MOORLACH UPDATE — Voice of OC — February 2, 2011

The Voice of OC covered the Board’s vote on the lobby ordinance yesterday evening.  Do I sense a bias in the first sentence, or is it just me?

Lobby Reform Passes

The Orange County Board of Supervisors took a big step toward transparency Tuesday by unanimously approving the first reading of an ordinance that would require lobbyists who are paid more than $500 to register with the county and file annual reports.

Today’s vote marks a victory for those who for years have been calling for lobby reform in Orange County. Supervisors failed in three attempts in recent months to come to agreement on a law. A lobbyist registry was first proposed early last year by former State Senator (and Voice of OC Board Chairman) Joe Dunn.

Most large California counties — including San Diego and Los Angeles — have had lobbyist registries for years.

"Its a victory for taxpayers today, and we are really glad the supervisors hammered out a resolution to this," said Jennifer Muir, spokeswoman for the Orange County Employees Association, one of the biggest proponents of lobby reform.

Despite the unanimous vote, supervisors Shawn Nelson and John Moorlach say they still don’t see a need for it.

"I think this probably a lot to do over nothing," Nelson said.

Although lobbyists would be required to register under the ordinance, they would not be required to disclose who their clients are. Also, lobbyists would be able to change clients throughout the year without having to report the changes to the county, according to County Chief Executive Tom Mauk. The law calls for lobbyists to start registering July 1.

A key issue yet to be resolved is whether to exclude non-profit organizations from the requirement.

The consensus among supervisors, with the exception of Supervisor Janet Nguyen, was clear — if you’re after taxpayer money, you’re a lobbyist, regardless of your tax status.

"They’re [non-profits] going to be ‘lobbying’ for these contracts," said Supervisor John Moorlach.

Nguyen, however, was reluctant to paint nonprofits with such a broad stroke, saying that the executive director and board of directors for a nonprofit aren’t after personal gain.

Nguyen did say, however, that a good trigger would be to have a nonprofit register if the organization actually hires a lobbyist. Ultimately, the board directed staff to come back with more information on exempting nonprofits, and supervisors will discuss it again then.

Supervisors also changed the reporting requirement from quarterly to annual. Supervisor Pat Bates asked for a review of the $75 lobbyist registration to make sure that the fee would actually pay for the administration of the registry.

County lobbying firms and county lobbyist employers would also be required to register.



February 2


Christine Richard of Dow Jones Newswires provided another perspective on the Edison International remittance in “Amid Calif. Crisis, Confusion Over Orange County Payment.”  The Reader’s Digest version below will show you how Fitch Ratings erroneously put the OC Investment Pool in the national spotlight.  It was a combination of clerical and judgmental errors that created victims and left me with severe doubts about its credibility and professionalism.  The two other major credit rating agencies, Standard & Poor’s and Moody’s, did not lower the credit ratings for local government investment pools holding Edison International.  It was also Fitch that strongly encouraged the OC Treasurer’s department to invest in asset-backed commercial paper (ABCP), later to also be called structured investment vehicles (SIVs), because SIVs had garnered the highest rating possible from Fitch (in retrospect, probably from the high fees that rating ABCPs and SIVs generated for the firm).  It’s quite rare for a journalist to report on the unique nuances of how information is communicated.  Accordingly, it was nice to see a reporter do it in this instance, as the reverberations were a bumpy ride for me.  Fortunately, I was convinced that after enduring the rapids, there was a calm lake that we would enter soon.

                Beleaguered Orange County of California attracted scorn this week from creditors caught up in the state’s utility debt crisis, but the criticism seems to have been sparked by an erroneous ratings agency report.

This payment was mistakenly thought by other creditors to be from Edison’s Californian subsidiary, Southern California Edison, which defaulted on some of its commercial paper earlier this month.  Hearing of the payment, some creditors cried foul and debt markets become abuzz with talk that the County had somehow arrange preferential treatment.

“I got a call from Ted Craver, CFO of Edison International, who said he’s fielding calls asking how come you’re paying Orange County,” said Orange County Treasurer John Moorlach.

Orange County officials say part of the blame lies with ratings agency Fitch.

“All the brouhaha started when our rating agency got it wrong and said that it was Southern California Edison paper we were holding” said Brett Barbre, a spokesman for the Orange County Treasurer’s office.

On Jan. 17, Fitch said it was downgrading Orange County Treasurer’s Money Market Educational Pool to AA from AAA because it held $40 million in commercial paper and medium-term note holdings issued by Southern California Edison.

The next day, Fitch corrected that announcement to identify the issuer as Edison International, though it declined to take back its rating action.

But the damage was already done.  Orange County, the otherwise wealthy Californian county whose losses on speculative investments in 1994 forced into an ignominious bankruptcy, was suddenly back in the news.

Numerous publications, including Dow Jones Newswires, published reports in January that the County had lent money to one of the two utilities in December, right in the midst of California’s disastrous power crisis.  This spread the confusion wider, those involved in the situation say, culminating with the mistaken identification of the Edison International payment on Jan. 31.

Adding to the confusion is the fact that Fitch had on Jan. 16 also downgraded Edison International paper to D, a rating that indicates a company has already defaulted on its debt or that the agency believes a default is imminent.  It was on those grounds that Fitch downgraded the Orange County Educational Pool, according to Steve Lee, an analyst at the agency.

                But an Edison International spokesman said the company had not defaulted on any obligations and plans to continue meeting payments.

                Moody’s lowered Edison International to Caa3 rating on Jan. 16 and Standard & Poor’s dropped its rating to CC.

                Orange County’s Moorlach called the Fitch rating exceptionally aggressive.

                “When the subsidiary (Southern California Edison) suspended payments, the rating agency treated the holding company (Edison International) with a broad brush,” said Moorlach.  “They downgraded Edison International too hard and us too hard immediately after that.”

                “The painted them with a broad brush and we’ve really been beat up over it,” Moorlach said.

                Moorlach said he expected Moody’s to release an announcement shortly saying that it did not believe the credit quality of the school districts represented in the pool were affected by the Edison holdings.

                But despite Orange County officials ascertain that they don’t expect Edison International to get pulled into bankruptcy court, they are taking measures to deal with such a contingency.

                On Jan. 18, the County announced the creation of an ad hoc committee that would represent the interest of unsecured creditors of Edison International and its subsidiaries in the event that Edison International failed to meet its obligations.

The OC Weekly’s R. Scott Moxley took this fun riding of the rapids as an opportunity to take a swipe at me in “The Honeymoon Continues—The press and politicians protect John Moorlach from tough questions about Edison investments.”  As the LOOK BACKS provide the good, the bad, and the ugly, here is a case in point.  The article is provided in its entirety.

I should at least clarify one issue that was raised.  I approved the issuers that my investment officers could purchase.  Consequently, I did not have to sit over their shoulders when the acquisitions were being made.  I should have pulled Edison from the approved list and I took responsibility for it.  As to the conclusion about transparency, allow me to share a story from my 1994 campaign days.  I had several brokers assisting me, but they did not want to be revealed publically as Citron had a way of going after their employers.  With the creditors committee, many local cities were on the list, but they also did not want to be revealed publically.  Consequently, I was the whipping boy on this issue and I protected them from the same treatment.

One of the juicier tidbits to emerge from Orange County’s 1994 bankruptcy was that then-county Treasurer Bob Citron secretly relied on two Anaheim psychics and a $4.50 star chart to manage as much as $22 billion in taxpayer funds. Without a hint of embarrassment, Citron testified that the astrologers and their charts "predicted when large changes in the financial market would take place." A court-ordered psychological report later concluded that the treasurer’s mental skills were "seriously impaired" and that he was possibly "brain-damaged."

Citron eventually went to jail and wary residents relaxed, believing that county funds were safe in the hands of his replacement, current Treasurer John Moorlach. Moorlach was, after all, the man who exposed Citron’s wacky, high-risk investments. Unlike Citron, the straight-laced Costa Mesa accountant and onetime head of the ultra-right-wing Costa Mesa Republican Assembly guaranteed cautious investments and accountability (Citron was notorious for hiding county records). "Let’s make it vanilla," Moorlach said of his investment strategy after the Board of Supervisors appointed him to replace Citron in March 1995.

As compensation for dismissing his prebankruptcy warnings, the local press has allowed Moorlach a scrutiny-free honeymoon of six years. But that love fest should have ended last month when the treasurer made several disturbing admissions.

First, the background: in September and December, Moorlach’s office made two investments totaling $40 million in Edison International, the parent company of Southern California Edison. Normally, investments in public utilities are sure bets. But the treasurer gave Edison critical county education dollars at a time when the state’s electricity market was crashing. Cash-strapped Edison was contemplating massive employee layoffs and bankruptcy and was unable to pay stockholder dividends for the first time in memory.

Moorlach, who does not handle criticism well, has displayed split personalities in response to inquiries about the questionable investments. "It breaks my heart," he told a Los Angeles Times reporter on Jan. 17. But with an Orange County Register reporter the same day, he turned arrogant. Perhaps taking a shot at his predecessor, Moorlach told the reporter, "If I had a crystal ball, I would have avoided the [Edison] investments."

Ironically, the Edison investments were not risky. The utility company’s executives—some of whom sit with Moorlach at Orange County Republican Party meetings—are politically connected in Sacramento. No matter how badly Edison screws up, the company owns politicians in both major political parties who will forward the company’s outrageous bills to the public. A Sacramento bailout of the utilities now in the works will surely rescue the treasurer.

So, though he won’t lose any taxpayer money on the deal, the Edison affair is nevertheless alarming for what it reveals about Moorlach’s operation.

Moorlach has offered several contradictory explanations for the investments. In response to questions from county Supervisor Todd Spitzer, Moorlach claimed he isn’t aware in advance of the investment moves his office makes; his aides decide where to invest. "The treasurer acknowledged that he did not oversee the purchases," Spitzer concluded. "I don’t think many board members walked out of the meeting today and said, ‘I’m comfortable.’"

Then Moorlach tried to argue that the investments were statistically insignificant—just 3.3 percent of the county’s education fund. But $40 million in public funds isn’t chump change under any scenario, especially in a county that has already strapped its taxpayers with 30 years of massive bankruptcy debt payments.

In yet another version, Moorlach claimed he knew about the investments in advance and approved them—but didn’t know Edison was in the midst of its biggest corporate crisis ever. "All of our data showed things were still rather comfortable," Moorlach told supervisors.

That claim met with incredulity at the board. In a Perry Mason moment, Spitzer held up a four-page special report written by investment analysts Fitch Inc. The report was issued three weeks before Moorlach’s first Edison investment, and it raised red flags about the financial health of California’s utilities. Moorlach admitted he had not read the report and relied instead on his "gut."

Of course, the treasurer did not need to read Fitch’s report to know what everyone else in the state knew. On Sept. 28, when Moorlach (or his aides) gave Edison the first $20 million, the Times carried a major article that concluded with a graphic image of Edison’s financial health: "The house is on fire." On Dec. 7, when Moorlach’s office made the second $20 million investment, the Associated Press carried a banner story with the headline "Power Crisis Hits California."

Moorlach’s counterpart in San Bernardino County didn’t wait for those headlines: he dumped $5 million worth of utility stocks more than a year ago when the energy situation first became precarious.

But Moorlach isn’t going to accept responsibility. "Basically, what we are encountering in the finance world is the 100-year flood," he said, as if the crisis were an unexpected overnight calamity. He has, however, tried to blame his investment troubles on Democratic Governor Gray Davis and, at another point, on Fitch Inc. "Thank you very much, Fitch," he said, "for not being more proactive."

Moorlach’s responses have so far raised more questions than they’ve answered. But the honeymoon continues. His supporter on the Board of Supervisors, chairperson Cynthia Coad, showed all the inquisitiveness of bankruptcy-era supervisors. Anger? Outrage? Even a meek request for an explanation? Nope. "John’s got a handle on it," she said. The Orange County Register—another Moorlach ally —usually can’t rant enough about bureaucratic bumbling but had only this to say on his Edison investments: "Why all the fuss?"

Spitzer, however, didn’t want to hear the blame games or participate in cover-ups. "We have to be more insightful," the 3rd District supervisor said. "We have to be on top of our game all the time because we’re talking about hundreds of millions of dollars."

The Moorlach debacle doesn’t end there. In December, the treasurer formed what he called a "critically important" committee to secretly negotiate with Edison. He has refused to reveal the identities of the committee members or publicly disclose records of their association and dealings with Edison. Moorlach will only say that the committee is composed of other Edison creditors.

This marks a dramatic change for the treasurer. When he took office, he promised, "There is not going to be anything secretive." But six years have passed, and Moorlach isn’t the wide-eyed newcomer anymore; now he’s a powerful incumbent.

Even as he blocked public disclosure, Moorlach’s spokesman Brett R. Barbre boldly said, "There aren’t any questions we’re going to run away from. Everything we do is wide-open and public."

The San Jose Mercury News also did a piece by Jennifer Bjorhus in “Counties’ risk in utility bonds assessed.”  What made this story amusing is that after I complained about the media errors, the reporter misspelled my name.  Here are the opening and misspelled paragraphs:

Six California counties – including Alameda, Santa Cruz and Monterey – hold more than $100 million in Edison International and PG&E Corp. “junk” bonds, but the holdings are small and unlikely to put the counties’ finances at risk.  That’s the conclusion of a survey released Thursday by the credit rating agency Standard & Poor’s in New York.

“We’ve just endured a lot of bizarre media frenzy,” [county treasurer John] Morlock said.

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