Orange County Still Dealing With Bankruptcy Legacy

Five years ago today, at 4:52 p.m., Orange County did the unthinkable and declared bankruptcy, instantly becoming a symbol of government greed, foolish risks and complacency.

Memories of the meltdown have faded, but its legacy lingers. Orange County still holds the distinction of being the largest government ever to seek protection from its creditors. And taxpayers are still chipping away at a Mt. Everest-size debt.

While the turbocharged economy has helped propel Orange County’s rapid recovery, the county still owes more than $1 billion. Paying the interest on that debt will cost taxpayers more than $800 million by 2027, when the bonds are expected to be retired.

Those tax dollars otherwise could have been used on parks, libraries, health care, law enforcement or building new jails--an example of some of the hidden costs of the bankruptcy.

Still, many county leaders are proud to say that the county weathered those dark and chaotic days, emerging leaner and more focused.

Losing $1.64 billion almost overnight jolted county officials into long-range financial planning and instituting more financial checks and balances. Since then, the entire culture of county government has changed, with fewer managers and more workers focused on delivering services, said Jan Mittermeier, Orange County’s chief executive, a position created after the bankruptcy to give greater authority--and responsibility--to the county’s top staffer.

But have the reforms immunized Orange County against future financial ills? Could the bottom drop out again?

Yes, say the experts.

While there is a small chance of a similar crisis, many of the core problems persist. The county remains dependent on state revenues and vulnerable during weak economies. And, some charge, politicians are too influenced by special interests.

“Are there politicians who would take the risk of destroying schools, roads and flood control to find money to fund their pet programs? Absolutely,” said Chriss Street, a Newport Beach financier who, with current Orange County Treasurer John M.W. Moorlach, tried to warn people before December 1994 about then-Treasurer Robert L. Citron’s precarious house-of-cards portfolio.

Mark Baldassare, senior fellow at the Public Policy Institute of California, said counties are vulnerable because of their reliance on state and federal money. He pointed to Los Angeles and San Diego counties, which have had brushes with financial collapse.

And then there is Ventura County, where the county administrator quit two weeks ago after only four days on the job, citing the county’s previously undisclosed financial troubles.

Moorlach said he takes several steps toward safeguarding the public’s money. He has two oversight committees monitoring his investments, and he also regularly discloses his office’s finances and investments.

“There was no oversight of Mr. Citron, and he opposed it every time it was even brought up,” said Moorlach. “[Now,] we’re not really selling the portfolio. . . . It’s more of a ‘Hey, it’s available.’ ”

Such steps also mean that the investment pool no longer reaps the same legendary returns it did when it held taxpayer funds from the county and 200 schools, specialized districts and all but two Orange County cities. Now, just two small special districts and the county make up the investment pool.

Under Moorlach, the county pool contains about $2.75 billion, a far cry from the $21-billion bubble that burst in December 1994.

In the early ‘90s, investors were enchanted with Citron and his hefty earnings, the results of winning bets on low interest rates. The earnings came as the rest of the region was struggling: California’s long recession had eliminated 57,000 payroll jobs, and real estate values had tumbled.

It all fell apart when the Federal Reserve repeatedly bumped up interest rates in 1994 to curb inflation, and the value of Citron’s securities--and the interest they paid--plummeted. Citron blamed Wall Street giant Merrill Lynch & Co., his chief investment house, for encouraging his disastrous actions. The county sued Merrill and other professional firms, contending that the strategy had been so reckless that it was illegal.

Merrill officials maintained it had acted properly, warning Citron of the risks. But the brokerage agreed to pay more than $450 million to settle the county’s civil charges and end a criminal investigation.

Additional settlements brought the county’s recovery to more than $860 million, about half the losses.

Voters, meanwhile, refused to raise the sales tax to pay off short-term obligations. The county was forced to pressure bondholders into accepting a year’s delay in payments, then took on about $1 billion in new long-term debt to pay the old debts.

As the county chips away at the debt, there are still some legal fights ahead on the bankruptcy front. To be litigated is a lawsuit against Merrill Lynch, brought by a group of 14 cities and public agencies that lost money in the bankruptcy and reserved the right to sue on their own behalf. That lawsuit is pending in Contra Costa County Superior Court.

Meanwhile, Citron, the bankruptcy’s most conspicuous figure, has adjusted to life after the scandal. He pleaded guilty to six felony counts of fraud and misappropriation of funds. There was no evidence of personal profit from the scheme.

Citron was ordered to pay a $100,000 fine and spend a year in jail, but instead served his time in a daytime community service program working at the sheriff’s commissary.

Now 74, Citron volunteers three days a week at a food bank, updating employee brochures and handbooks. He attends every USC football home game, as he has for more than 50 years.

The rest of his time is spent at home in north Santa Ana. Five years after the furor, the Citrons still shy away from interviews.

“We’re fine,” said Citron’s wife, Terry. “We just get upset every once in a while over the press coverage.”