MOORLACH UPDATE — Investment Authority — March 17, 2010

Happy St. Patrick’s Day!

March 17 is a special date for me.  Fifteen years ago, today, I was appointed by the Board of Supervisors to the position of Treasurer-Tax Collector.  The Associated Press wire service story is in the LOOK BACK below.

The Daily Pilot has two stories on actions by the Board of Supervisors at yesterday morning’s meeting.  On the recent conclusion of our negotiations with AOCDS, I was hoping that the “2% @ 50” formula would be applied for “new hires” in our public safety category.

I also voted to approve an item that, as you may recall, I put on the Board’s agenda two and one-half years ago.  This time Supervisors Campbell and Nguyen put it before us.

The OC Register also covers this topic in its news article and editorial.

The editorial makes me want to elaborate.

It’s difficult dealing with someone who only tells you half of the story.

Yes, the County’s Investment Pool garnered the highest rating possible from Standard & Poor’s.  But, we have a new portfolio that only holds the Whistle Jacket Structured Investment Vehicle residue, Serpentine Funding Limited, that was not rated.  Had this toxic holding not been segregated, the Pool would not have garnered rating.  You’ll have to ask S&P for their logic on this one.

I could go on with more examples, but why belabor the point.  Mr. Street had me fooled for a very long time.  Live and learn.

I stated at the Board meeting that it was the Board of Supervisor’s vote in August of 2004 for “2.7% @ 55” for our non-safety, general, members that was the pivotal incident that drove me to run for Supervisor.  I testified against this agenda item on that famous day.  If I couldn’t convince them from the podium, maybe I should join them on the dais?  So I ran.  This created a vacancy.

With the new “2.7% @ 55” formula, some 800 senior managers left the county in March of 2006 to retire.  That left a vacancy in the Assistant Treasurer-Tax Collector position.  By March, 2006, there was only one candidate running for Treasurer-Tax Collector, Chriss Street.  I held a short, one-day recruitment.  This is not an uncommon practice and was authorized by Human Resources.  There were two applicants.  One dropped out.  It gave me a chance to train my successor for the next ten or so months.

It’s nice to be criticized by the head of the union that garnered “2.7% @ 55” about hiring Chriss Street, but he can take the credit for putting the balls in motion.  Beware the rule of unintended consequences.

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Sheriffs get new pension

Plan would have department employees pay for part of their pensions and freeze salaries until 2011.

By by Erik Holmes

The Orange County Board of Supervisors approved a resolution Tuesday to implement a new pension plan for sheriff’s deputies, raise their retirement age, reduce benefits and ask them for the first time to contribute to their retirement plans.

All four sitting supervisors voted to implement the agreement with the Assn. of Orange County Deputy Sheriffs, although Supervisor John Moorlach, 2nd District, had voted in February against approving it.

Supervisor Bill Campbell, 3rd District, said the plan will save the county only a modest sum now but will bear more fruit in the future as current employees retire and new ones are hired.

“The immediate benefit of this is that new employees will be paying a certain percent of the pension cost, and that’s a savings to us,” he said. “The (larger) benefit will be seen over time.”

The plan will save the county an estimated $4.4 million during the three-year term of the agreement, according to a report prepared by county staff.

The agreement between the county and deputies’ union — which runs through October 2012 — calls for new deputies hired after enactment to receive a “3% at 55” pension benefit, which means at age 55 recipients can begin collecting 3% of their final-year salary for every year they served.

Existing employees will remain in the current “3% at 50” plan but will have to contribute up to 5% of their income to the retirement plan. New employees will begin paying 6.6% of their income as a retirement contribution.

The plan will go into effect April 9.

Moorlach said he would reluctantly vote to approve the plan, even though he favors cutting the deputies’ retirement benefit to “2% at 50.”

“I would have certainly liked to have seen a more aggressive change,” he said.

The county employees’ pension fund faces a future deficit of $3 billion, in part because deputies have never contributed from their paychecks as other county employees do. Moorlach asked county staff for a more complete analysis of how the plan will affect the future unfunded liability.

The new plan also will impose a salary freeze on deputies through at least October 2011.

In return, deputies will receive increased contributions from the county to their medical trust fund. The agreement requires the county to pay $745 per employee per month, compared with $620 under the old arrangement. Also, the county’s contribution will increase twice more before the agreement expires.

Supervisors strip treasurer’s powers

The Orange County Board of Supervisors on Tuesday temporarily stripped embattled County Treasurer Chriss Street of his investment powers.

“It’s a sad day,” Supervisor Bill Campbell said before the board passed an emergency ordinance to turn Street’s investment authority over to the county’s chief financial officer.

A U.S. Bankruptcy Court judge last week handed down a $7-million judgment against Street, a Newport Beach resident, for breaching his fiduciary duties while he was a trustee for a bankrupt trust from 1998 to 2005, before his election as county treasurer-tax collector.

The court ruled that Street breached his fiduciary duties to the End of the Road Trust and violated certain terms of the trust agreement. Judge Richard Neiter ordered Street to pay more than $7 million in damages.

“I certainly feel like I was not informed properly — like I was used perhaps,” Supervisor John Moorlach said.

In a letter to supervisors Friday, Street recommended that the board temporarily delegate his investment powers to Auditor-Controller David Sunderstrom while he weighed his legal options.

Street was one of Moorlach’s allies. The supervisor served as treasurer before Street, and both were critics of former Treasurer Bob Citron, who served prior to the county bankruptcy of the 1990s.

— Brianna Bailey

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Supervisors strip Street’s investment authority

County supervisors on Tuesday unanimously voted to revoke Orange County’s Treasurer-Tax Collector Chriss Street’s authority to invest county funds.

The vote comes on the heels of a federal ruling against Street that in his previous job, he breached his fiduciary duty when he attempted to build an empire instead of protecting the assets of a trust he was hired to liquidate. He was ordered to pay more than $7 million in damages to the End of the Road Trust, which he ran for seven years.

Supervisors said Tuesday that while Street has done a good job as treasurer, the move was needed to prevent the public and investors from losing confidence in the county’s investment pool until Street’s term ends on Jan. 3, 2011.

“It’s a sad day,” Supervisor Bill Campbell said.

Street recommended last week that the board temporarily remove his ability to invest county funds, but he suggested handing over that authority to the county’s elected Auditor-Controller David Sundstrom. The board rejected Street’s plan and instead gave investing authority to the county’s Chief Financial Officer Robert Franz. Street was not at the supervisor’s meeting.

Street was the court-appointed trustee for the End of the Road Trust, successor to the bankrupt Fruehauf Trailer Corp., from 1998 until creditors forced him out in July 2005. Supervisor John Moorlach hired him as the county’s assistant treasurer in January 2006, in effect making Street his designated heir in the June 2006 election.

Nick Berardino, general manager of the Orange County Employees Association, called out the one-day hiring process Moorlach implemented to hire Street, saying it was unnecessarily politicized and that nobody listened to the union’s criticism of the process at the time.

“It is a sad day, but it is a day that probably didn’t need to happen,” Berardino said. “There are lessons for all of us to learn to help us face the challenges (ahead).”

U.S. Bankruptcy Judge Richard M. Neiter ruled that Street wasted millions of dollars trying to create a truck-trailer manufacturing business that he could run, rather than liquidating assets as he was hired to do. And he found that Street used trust money to pay for everything from fancy dinners to parking tickets.

Neiter ruled that Street “willfully engaged in self-dealing to advance his personal interest ahead of that of the trust’s beneficiaries.”

And the judge dismissed Street’s sworn explanations for his conduct as “absurd”, “inconceivable” and “incredulous.” He wrote that Street’s conduct as trustee “amounts to gross negligence and willful misconduct.”

Moorlach said he’s known Street since 1994, when he ran against Robert Citron for the treasurer. Citron’s risky investments later drove the county into bankruptcy, and Street, Moorlach said, was one of the few people who knew what Citron was doing.

But Moorlach says that when Street expressed interest in running for treasurer, he never told Moorlach about his issues with Fruehauf.

“I was not informed properly. I was used.” Moorlach reiterated Tuesday. “Fruehafuf was not a fly on the wall in a room. It was a Doberman Pinscher.”

As county treasurer, Street’s track record was better. He invested $6.5 billion for the county government and more than 20 local school districts. Under his guidance, the county treasury earned high ratings from outside groups for its safety, with its money market fund earning 0.54 percent in the last year and its extended fund, invested for one to three years, earning 2.45 percent.

Yet he also lost millions investing in structured investment vehicles, a strategy that other county treasurers avoided and that backfired when the worldwide credit market collapsed in August 2007.

Supervisors Bill Campbell and Moorlach called for Street’s resignation after the ruling. Street declined, and he’ll remain in office until the beginning of 2011. He has decided not to run for reelection, and the filing deadline to fill his open seat closes Wednesday.

Editorial: OC treasurer made a dead-end Street

Embroiled in a scandal involving his dealings in a former private-sector job, Orange County Treasurer-Tax Collector Chriss Street recently was on the losing end of a federal court judgment that found he breached his fiduciary responsibility to a trust he was hired to protect and liquidate. In response to the court’s ruling, the Orange County Board of Supervisors voted unanimously Tuesday to strip Mr. Street of his power to invest county funds, effectively rendering him lame in his position.

Mr. Street was found negligent during his former employment with the End of the Road trust, a position he held for seven years. U.S. Bankruptcy Judge Richard M. Neiter ruled Mr. Street should pay more than $7 million in damages for his mismanagement. As a result of the ruling, Mr. Street opted not to run for reelection this year.

It is unfortunate that Mr. Street will leave office under these circumstances, because he has been a good steward of the county’s resources, at least as far as the eye can see. The Board of Supervisors agreed Tuesday, stating that, while his performance had been good, they needed to remove his investment authority in order to maintain the confidence of investors and the public in the county. The supervisors are correct; Mr. Street rightfully should go.

Of course, there is more than meets the eye in these types of situations. When Mr. Street originally ran for Treasurer-Tax Collector in 2006, he was at the time deputy treasurer, a position bestowed on him by then-treasurer John Moorlach, now a supervisor. Mr. Moorlach all but anointed Mr. Street as his successor as treasurer but when the controversy erupted over Mr. Street’s performance with the End of the Road trust, Supervisor Moorlach was quick to call for his resignation. Mr. Street declined.

It will be interesting to see whom members of the Board of Supervisors support for treasurer this coming election cycle, particularly Mr. Moorlach, given he once held the position. Whoever the replacement is, the new treasurer should have the same expertise Mr. Street possesses on pensions and the same informed, cautious approach to investment that garnered the county several awards on Mr. Street’s watch.

It is imperative that the incoming treasurer have remarkable knowledge on public-sector pensions but also a particularly credible and ethical persona that ensures continued integrity for one of the county’s most important public offices.

FIVE-YEAR LOOK BACKS

March 17

1995

St. Patrick’s Day will always be special to me, as it was the day that the Orange County Board of Supervisors appointed me to the position of Orange County Treasurer-Tax Collector.

The Associated Press did a story that hit the wires on the 17th.  Of course, the other printed publications would have their stories in their March 18 issues.

The title of this piece was “New Orange County Treasurer Named.”  It may have been penned by E. Scott Reckard, although he has another similar piece that was printed in the San Diego Union Tribune the next day.

Here are some selected paragraphs:

                The accountant whose warnings of financial doom went unheeded by Orange County voters was sworn in as treasurer Friday, 9 months after his defeat at the polls.

                “You want me to start tonight?  In an hour?” a beaming John M. W. Moorlach asked the county Board of Supervisors.

                “Yes!” came a shout from one of the many supporters in the audience.

                On Friday, the 5-member Board of Supervisors unanimously appointed Moorlach to serve as Treasurer until the next regular election, in March 1996.

                Moorlach showed “a lot of courage.  He called it right.  He had the good sense to find experts to assist him with some of the technical aspects,” interim Treasurer Tom Daxon said.  “And he did something no one else managed to do:  He warned the county.”

                Moorlach, an accountant and financial planner in Costa Mesa, promised to develop guidelines for a conservative investment strategy.

                He also promised financial reports written in plain English once a month, earning praise from Supervisor Roger Stanton, who said it would be a stark contrast to Citron’s autocratic, secretive attitude.

                “Orange County in the past was treated like mushrooms—they were kept in the dark and fed manure,” [Moorlach] said Thursday at a committee meeting, where he charmed audience members with promises of conservative investments and full disclosure.

                Fullerton resident Dick Davenport was especially enthusiastic.

                “I was one of the 40% of the electorate who voted for John Moorlach,” he told the committee.  “And I am convinced more than ever tonight that I did the right thing.”

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