MOORLACH UPDATE — TIN CUP — July 27, 2010

Today’s Board meeting had an agenda item that was covered in the OC Register.  I decided to wait until after the meeting to issue my Update.

Two years ago this month, when I served as Chair of the Board, I directed the County Executive Office to coordinate the activities of an ad hoc committee to review two broad areas concerning the current County Campaign Reform Ordinance (TINCUP 2):

1.       The compatibility of TINCUP 2 with state law.

2.       Whether any oversight commission should be established.

The committee reviewed TINCUP 2 in its entirety and by consensus (unanimous agreement among committee members) updated certain provisions to reflect current law, added various new sections and made technical adjustments.  During the course of the committee’s work, the committee determined that the revisions contemplated for TINCUP 2 are compatible with state law.   The revisions that were approved by consensus of the committee are as follows:

·         Exempts recall targets from campaign contribution limits. (§ 1-6-5(b))

·         Requires termination of recall committees within 90 days of paying all attendant expenses. (§ 1-6-5(c))

·         Extends aggregation to individuals and all related business entities, but the individual must own a controlling interest or control the decision of the entity concerning whether and in what amount to contribute to candidates. (§ 1-6-6(c))

·         Deletes unconstitutional provision aggregating husband and wife contributions of community property. (Former § 1-6-6(e))

·         Clarifies recall election cycles. (§ 1-6-7)

·         Regulates intra-candidate transfers and provides for disclosure of related information. (§ 1-6-9)

·         Defines extensions of credit and distinguishes genuine extensions of credit from campaign contributions. (§ 1-6-10(b))

·         Deletes criminalization of violations and requires payment of laundered contributions to the County General Fund. (§ 1-6-15)

·         Limits liability of campaign treasurers to situations in which neither the candidate nor the committee has paid the violation or in which the treasurer knew or should have known the facts constituting the violation. (§ 1-6-16(e))

·         Clarifies the reference point for the automatic CPI increase or decrease in the contribution limits. (§ 1-6-23)

·         Provides fines for late filing of reporting documents. (§ 1-6-29)

·         Allows for campaign contributions to retire campaign debt. (§ 1-6-33)

Areas where the committee did not achieve consensus were also identified.  The committee addressed whether there should be an oversight commission, and other civil enforcement mechanisms.  The committee agreed that an oversight or enforcement mechanism is necessary and that criteria to be considered for this purpose should include accountability to the voters, cost effectiveness, independence, legal expertise, and non-partisanship; however, a resolution on implementation could not be reached.  Consequently, one member of the committee, featured in the article below (and my appointee), decided that putting this cure on the ballot would not be proper because it was missing the enforcement component.

My appointee was able to contact an intern reporter at the OC Register and the article below is the sad result. 

While I’m at it, TINCUP 2 is an interesting attempt at campaign finance, but it is not perfect.  One could make the argument that it isn’t even necessary.  It does nothing to stop independent expenditures.  It still allows a wealthy individual to self-finance and avoid the contribution limitations.  It doesn’t stop state legislators from transferring funds from a state campaign account into a county campaign account.

I’ve already had my share of instant campaigns.  That is, you get it on the ballot in July and sprint until the beginning of November, in campaigning on its behalf. 

Campaign finance reform was not on my list of things to accomplish while serving as your Supervisor.  I did open a dialogue with Shirley Grindle, even though she is very prickly, to see what could be accomplished.  All we got was her whining about everything.  That’s what happens when one is too invested and can’t play well with others.

The article takes off after the other nine volunteers.  Nice touch, Shirley.

My thanks go to the other nine ad hoc committee members, many from the industry, and county staff that enjoyed the exercise and donated their time.  We have a product that can be picked up in the future and reconsidered.  The work quality shows.  The proposed changes are good public policy, but I’ll leave it to future Boards to address this matter.

TINCUP committee wants to gut campaign finance restrictions

Elias J. Groll

A committee charged with evaluating the county’s campaign finance law has recommended a new ballot measure that would substantially reverse the reforms of the voter-approved law and potentially benefit some of the committee members by injecting more money into county political campaigns.

County supervisors will consider tomorrow whether to put the measure on the November ballot.

A majority of the committee’s members had pushed to repeal the county’s campaign finance law—TINCUP, short for Time Is Now, Clean Up Politics—but that idea ran into substantial opposition. Most of the members on the committee are aides to county supervisors, political strategists, or pollsters who could benefit from more spending.

“As far as I’m concerned, this is a case of the rats guarding the cheese,” said Orange political activist Shirley Grindle, pictured above, one of the authors of the original measure and a member of the committee.

Grindle’s staunch opposition prevented the repeal of the act, but the committee’s recommendations still significantly ease restrictions on fundraising and fail to create an enforcement mechanism to police campaign finance violations.  The changes recommended by the committee have to be approved by the Board of Supervisors and then approved by the voters in November.

By loosening restrictions on donations, the political operatives who have proposed the revisions are likely to financially benefit, critics said.

“A clear conflict of interest exists between those who are on the committee,” said Bill Mitchell, a San Juan Capistrano attorney and the former chairman of OC Common Cause.  “Those who the law seeks to regulate are revising the law….They make their money on fundraising. The more money that can be raised, the more benefit to them.”

Under the proposed amendment to the law, the district attorney will continue to be responsible for enforcing the restrictions.  Grindle charged that DA Tony Rackauckas has been unwilling to prosecute violations. So as long as the DA remains unwilling to enforce the policy, she said, the act will be effectively toothless.

Grindle said she has sent cases to Rackauckus, including apparent violations by former sheriff Mike Carona and former supervisor Chris Norby, but said he has yet to prosecute any of them, instead sending them on to state officials for review.

Susan Kang Schroeder, Rackauckus’ chief of staff, disputed Grindle’s assessment.

“Shirley Grindle is a political opponent of the DA who has given the maximum contribution to his opponent.  She likes to take potshots at us without having any merit to her claims.   None of the cases she has sent us had evidence to prove what she claims. ”

Schroeder added “We don’t take sides on what the law should say.  We just enforce the law.  Whatever the law says is what we will prosecute and enforce.” 

The original law makes violations of the law a misdemeanor.  Under the proposed changes violators would only be liable for civil claims.

The proposal also:

  • eliminates contribution limits for candidates who face a recall, opening the door for recalled candidates to raise larger sums than they would be able to in a normal election.
  • eliminates a provision that made a husband and wife one entity and subject to the $1,700 contribution limit. The state attorney general had questioned the constitutionality of that provision in 2005. Under the new law, the husband and wife will each be able to donate the maximum amount, doubling each household’s contribution limit to $3,400.  
  • allows candidates to raise funds to retire debt after the election has ended without running up against fundraising limits in the next election cycle.

That provision effectively lengthens the fundraising period and makes it easier for candidates to spend more by racking up large debts, knowing full well that they can retire the debts once the election has ended.  In sum, the new provisions make it easier for county-wide candidates to raise money and promises to bring an infusion of cash into county politics.

Among the committee members who may directly benefit from the changes:

  • Committee member Adam Probolsky, a Laguna Hills pollster appointed by Supervisor Pat Bates, has long been a fixture of Orange County politics and has cemented himself as one of the top political operatives in the county. Since 2006 Probolsky has collected at least $41,200 for political services provided to County Supervisors John Moorlach and Bates, according to an analysis of disclosure forms by Grindle.  Probolsky declined to comment for this story.
  • John Lewis, another political operative appointed to the commission by Supervisor Bill Campbell, received $27,022 in fees from the campaigns of Campbell and former supervisor Chris Norby, according to Grindle’s analysis.  Lewis could not be reached for comment.

By increasing the flow of cash into county politics, candidates will have more money on hand to spend on the polls, strategy memos, and sage advice provided by these two operatives.

Most of the other members of the committee are beholden to county politicians with a vested interest in the committee’s findings.

Matt Petteruto, one of the committee members, is Bill Campbell’s chief of staff. Eric Norby, another member, is Chris Norby’s brother and served as his chief of staff while he was a county supervisor. Committee member Chip Monaco is a former staffer in Supervisor Pat Bates’ office.

Phil Greer, another member of the committee, is also intimately connected with the county’s political establishment. He has represented three of the five member of the Board of Supervisors and disgraced OC Treasurer Chriss Street. Over the past four years, Bates has paid Greer $6,500 in fees.   Greer has faced multiple ethics complaints by the state BAR association and has been ordered to take ethics classes.

The Watchdog began calling the supervisors about this on Friday; resumed calls on Monday,  but as of noon had yet to get a comment from the supervisors or any kind of explanation from the committee members who supported the changes.  As soon as we get that, we’ll give it to you here.

The Board of Supervisors will consider tomorrow whether to add the measure to the November ballot.

Grindle will be speaking at the meeting.  She said she has to miss her regular softball game to be there, something she is not happy about.

Register Staff Writer Martin Wisckol contributed to this report.

FIVE-YEAR LOOK BACKS

2005

July 27

Bloomberg News columnist Joe Mysak, one of the best municipal commentators in the country, had a piece titled “California Fashion Includes Refinancing, Bankruptcy.”  My editorial in the San Diego Union-Tribune caught his eye (see MOORLACH UPDATE — LOOK BACKS — May 17, 2010).  Mysak interspersed my comments concerning the city of San Diego with the state of California’s recent tobacco bond refinancing.  In 2003, Gov. Davis securitized his tobacco settlement revenues to take care of his budget deficit.  The OC uses its annual revenues for health care.  Yes, I opposed the state’s squandering a long-term revenue stream to solve one year’s problems, but don’t get me started.

It was quite a compliment to have someone of Mysak’s stature acknowledging one of my editorial submissions.  Consequently, I’m providing it in full.

Public finance blows in from the West, says an old municipal market axiom.

This could be good or bad news, depending upon which story out of California we’re talking about.

Voters in San Diego yesterday voted on a new mayor, who will either put the city’s house in order or let a court do so with a Chapter 9 bankruptcy filing.

On Tuesday, underwriters led by Bear Stearns Cos. started pricing $3.2 billion in California tobacco bonds, a refinancing of debt sold in 2003 that will also provide the state with about $525 million for its 2006 budget.

If the adage holds true, this means that all municipalities are going to start looking at Chapter 9 bankruptcy. Or maybe they will think about refunding some of the $25 billion in bonds they sold that are backed by the 1998 settlement with the tobacco industry.

The bankruptcy prospect, naturally, is the most disconcerting. The tobacco bond refinancing would make bondholders and underwriters pretty happy.

Finance Hothouse

Don’t laugh. The notion that trends in municipal finance start on the West Coast dates to the fallout from California’s Proposition 13 cap on property tax increases, which the voters approved in 1978.

That measure limited the amount of general obligation bonds that municipalities in the state could sell and turned the state into a sort of laboratory where the mad doctors of public finance concocted all kinds of bonds designed to pay for capital improvements.

Those ideas proved ripe for export, and just about all issuers now engage in variations on the theme in order to get around property tax curbs.

California was also the site of the most spectacular Chapter 9 bankruptcy in the history of the market, that of Orange County in 1994. The county’s own treasurer/tax collector, John Moorlach, raised the prospect of Chapter 9 becoming fashionable in an editorial column published in the May 11 San Diego Union-Tribune.

San Diego is running a budget deficit and only has about two- thirds of the money it estimates it will need to pay retired city workers. It is now seeking to reduce some of the sweet deals it promised civil servants in exchange for years of deferring contributions to the pension plan. The shortfall in the pension system is about $2 billion, more than twice the size of its annual budget.

Can the city rescind retirement enhancements like generous annual increases and the annual lump-sum payment known as the 13th check? In the private sector, under Chapter 11 bankruptcy, it happens all the time. Yet “these are uncharted waters,” Moorlach wrote.

Trendy Chapter 9

A federal bankruptcy court may find that state constitutional law on contracts trumps bankruptcy law. But “If the city prevails and collective bargaining agreements can be rescinded, then expect Chapter 9 to be the latest legal trend around the state and the nation.”

Imagine Chapter 9 becoming “fashionable.” That was perhaps the single most terrifying sentence in Moorlach’s article. San Diego wasn’t alone in handing out goodies to retirees in exchange for not putting as much money as needed into its pension plan.

Moorlach noted that bankruptcy was expensive, costing Orange County more than $100 million in legal and accounting fees. But if it does succeed in rolling back pension plan enhancements, he wrote, “then you will have provided a strong tool for other municipalities, whose financial status is not far behind that of San Diego’s.”

State Pledge

Perhaps the trend, though, will go toward refinancing tobacco debt.

Not too long ago, tobacco bonds were under water, trading for 60, 70 cents on the dollar, such was the perceived risk that Americans would stop smoking cigarettes and that the money promised to the states in perpetuity would dry up.

In fact, the bonds California is refunding this week are double- barreled. That is, they were backed by the tobacco company payments as well as a state promise to appropriate money for debt service should those payments fall short.

That pledge is why Moody’s Investors Service rates the bonds A3, just one level below where it rates the state. Pure tobacco bonds, which are backed solely by the tobacco payments, and which the state also sold earlier in 2003, are rated Baa3 by Moody’s, one level above junk.

Pure Tobacco

For a couple of years, promising to make good on tobacco bonds if the industry couldn’t was the only way states and localities could sell such debt. That all changed in May of this year, when Virginia sold a pure tobacco issue of $450 million. The top yield on the bonds maturing in 2037 was 5.78 percent.

When a state refunds bonds, it sets up a little pot of U.S. Treasury securities whose principal and interest goes to pay off the bonds. The refunded bonds are no longer reliant on the issuer (in this case, the state and the tobacco industry) for repayment.

If tobacco bond refinancing is the fashion to blow in from California this year, that could lead to a lot of happy bondholders, and a lot of happy underwriters, too.

Alicia Robinson of the Daily Pilot also did a piece on Congressman Cox in “Cox awaits panel’s vote – Senate committee questioned three nominees but did not vote on SEC appointment.”  I assisted Congressman Cox with his 1995 Private Securities Litigation Reform Act and had my own personal experiences with Bill Lerach at the time.  Bill Lerach was the “ambulance chaser” that I was referring to.  Not to dwell too much on Bill Lerach, but he was just released a few months ago after serving time in a Federal penitentiary.  Here are selected paragraphs.

            Rep. Chris Cox is now playing the waiting game, after a U.S. Senate committee on Tuesday held a hearing but did not vote on whether to confirm him as head of the Securities and Exchange Commission.

                Cox told the committee he will work to make sure the SEC is consistent in making and enforcing rules, according to a transcript of his statement.

"My top priority will be vigorous enforcement of our securities laws," Cox said, according to the transcript. He said the commission must protect investors against fraud and unfair dealing.

Several labor and investor groups, led by the consumer advocacy organization Public Citizen, on Monday attacked Cox as having a "strongly anti-investor" Congressional voting record.

A report from Public Citizen claims Cox’s major piece of securities legislation, the 1995 Private Securities Litigation Reform Act, made it harder for investors to sue when they lose money from corporate fraud. He also voted against tougher investor protections in the 2002 corporate reform bill known as Sarbanes-Oxley and sponsored other legislation that was against investors’ interests, the report said.

Local financial observers, however, discounted the criticisms. The purpose of Cox’s 1995 securities bill was to stop frivolous lawsuits by "ambulance chasers" that aren’t good for the market, Orange County Treasurer-Tax Collector John Moorlach said.

"Chris has historically always been free enterprise," he said.  "Let the marketplace take care of itself, and it usually does….When those egregious fraud cases come up, you still have remedies, because you’ve got criminal charges."

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