O.C. Panel: Edison Plunge Proves Pool Needs Reform

The fact that Orange County invested $40 million in Edison International despite warning signs that the utility was having financial problems shows reforms are needed in the county’s investment procedures, an oversight committee concluded Wednesday.

The Treasury Oversight Committee, formed after the county’s 1994 bankruptcy, concluded that Treasurer John M.W. Moorlach’s office should use more information than just credit ratings before making purchases.

“As we’ve seen, credit ratings are less than perfect,” said Clyde Kendzierski, a member of a technical committee that reviews the county’s trades weekly and advises Moorlach.

Moorlach has repeatedly apologized for the investments and says his office is considering adding a financial analyst to do more research before trades are made.

While Edison had a good rating at the time Moorlach’s assistants made the first of two $20-million investments, the county’s rating agency had warned of putting money in the state’s utility market. The treasurer’s office made its first investment Sept. 28 and a second on Dec. 7 as state utilities began to warn of rolling blackouts and potential state bailouts.

County Auditor-Controller David Sundstrom said Wednesday that Edison had been placed on “credit watch” in September, a warning signal to investors. He said while it would be impractical for Moorlach to personally approve every trade, he should approve any trade involving a company on “credit watch.”

Robert Fauteux, one of two private citizens serving on the oversight committee, said the warning should have been a “red flag waving out there.” If the investment ultimately sours, it should be blamed on bad judgment, he said.

“The problem was a bad credit decision of not being plugged into the credit environment in which we were operating,” Fauteux said.

Other committee members said the county shouldn’t be excluded from dealing with a company on “credit watch” because it might indicate something positive is occurring, a merger perhaps or a development that actually would enhance the company’s performance.

Committee members generally praised Moorlach’s performance over his tenure and said he has been open and forthright. Moorlach became treasurer after raising warnings about the risky investments by then-Treasurer Robert L. Citron that led to the county’s bankruptcy and a $1.6-billion loss of funds held for the county, schools and special districts.

So far, no money has been lost in the $40-million Edison investments, which were purchased with school funds. The pool holds excess operating funds for the county’s schools among others, and now approaches $1.3 billion. The first $20-million Edison note will mature next Wednesday; the second is due July 18.

Edison International has pledged to pay all of its financial obligations, regardless of the financial situation of its subsidiary, Southern California Edison. Last week Moorlach created an ad-hoc committee to deal with Edison in the event the parent company enters bankruptcy.

Jeffery M. Thomas, the Tustin mayor who heads Moorlach’s technical committee, said the potential risk with the Edison investments “goes on in business all the time” and that investors shouldn’t overreact.

But Sundstrom said the county’s schools have good reason to be worried because they can’t afford to lose even a portion of the interest earnings from their investments.

“Schools run on such a tight budget that they count every nickel,” Sundstrom said.