CEO Urges County to Tighten Controls Over Bond Issues
Hoping to reassure the public and Wall Street that financial disaster could never happen again, Orange County’s chief executive on Tuesday proposed a sweeping set of reforms to the way the county will handle municipal bonds in the future.
And while the proposals will not be put to a vote of county supervisors until next week, a majority told The Times on Tuesday that the reforms would win certain approval.
Under the proposed reforms put forth by County CEO Jan Mittermeier, the county would be prohibited from issuing any notes or bonds to speculate in financial markets--a practice that led to massive investment losses and brought about the county’s bankruptcy in December 1994.
The measure also creates a five-member panel of county officials and citizens to oversee--and have veto power over--any county debt issues.
The reforms would further require outside lawyers and financial advisors to provide written assurances that county bond issues are legal, that they are financially prudent, and that proper disclosures have been made to potential bond buyers. The county has been sharply criticized for failing to disclose the risky nature of its investments.
The proposal would also prohibit the county from awarding business to virtually any financial professional who has contributed to the political campaign of a county supervisor, but does not specifically ban contributions from lobbyists employed by municipal finance firms.
Mittermeier said the measure was designed to send a clear signal that the county, which holds the dubious record of filing the worst municipal bankruptcy in U.S. history, was drastically changing its ways.
“These new guidelines are part of the county’s ongoing efforts to restore public confidence in county government,” Mittermeier said, “and to assure the financial community that there are excellent safeguards in place to prevent future recurrences of the county’s financial crisis.”
Mittermeier’s proposal builds on a fledgling federal rule that prohibits bond underwriters from giving campaign contributions to elected officials who vote on bond issues.
Like the federal rule, Mittermeier’s proposal seems aimed directly at the informal system known as “pay to play,” where finance professionals competing for lucrative county business contribute heavily to the reelection campaigns of the elected officials who dole out the business.
The pay-to-play system has figured prominently in a host of scandals nationwide, and has been blamed by many as a catalyst of Orange County’s financial collapse.
By creating a board of county officials and citizens to oversee all bond issues, the Mittermeier proposal would ensure closer supervision of the county’s financial dealings. Lax oversight of longtime Treasurer-Tax Collector Robert L. Citron’s high-risk investment scheme--by supervisors and staffers--was a primary contributor to the financial debacle.
“You will not have people making decisions that cannot be scrutinized,” Mittermeier said. “This will be done in a public way. It will ensure that all the issues that need to be addressed will be discussed in a public manner.”
County supervisors and members of the financial industry greeted the proposal with enthusiasm.
“The most significant part of this is that it would entirely remove the supervisors from the influence of broker dealers,” Supervisor Marian Bergeson said. “It’s a tough policy that deserves our support.”
Supervisors Don Saltarelli and William G. Steiner echoed Bergeson’s approval. Supervisors Jim Silva and Roger R. Stanton were unavailable for comment. The chief of the Municipal Securities Rulemaking Board, which regulates in the industry, said he welcomed the proposal as a way to purge the municipal bond world of any hint of corruption. The MSRB has issued a rule banning political contributions from underwriters doing business with elective bodies.
“We’re supportive of any effort to remove conflicts of interest or questions or concerns that people have about the process,” said Christopher A. Taylor, the executive director of the MSRB.
The heart of Mittermeier’s proposal is a five-member board, called the Public Financing Advisory Committee, that would oversee county bond deals. The committee would consist of the county CEO, the county counsel, the auditor-controller and two citizens named by the supervisors.
Under Mittermeier’s plan, the county’s chief executive would submit any proposals for public financing to the advisory committee. Guided by the written explanations from underwriters and bond lawyers, the advisory board would modify, reject or recommend the deal to supervisors.
The advisory committee would have to approve the financing for it to go forward.
Mittermeier said the written assurances that the county would require from underwriters and lawyers would help ensure the soundness of the county’s investments.
“This is a way to make sure that we get all the pertinent data that we need make a decision,” Mittermeier said.
The advisory board would also select underwriters and financial advisors for the deal. Those choices would be subject to ratification by the supervisors. That step would mark a departure from past practice, when such choices were made largely by the supervisors.
The plan would also extend the ban on political contributions to financial advisors and bond lawyers. Under the Mittermeier proposal, any financial professional who makes a contribution to a supervisor would be ineligible for county business for two years.
Skip Fish, an Orange investment counselor and former chairman of the MSRB, said he thought extending the ban to cover lawyers and investment advisors was a good idea.
“They are competing for the same business as anyone else,” said Fish, the chairman of Fish and Lederer Investment Counsel.
That aspect of the plan could dry up what was once one of the most lucrative sources of campaign cash for several supervisors. In the years leading up to the bankruptcy, several supervisors collected thousands of dollars in campaign funds from professionals who did work on county bond deals.
Between 1990 and 1993, Supervisor Stanton received $19,243 in campaign contributions from bond-related firms. Then-Treasurer Citron received $13,929, then-Supervisor Gaddi H. Vasquez picked up $15,225 and Steiner got $10,300.
Steiner said the proposal would send a strong message that the county had fixed its problems. And he said he hoped that Orange County would become a positive role model for other local governments.
“I think this will set the tone for the entire municipal securities market,” Steiner said.
* D.A. ‘INTIMIDATED’ JURY: Grand jurors say Capizzi opposed independent counsel. B1
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Reforming the Rules
County Chief Executive Officer Jan Mittermeier wants to change the way Orange County handles municipal bond issues. Her reforms would:
Prohibit the issuance of bonds purely to gamble on interest rates.
Prohibit contracts with finance professionals and lawyers who have contributed to the political campaigns of county supervisors.
Establish a committee to oversee all municipal bond issues and pick the underwriters and financial advisors for each bond deal. These underwriting teams are currently selected by supervisors.
Require the county’s executive office to prepare a comprehensive report before any bond issue is approved.
Require bond lawyers and underwriters to provide written assurances that proposed bond issues are financially sound, that they meet legal requirements and that proper disclosures are being made to buyers.
