec. 3 staff meeting that included Andrus, Lewis and Schneider and was held at Prego ristorante in Irvine, where talk of seeking then-Treasurer-Tax Collector Robert L. Citron’s resignation first surfaced. A group of staffers and outside bond counsel Jean M. Costanza visited Citron the following day, armed with a prepared letter of resignation.

“I get the impression that the supervisors did nothing, weren’t involved in the process, much to their chagrin and embarrassment,” Hurtt said. “There was a posse of top department people who pretty much ran the county and were making decisions.”

Even before any testimony was heard, the special Senate committee kicked off its morning session by questioning whether the state should play any legislative role in Orange County’s financial recovery.

“When we are talking about giving local government more control and talking about getting state government off their back, its seems what we are looking to do is get more involved in their problem,” Wright said. “I don’t think we should. I’m still not convinced the problem in Orange County really requires any legislation.”

Kopp, one of the most outspoken committee members, said he was appalled by the “head-in-the-sand attitude of the Orange County governing board.”

He said it’s time that county supervisors “recognize the fact . . . that the debacle will affect the state of California.”

Lawmakers also quizzed Andrus, the county counsel, about the final days before Orange County filed bankruptcy and asked him why he never told the Board of Supervisors about a 3 1/2-hour meeting that he, Citron and Raabe had with the federal Securities and Exchange Commission last April.

“When I came back from that meeting I was convinced that the controversy was political, based on everything they said,” Andrus said. “Everything I took away led me to believe (it had) . . . nothing to do with the integrity of the (investment) pool.”

Andrus defended the county’s decision to file for bankruptcy protection as its only option after it failed to get the SEC to step in and arrange a deal with a potential buyer for the county’s investment portfolio.

While county officials were grilled Thursday, Costanza, a partner with the New York firm LeBoeuf, Lamb, Greene & MacRae, also faced scrutiny by lawmakers who questioned her role in the financial crisis.

‘No Conspiracy’

Like a parade of others before her, Costanza, 46, testified that she did not help deceive investors--or the Board of Supervisors--as to the severity of the investment pool’s problems.

In answer to Sen. Tom Hayden (D-Santa Monica), who said it appeared to him that Costanza had helped defraud investors, Costanza angrily replied: “There was absolutely no conspiracy here whatsoever. I don’t understand how you can reach that conclusion.”

Costanza said she had been providing Citron legal advice on short-term bond issues since the late 1980s and began working for LeBoeuf in Los Angeles in 1993. In 1994, LeBoeuf was selected as bond counsel on five short-term note issues that closed that summer.

In April, she said, Citron told her that the Securities and Exchange Commission wanted to question him and then-Assistant Treasurer Matthew Raabe about the fund and Citron’s investment strategies. The SEC also requested more than 20 boxes of documents.

At Citron’s request, Costanza said, she arranged for her partner, John W. Cotton, a litigator specializing in SEC cases, to go along. Andrus and his deputy, Robert L. Austin, the treasurer’s legal adviser, also attended the SEC meeting.

Under questioning from Hayden, Costanza said she did not reveal the SEC inquiry on the official statements accompanying bond issues that summer because she did not “believe that the SEC inquiry rose to the level” of a material fact that must be revealed to potential bond buyers.

Hayden asked Costanza that if she “were a member of the Orange County Board of Supervisors, would you have thought different?”

Costanza replied that the fact that the SEC took no further action was a “positive sign” that nothing was wrong. She said she also was reassured by a meeting with ratings agencies that quizzed Citron and Raabe about the investment pool in May, 1994.

It wasn’t until late October, Costanza said, that she assumed a “special counsel” role--which said was permitted in her contract with the county--and began to help assess the troubled investment pool.

Costanza said Raabe came to her and said he “thought there was a potential problem with the pool.”

At that point, she became part of a small group of top county staffers, including Andrus, Austin, Raabe, Lewis and Schneider, who tried to sort out the fund’s escalating problems, Costanza told the senators.

“The first thing that had to happen was to get a handle on if there were losses in the pool,” she said.

Costanza said she recommended two outside firms to evaluate the pool, and she was told to subcontract with New York-based Capital Market Risk Advisors.

Costanza said she hired Capital Market so the relationship would be protected by attorney-client privilege and no information about their work would get out before the evaluation was complete.

“If information got out early . . . it could be disastrous,” she said.

Senators Suspicious

Sen. Wright later said it appeared Costanza had hired Capital Market so the county’s elected leaders would not be alerted.

“This was another way in which you kept information away from the Board of Supervisors,” Wright said. “The board would have had to approve the contract.”

One county official who did not appear before the Senate committee was Raabe, who has eluded a subpoena to testify. Raabe’s ex-wife appeared at the county treasurer’s office Wednesday with a doctor’s note stating Raabe was too ill to come to work for four months.

The development has irked county officials.

“He’s obviously avoiding the subpoena,” Supervisor Marian Bergeson said Thursday. “No one can be that lost that you can’t find them. I know the Senate sergeants and they’re very good at finding people. You have to wonder why he doesn’t avail himself.”

Interim Treasurer Thomas E. Daxon ordered Raabe to appear at the office Wednesday in order to be served with the subpoena. He said Thursday that the validity of the physician’s note is being checked.

“I have no reason to think that the note is not valid,” Daxon said.

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The Who and What of the Special Session

The Legislature convenes a special session today to debate measures dealing with the Orange County bankruptcy. The session will deal with bills designed to help the county recover and others to prevent such debacles. About two dozen bills are expected to be introduced.

The Timing: The session allows accelerated approval of measures, in some cases direct floor action without first going to committee. But most lawmakers expect county relief bills to be debated in fiscal and policy committees, with a goal of final approval before summer. Preventive bills will follow a more deliberate course that may stretch through the end of the legislative year, in September.

The Buzz: Democrats have already criticized the package of recovery bills pushed by Orange County. Behind the rhetoric is a struggle over taxes: Democrats want the county to raise its sales tax. Republicans want to find other means to solve problems, such as relief from costly state mandates and cuts to welfare and other programs.

Key Players

Dennis Carpenter: Orange County lobbyist has good ties with Democrats and Republicans; admits to facing tough odds on many bills in the package.

Curt Pringle (R-Garden Grove): Head of the Assembly Appropriations Committee; main force behind legislative push.

Willie Brown (D-San Francisco): Powerful Assembly speaker has already blasted Orange County and its legislative package.

Marian Bergeson: Orange County supervisor and former state senator; still has many friends in Capitol. But politicians can forget friends quickly.

Bill Lockyer (D-Hayward): Top man in the Senate; also has raised serious questions about much of the county’s plan and hinted a tax hike is needed.

Key Bills

Intercept program (Pringle): State takes a portion of property taxes and vehicle license fees normally sent to Orange County and sets it aside to pay bondholders.

Contracting out (Assemblyman Mickey Conroy (R-Orange); Sen. Rob Hurtt (R-Garden Grove)): Lets county contract out for any service.

Welfare (Assemblywoman Marilyn C. Brewer (R-Irvine)): County streamlines welfare operation. Separate bill allows cuts in administrative and programmatic requirements for Aids to Families with Dependent Children and Medicaid, among others. A third temporarily waives law requiring support, care and medical services for the indigent.

Mandate relief (Hurtt): Allows county and cities to temporarily discontinue a variety of state-required programs.

Inmate medicine (Assemblyman Jim Morrissey (R-Santa Ana)): One bill allows county to maintain existing staff levels at jails for mental health and medical services, rather than implement new state requirements. A second requires inmates to pay part of medical and dental bills.

Public defender retainers (Conroy): Makes criminal suspects using public defender’s office pay for service when financially able.

Asset sales (Sen. John R. Lewis (R-Orange)): Streamlines process for county and cities to market public assets.

Tax equity (Brewer): Asks state to redistribute amount of tax revenues given each county to change Orange County’s status as “donor” county that sends more revenue to state than it receives back in grants and services.

Fingerprinting (Pringle): Use fingerprints to fight welfare fraud.

Source: Times reports

Officials Under Fire

Orange County officials came under fire again Thursday at a hearing in Sacramento held by the Senate Special Committee on Local Government Investments. Today, the state Legislature convenes a special session to consider Orange County’s financial crisis.

“Don’t you really think you betrayed the trust of the people of Orange County?”

Sen. Quentin Kopp (I-San Francisco)

“Not based on what I knew at the time.”

County Auditor-Controller Steve E. Lewis

TAKEN TO TASK: State lawmakers grill Wall Street investment bankers about risks. A8

BROKER DEFENDS ROLE: Citron’s mystery broker says he gave only technical support. A9

SUIT BLOCKED: A judge rules against a restaurant that wants to sue the county. A10

FULL COVERAGE: A8-A10