County Weighs Hiring Private Fund Manager

Amid debate over who should be Orange County’s next treasurer and how to fill the key post in the future, Chief Executive Officer William J. Popejoy on Thursday tossed a new idea into the mix: Why not turn the trickiest part of the job over to a private expert?

As part of a comprehensive plan, Popejoy suggested privatizing management of the county’s investment pool, whose stunning plunge last year triggered the largest municipal bankruptcy in U.S. history.

Popejoy offered few specifics--he is unsure how much money the move could save, whether it’s even allowed under state law, or whether there is a firm interested in the job. But he said hiring a private money manager would ensure sophistication, experience and professionalism in investment decisions.

“We may be able to bring more expertise to bear” by contracting out, said interim Treasurer Thomas E. Daxon, who will leave the job later this month. “We may also find that in the long run we can save on fees if we take that route.”

Executives at several large money-management firms said they already handle some government funds and could take over the county’s pool, running it like a large mutual fund while observing the restrictions state law imposes on investing public money.

“The main advantage is that you would have true investment professionals managing the funds,” said Scott McIntire, spokesman for Capital Guardian, a Los Angeles firm that handles more than $100 billion in assets.

But treasurer-tax collectors around the state said farming out the investment side of their job would be impossible, irresponsible and even illegal without changes to current laws.

Barbara Coates of Plumas County, president of the California Assn. of County Treasurer-Tax Collectors, said the government code demands that the county’s money be invested either by the Board of Supervisors itself or by the treasurer.

Though the treasurer is allowed to hire experts to assist in money management, Coates said, putting a private firm in charge of the entire portfolio could decrease disclosure about investments and reduce accountability to the public. She also said it would give supervisors too much power if the contracting firm reported directly to the board.

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“There needs to be a division of power,” Coates said. “The whole reason it was set up this way to begin with was to provide for a balance in government, checks and balances, division of power, division of authority. They’re there for a reason.”

Coates and others said the treasurer must have control over investments because the portfolio is directly linked to day-to-day cash management decisions.

“One of the biggest issues that most of us face is cash management, and I don’t think cash management should be done outside,” said Lee Buffington, treasurer-tax collector of San Mateo County. “It’s hard to differentiate the two.”

Orange County’s longtime treasurer-tax collector, Robert L. Citron, resigned Dec. 4, two days before the county’s unprecedented bankruptcy filing.

Citron has claimed he did not understand the complex investment instruments he was using in the $7.4-billion investment pool he managed for the county and about 200 other local government agencies. Most observers have blamed Citron’s bad judgment for the county’s financial fiasco.

The Board of Supervisors stands poised to appoint Costa Mesa accountant John M.W. Moorlach, who ran against Citron last year and was the first to warn of his investment policies. But some express concern that Moorlach also lacks the investment savvy necessary to manage the portfolio. Giving that job to a private firm specializing in money management could solve that dilemma.

“I think it’s an excellent idea. I don’t think you ought to have that job involved in politics. It’s not a beauty contest,” said Peer Swan, treasurer of Pacific Scientific and chairman of the Irvine Ranch Water District, one of the largest investors in the county pool.

“Have a treasurer who works on cash flows and negotiates financings with brokerages, and does things that treasurers normally do, but have the investments done outside with a professional money manager,” Swan said.

If appointed, Moorlach said, he would immediately study such a move. “The question would be, what is more cost-effective: having qualified staff that can do the trades, or to have a professional money manager?” he said.

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Swan, Popejoy, Moorlach and Supervisor Marian Bergeson all agreed that privatization would work only with a strong oversight committee in place and clear guidelines directing the private firm’s investment strategy. Also, investors in the county fund would have to agree to turn the responsibility over to a private company.

“The county has the fiduciary responsibility,” Bergeson said. “There would have to be checks and balances and assurances and lots of reporting to the board.”

Popejoy also pointed out that if a private firm violated the county’s investment guidelines and suffered losses, the county could likely collect on the company’s insurance policy.

It remains unclear whether the move would save any money, since few county jobs would be eliminated and the outside firms might charge high fees.

“It cost $2 billion to run the treasurer’s office,” said Capital Guardian’s McIntyre, referring to the massive budget hole now facing the county. “So I can’t necessarily say it would cost any more.”