O.C. Schools’ Investment in Edison Drops Credit Rating

Orange County invested $40 million in public school funds over the past 3 1/2 months in the struggling Southern California Edison, actions that triggered a downgrading Tuesday of the county investment pool’s credit rating.

County Treasurer John M.W. Moorlach, who as a candidate warned of the county’s risky investments before its historic 1994 bankruptcy, invested the money even though Edison had publicly acknowledged its financial difficulties at the time.

In a memo late Tuesday, Moorlach alerted the county Board of Supervisors that he invested $20 million in late September and another $20 million in early December.

The memo came after the credit-rating firm Fitch IBCA, Duff & Phelps lowered its rating a notch for a county pool that holds $1.1 billion in excess funds for the county’s school districts. The investment pool was still left with an investment-grade rating.

“It is our opinion that while there is a remote potential of a delay in receiving payments at maturity of these securities, there will not be any loss of principal,” Moorlach wrote to supervisors.

The county’s investment in Edison debt securities amounts to 3.3% of the schools’ pool. The county’s overall investments total $3.8 billion; there are no Edison investments in the county’s main investment pool.

Fitch’s decision to downgrade the schools’ fund credit rating came after Edison notes fell Tuesday to junk-bond status when the utility defaulted on nearly $600 million worth of payments. But Moorlach said the county’s investments in Edison are not expected to result in the loss of any principal value, presuming Edison will work its way out of financial difficulty.

“It’s impractical for the state to let Edison go into bankruptcy,” Moorlach said. “I feel comfortable we will get our principal and interest.”

The county treasurer initially invested $20 million Sept. 28 in a medium-term note after Edison publicly acknowledged that it was paying more for electricity than it could charge customers. That note matures July 18.

He invested another $20 million in a short-term note on Dec. 7, three weeks after Edison said it needed a 10% rate hike and the ability to set its own rates to avert a financial disaster for the utility.

On Tuesday, Moorlach defended his decision to make the Dec. 7 investment even while electricity supply costs had skyrocketed and utility companies were warning of brownouts, rolling blackouts and possible bailouts needed to keep them afloat.

He said he and his advisors believed the note was “a good credit-quality investment” and that they were comfortable with the terms.

“At the time, we did not believe the state would let the situation devolve to where it is right now,” Moorlach said.

Later in December, with Edison officials openly warning of bankruptcy, the county attempted to sell the notes, but couldn’t find any takers, he said. Rather than sell at a loss, Moorlach said he decided to hold on and wait for the state to intervene.

Moorlach compared the current situation to sudden losses in the county’s investment pool that resulted in the bankruptcy six years ago. Had investors held on at the time, Moorlach said, “they would have had their principal and interest in full. That’s the position I’m taking.”

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In early 1994, Moorlach had warned that the risky investments of former Treasurer Robert L. Citron could lead the county into financial collapse, which occurred the following December.

“It is ironic that the man who blew the whistle on what was going on in those days as being speculative and ill-conceived has got himself caught in this mess,” said Zane Mann, publisher of the California Municipal Bond Advisor. “But if I were a taxpayer in Orange County, this is nothing to be concerned about.”

Edison spokesman Clarence Brown said he was unaware of Fitch’s action against the county pool, but said the utility’s financial crisis will reverberate across the state.

“We’ve said all along that the California economy is at risk here,” Brown said.

Board Chairwoman Cynthia P. Coad said she hadn’t had time late Tuesday to digest Moorlach’s memo but praised him for informing the board of Fitch’s action.

“John’s got a handle on it. I have confidence in him,” she said.

Several Orange County school officials said they were aware of the Edison investments and were being provided with updates by school officials.

Dana Black, a board member in the Newport-Mesa Unified School District, which was hit hard by the county’s bankruptcy, said she and other board members have been receiving weekly--and sometimes daily--updates regarding the pool’s status.

“It came up immediately when we started hearing about [the problems at] Edison,” Black said. “We’ve been assured that the county is looking into it, but you never know. At the last meeting our assistant superintendent of business services said that they were on top of it and that there are no concerns, but we are concerned. We are very concerned.”

Ann G. Albertson, a trustee for the Tustin Unified School District, said she was unaware of any problem with the pool but said Fitch’s action Tuesday “definitely raises a red flag.”

However, John Palacio, a board member at the Santa Ana Unified School District, expressed confidence that Gov. Gray Davis and the Legislature will step in before the utility fails and that any short-term loss would be recouped.

“Utility stock has historically been a very safe stock,” he said.