Moorlach Feels Pain of School Losses

Orange County’s financial chief said the uproar over his office’s decision to invest $40 million in school money in the battered utility market is “breaking my heart,” and he conceded that every school district in the county could lose millions in future earnings.

County Treasurer John M.W. Moorlach said the twin $20-million investments in Edison International--one made Sept. 28 and the other Dec. 7--were viewed as solid moves by his office at the time, despite loud warnings then of a potential financial meltdown of Southern California Edison, the state’s second-largest utility.

The investments represent 3.3% of about $1.1 billion in the county’s educational investment pool, which holds excess operating cash for school districts. The pool was expected to earn 6.5% in interest this year.

The Edison notes fell to junk bond status Tuesday, triggering a downgrading of the county pool’s credit rating from AAA to AA status the same day.

Some school and county leaders expressed concern, even amazement, that Moorlach had invested school money in Edison, but said they had faith the notes eventually would be repaid. County supervisors and members of an oversight committee that was established after the county’s historic 1994 bankruptcy--caused by soured investments--indicated they will review the Edison investments next week.

Orange County could find itself waiting in line as a creditor if Edison files for bankruptcy. In such a worst-case scenario, the county would withhold interest payments to the districts for five months and use that money to replace the lost capital. The lost interest earnings for the districts could potentially range from $4.08 million at Garden Grove Unified to $3.89 million at Capistrano Unified. Any remaining interest would be distributed among the districts, based on the total amount each district has in the pool.

Moorlach said he learned of the Dec. 7 purchase of the Edison bonds a week after the investment. He said he hadn’t told his investment officers to steer clear of such market purchases because “my gut didn’t tell me it was necessary.”

“In hindsight, that would have been easy to do,” he said. “It’s breaking my heart to see this happen.”

Robert Fauteux, chairman of the Orange County Treasurer’s Oversight Committee, said that while his panel was unaware of the purchases, they did meet the guidelines of the county’s investment policy.

“Hindsight is worth 20,000 pounds of foresight,” said Fauteux, who was asked by Moorlach to chair the committee after it was formed in 1995 in the wake of the county’s $1.64-billion bankruptcy the previous year.

Fauteux said the panel, which meets Jan. 24, is charged with guaranteeing that investments meet county and state law.

Supervisor Todd Spitzer said he also will ask his colleagues next week to question Moorlach on why his office bought the Edison bonds.

School Officials Find News Hard to Believe

School officials, alerted late Tuesday to the troubled investment, continued to monitor the situation. Many expressed concern.

“I would be very interested to try to understand why he would have done that,” business official Carlene Wing Chandler of the Capistrano Unified School District said of the investments. “I think it’s certainly something that I would have been very cautious about.”

Michael Fine, assistant superintendent for business services for the Newport-Mesa Unified School District, said he found it hard to believe Moorlach would invest $20 million in Edison just last month. But Fine said he was confident the investments ultimately would not harm the schools.

“I’m not worried about it,” he said. “Maybe I’m being Pollyanna-ish.”

Art Montes, a trustee for the Centralia School District in Buena Park, said that, of all people, Moorlach--who was the lone critic of then-Treasurer Robert L. Citron’s risky investments in 1994--”should have seen it coming.”

Montes and Bruce Whitaker, an accountant and government watchdog, questioned whether Moorlach may have been blinded by his friendship with several local Southern California Edison executives--including public affairs manager Jo Ellen Allen, who has served with Moorlach on the Orange County Republican Central Committee.

“That makes it difficult to be objective,” said Whitaker, who monitored the county’s investments after the bankruptcy.

Moorlach denied discussing the investments with Allen or other Edison employees prior to the purchase. Edison officials declined comment on the investments.

“This was completely removed from anything political,” Moorlach spokesman Brett Barbre said.

Steve Lee, a financial analyst with Fitch Inc., which downgraded the county pool’s credit rating, minimized the significance of the investment risk and said the remaining funds in the school pool are strong.

“From a credit standpoint, the downgrading is not that significant,” Lee said. “Even if Southern California Edison defaulted, everything else is safe.”

He said managers of the pool would have the option of spacing out those months when interest would be withheld.

“They could spread it out over a year or two or get it all over at once. It depends on how they want to spread out the pain,” Lee said.

Meanwhile, investors for other government agencies in Orange County said they did not invest in utilities such as Edison because it was viewed as being more of a risk than government securities and less profitable than other forms of commercial paper.

San Bernardino County Treasurer Dick Larsen said his office dumped $5 million worth of Edison and other electric utility stock a year ago when the uncertainties of deregulation first loomed.

“We just thought it was not the thing to be in,” he said.

At the Santa Margarita Water District, Manager John Schatz said the policy of the South County water agency forbids commercial paper investments such as the one involving Edison.

“Our policies require a pretty conservative investment strategy,” Schatz said. “I think we’re seeing why that’s the case now.”

The Irvine Ranch Water District, the city of Anaheim and the Orange County Transportation Authority also have refrained from investing in such utilities.

Moorlach said in an interview Wednesday that he has instructed his investment officers to stop buying notes or other investments from California utilities for the time being.

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Contributing to this report were Times staff writers Monte Morin, David Reyes and Jessica Garrison.

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O.C. Educational Investment Pool

Orange County Treasurer John Moorlach invested $40 million in public school funds in Southern California Edison debt securities. A district-by-district breakdown as of Dec. 31, 2000:

Source: Orange County Treasurer’s Office