Red Flag Investments
In an ironic twist of fate, John M.W. Moorlach, the current county treasurer who first blew the whistle on the risky investment practices of his predecessor, now finds himself in a situation with some similarities.
Two of Moorlach’s investments, for a total of $40 million in Edison International (not Southern California Edison), are being understandably questioned and criticized by some as being risky, speculative and not in keeping with the conservative investment approach that he assured the public would be followed in the wake of the 1994 bankruptcy.
Moorlach’s openness and operation of the treasurer’s office, and its investments, certainly are far different from the high-rolling and at times illegal operations of former Treasurer-Tax Collector Robert L. Citron. Moorlach has done much to restore confidence and integrity to the operations of the treasurer’s office in the aftermath of Citron’s wrong-way bets on interest rates and his duplicity in trying to cover them up.
The $40 million represents only a small portion of the county’s educational investment pool. But it raises a red flag. It also again puts school districts that lost not only interest but principal in the 1994 county bankruptcy at risk again. Schools need every cent they can get and whatever they may lose now shortchanges their critical classroom needs.
Moorlach, distraught at the outcome, has said he considered it a good investment and never expected Edison or the state to allow the utility to wind up in such a financial bind. He feels confident that the notes eventually will be paid in full. The experience of utility investments, even in the case of bankruptcies, would seem to support that optimism. Investors can only hope so.
But that doesn’t resolve some of the questions raised by the rationale of investing $20 million last September after Edison disclosed it was paying more for electricity than it could charge its customers.
Another $20 million came on Dec. 7 after the utility had acknowledged its serious financial problem and the possible need of bailouts to keep it solvent. Administrators of other public investment pools months before stopped putting money into utilities because of the uncertainties of deregulation.
The notes Moorlach bought have now been downgraded to junk-bond status and the county’s pool credit rating was downgraded a notch to AA status.
The most important question to be asked from this recent experience is what happened to the oversight procedures put in place after the 1994 bankruptcy to serve as a check and balance on the investment program?
Moorlach reviews his investment officers’ decisions and issues a monthly report that goes to the county’s investment oversight committee, county supervisors, pool investors and is even put on the Internet for the public. The state also has oversight reporting requirements.
That somehow still hasn’t insulated the investment pool from purchases such as the Edison notes, or prompted any inquiries of concern from those responsible for overseeing investment funds. Shouldn’t oversight come closer to investment time rather than long after?
The fallout over the Edison purchase also raises the question of how much confidence may be lost in the county’s management of the investment pool. Only a few special districts have rejoined the pool since the bankruptcy, but the treasurer’s office manages all school district investment funds.
All investments are subject to the vagaries of the market and Moorlach, who is an able and hard-working public official, now must not only rightfully account for his judgment, but bear the brunt of the hindsight being applied to it.
Supervisor Todd Spitzer said he will ask the county board to question Moorlach on the purchase. The board should also review its oversight procedures.
It’s obviously a sounder investment policy to try to avoid potential losses in the first place than to have to explain them later.
