Eighteen years after Orange County crashed into the largest municipal bankruptcy, with a $1.6-billion trading loss, the collapse remains the leading example of foolhardy investments, Wall Street greed and lazy government supervision.
That is an enduring legacy of Robert L. Citron, the soft-spoken but high-rolling former treasurer who died this week at age 87. His legacy, though, also includes the state Legislature’s subsequent overhaul of investment rules, which were tightened to prevent budget-strapped local governments from ever becoming so reckless again.
Indeed, it was other pressures — soaring pension obligations, diving revenues, higher unemployment and a glut of foreclosures — that sank San Bernardino, Stockton and other cities into recent bankruptcies.
Jefferson County, Ala., became the largest municipal failure two years ago, with $4.2 billion in losses. But no local government has yet overshadowed the Orange County debacle in sheer shock value.
“Everybody comes back to Orange County because it’s one of the wealthiest counties in the country, the surprising amount of debt and the types of investments that Bob Citron made,” said Mark Baldassare, a former UC Irvine urban planning expert who wrote a book on the bankruptcy.
Had Citron’s speculations in complex securities not imploded, more cities, schools and local agencies would have taken similar risks to plug budget gaps that seemed only to increase over the years, Baldassare and other observers said.
“Did a great big disaster happening early help avoid an outcome of multiple bankruptcies that together would have been bigger? That’s not hard to imagine,” banker Christopher Varelas, whom the county hired as a financial advisor after the bankruptcy, said Friday.
Without the example of Orange County, there probably would have been a robust market offering complex, higher-yielding securities to California cities and schools, Varelas said.
“It’s hard to believe Wall Street could have stayed away from such a large market. And it’s hard to believe municipalities could have resisted the temptation to find a quick fix for their budget problem,” he said.
Citron offered just such a quick fix to Orange County during the deep recession of the early 1990s when aerospace jobs evaporated and home prices cratered.
Originally elected tax collector, Citron, who had no formal financial training, became treasurer as well when the United States’ fifth-most-populous county consolidated operations. He was elected seven times.
In the years before the collapse, he was bringing in an extra $160 million a year by what proved to be sheer wagers on low interest rates, magnified by heavy borrowing that converted $7.8 billion in local government funds into a $20-billion investment portfolio.
After huge losses were disclosed in late 1994, Orange County blamed its former financial and legal partners for the debacle. It ultimately won $900 million in settlements, about half from Merrill, Lynch & Co., which concocted many of the complicated securities that fell apart. One called an inverse Swiss floater incorporated two bets: one that the Swiss franc would decline in value, the other that interest rates would stay low.
The county had to take on $1 billion in new debt largely to repay 200 cities, school districts and public agencies that invested in Citron’s county funds.
Orange County refinanced the debt at a lower rate in 2005, keeping its annual payment at about $90 million but allowing a projected payoff in 2015 or 2016 instead of 2027, said John M.W. Moorlach, who replaced Citron as county treasurer and is on the county’s Board of Supervisors.
Repayment has forced the county to budget conservatively, ignoring or postponing projects in such areas as flood control and mental health, Moorlach said. When the debt is retired, he hopes the funds can be redirected to paying down Orange County’s unfunded pension liabilities, which top $5 billion.
Back when the money from Citron was rolling in, making belt-tightening unimportant, few had raised questions about its source.
“I don’t know how in the hell he does it, but he makes us all look good,” Thomas F. Riley, a former Board of Supervisors chairman, famously said.
Citron’s bets paid off so well in the early 1990s that he and his assistant Matthew Raabe skimmed off $89 million due to cities, schools and agencies to put in the county’s coffers for discretionary use.
Both later were convicted of fraud. Citron was sentenced to a year of clerical duty in the jails during the day and spent nights at home; Raabe’s conviction was overturned on appeal.
William J. Popejoy, the financial executive brought in as county chief executive after the meltdown, says the lesson for other governments is to speak up when something looks too good to be true.
“A lot of people in the county government and at the cities and especially the special districts knew there was a huge amount of money coming in. But no one asked the question; they didn’t want to stop the golden flow of funds coming from Citron,” Popejoy said. “And somebody should have.”
Actually, someone had — Moorlach.
Although had lost his bid in 1994 to unseat Citron as treasurer, Moorlach had predicted a financial disaster a year earlier and tried to make it a campaign issue. Citron dismissed the talk as political posturing and was reelected.
Popejoy and other officials proposed raising taxes to help right the county’s finances, but voters refused. The county froze hiring, laid off thousands of workers and cut spending on social programs.
“It caused great hardship, and that is part of the legacy Bob Citron left as well,” Popejoy said. “To my knowledge, however, he never did so for personal gain.”
Citron’s defense attorney David W. Wiechert said Citron, however misguided, “was an incredibly loyal and caring individual” who believed himself to be acting in the county’s best interests.
Forgiveness is in order, Wiechert said, “especially now, when we have seen that even the brightest minds on Wall Street could bring the world’s economy to an apocalyptic precipice.”