MOORLACH UPDATE — Super City Stir — August 20, 2011

One week, it’s a whimsical column on the possibility of making a “Super City” out of Newport Beach and Costa Mesa.  The next week, it’s a dig for gracefully bowing out of a rhetorical question, because I’d like to stay neutral on the proposition.  Wow.  Forgive me for my perceived insincerity, but I work with both cities and like to live by one simple rule:  no surprises.

Addressing the potential for a real Super City, versus a whimsical proposal, hardly warrants a rebuke.  But, it’s a fun closer for a columnist to use.  Just don’t try it at home . . . it’s a little too much of a stretch.

The real news is the number of hits and responses that Barbara’s first piece garnered.   The Super City concept is being heavily debated in West Orange County.

Newport Beach and Costa Mesa have been working on a solution for all of the unincorporated islands within their spheres of influence.  The lynch pin is Banning Ranch, which is hinted at below.  Once the Environmental Impact Report (EIR) is approved, we’ll restart our efforts.  Stay tuned.

Barbara knows how time-consuming annexation efforts are.  We worked together to annex her home into Newport Beach (one example of leading by example).  There were more annexation success stories in the years to come (including the recent news about Sunset Beach’s failure to have the Courts disrupt Huntington Beach’s annexation efforts).  Enough said.  Her weekly OC Register column is found below.

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BONUS:   This Great Blue Heron was nesting in a palm tree and posed for us while hiking Bolsa Chica last Saturday.

APOLOGY:  I accidentally sent you an e-mail on Friday intended for my John Wayne Airport E-Mail Tree.  I make this goof about once every two years.  Please accept my apologies.

Talk about creating O.C. ‘super city’ creates stir

By BARBARA VENEZIA
FOOD FOR THOUGHT
CONTRIBUTING COLUMNIST

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Last week I raised the hypothetical question, "What if Costa Mesa merged into Newport?" Opinions ran the gamut.

I was surprised when more than a few folks felt Costa Mesa was a better fit with Fountain Valley than Newport. Really?

A big eye opener though, was how county readers viewed Newport. It wasn’t very nice.

The consensus; Newport residents would never take Costa Mesa due to its ethnic make-up, I’m putting it nicely – most didn’t, some calling it "Costa Mexico," which was a new one for me.

Interestingly, none suggested another city merge into Costa Mesa – rather Costa Mesa merge into a neighbor. Guess that says something about how readers view the governing of Costa Mesa.

My column about blending borders to create "Super Cities," and about Orange County LAFCO’s (Local Agency Formation Commission) laws on how residents could disincorporate, move territories or merge with neighboring cities, generated a flurry of reader response.

Surprisingly, more folks than not felt the idea of merging cities was intriguing, could solve economic problems, and that timing was right to explore the concept. They liked the idea of one police and fire chief, city manager, etc.

Readers also raised some good questions when it came to cities like Huntington Beach, Costa Mesa and Newport studying combining essential services. Many pointed out problems like; if services were combined, which city would take the lead? Whose rules would be followed? Would political egos muddy the waters?

But the whole discussion about borders got me thinking. I called Joyce Crosthwaite, executive officer of OC LAFCO, and asked how city borders were originally created and if LAFCO could change them.

She explained only residents can petition LAFCO to change, or merge borders. LAFCO can only change special district borders like water districts.

"When most cities were incorporated, borders followed natural landmarks back in the 1950’s -1960’s like hills, rivers, roads or property ownership," Crosthwaite stated.

Back then O.C. was mostly farm land and orange groves. As cities grew, the landscape changed, which is why we now have some odd border lines, she explained.

Take Banning Ranch. Newport annexed a one-foot border around Banning before Costa Mesa incorporated. The story goes, Newport leaders wanted to protect the valuable oil-producing property.

But in recent years Costa Mesa and Newport have battled at LAFCO – each trying to annex Banning ranch, the interior property remains unincorporated.

But is merging cities just an O.C. thing? Apparently not. According to an Associated Press story from Aug. 13, Italian Premier Silvio Berlusconi is proposing merging towns in his country to save money.

Supervisor John Moorlach’s been a champion of the Super City idea. He’s tried to get Rossmoor, Los Alamitos and Seal Beach to merge for years without much success.

I asked Moorlach how he felt about his home town of Costa Mesa merging with Newport or any another city.

"No comment, but we’re in an era where mergers are going to have to be considered at some point, even at county levels. We’re going to need to think out of the box," he said. 

So why not start with his city?

I get that he was trying to be politically correct not offending his brethren on the Costa Mesa council. But initiating real change will take relinquishing this mindset and standing by his Super City convictions and leading by example, not rhetoric.

FIVE-YEAR LOOK BACKS

2006

August 17

One of my favorite hobbies is driving to and photographing California Historical Landmarks (see http://ohp.parks.ca.gov/default.asp?page_id=21387).  My most recent visit was Number 1044, Giant Dipper Roller Coaster, on Mission Boulevard in San Diego.  I photographed the coaster, but I could not locate the State Landmark Plaque.  Some landmarks are a series, such as Art Folklore or the First Transcontinental Railroad.  Consequently, even though I just photographed number 1044, there are really about 1,100 official landmarks in total.

Dana Parsons of the LA Times caught me on a landmark seeking vacation in the counties of Plumas and Lassen when he called.  It gave him the theme for this column, titledMoorlach Eyes Monumental Task: O.C. Pensions,” another passion.  As my kids have endured my landmark hobby during their entire lifetimes, I’m providing the column in total.  (It’s also interesting to see how my fears of a long-term recession materialized—see underlined portion.)

Orange County Treasurer John Moorlach is nothing if not meticulous. You’ve got to be if you’re intending to visit all of the state’s historic landmarks in one lifetime.

At 50, Moorlach, maybe, can count on another half-century to finish the job. He visited 24 on a recent vacation with his wife and son in the western Sierra to reach 1,001.

The number of sites apparently is hard to agree on. While some devotees put the figure at roughly 1,100, a state official told me Wednesday the figure is 1,043.

Either way, the task sounds eminently doable for Moorlach. He won’t have the rest of his life, however, to track another of his passions: dealing with what he says is the county’s potentially ruinous pension system.

And make no mistake, when Moorlach joins the Board of Supervisors in a few months, he plans to attack the pension and retiree medical-benefits situation with the same vigor he brought to his campaign for treasurer in 1994. He charged that then-Treasurer Robert Citron’s investment practices jeopardized the county. Not enough people listened to Moorlach: The incumbent won reelection easily in June 1994, and the county declared bankruptcy by year’s end.

These days, I picture Moorlach slowly donning his battle garb for the ensuing fight. Even if his four colleagues on the board see things his way, employee unions likely will not. They strongly supported his June election opponent in a race that Moorlach won with 69.5% of the vote.

"They already shot their cannonball," Moorlach says, in response to my question of how he thinks he’ll deal with them. "To be honest, I’m a forgiving man and know we have to work closely together. Without [county employees], you can’t do the work, right? But I have to educate them, too, and they’ve got to get off their mean streak and start talking hard dollars."

Moorlach is a numbers guy, but well aware that most of the rest of us are not. That was part of his problem in 1994, when average Joes simply didn’t warm up to warnings about "derivatives" and "reverse repurchase agreements." Similarly, he knows pension-related conversations about "defined benefits" and "unfunded actuarial accrued liability" aren’t likely to captivate the public.

But that is the task, and he thinks the recent spate of stories from around the country detailing corporate and governmental pension problems signal a growing public concern.

Moorlach thinks his board predecessors have been much too generous and much less discerning about the pension effects than they should have been. Still, he considers himself "a team player" not itching for a fight and someone who will use his accounting experience to present the facts of life to his colleagues and the public.

That may carry him only so far. Once he and his board colleagues start doing the number-crunching and start figuring out what, if anything, to do about the problem, full battle armor may be the uniform of the day.

If people can’t agree on the number of historical sites in California, they sure won’t agree on how to address the pension and benefits problem.

With that prospect of unpleasantness, I ask Moorlach why he ran. He could have been reelected treasurer in perpetuity. Besides, he takes a pay cut to become a supervisor.

"It’s one of my passions," he says.

Which doesn’t mean that he thinks his board tenure will be as fun as photographing historical landmarks.

He fears what a recession could do to the county portfolio and says, almost in passing, that the next few years "could be the worst time to be a supervisor."

Still, there’s that thing called opportunity. "Orange County is one one-hundredth of the country," he says.

"We are significant in the country’s population. If we can address some issues and work collaboratively with the unions and the board to come up with some resolutions that make our costs manageable and predictable and that benefit employees and still make us competitive with the private sector, we have an opportunity to create a model for the rest of the country."

Hey, a man’s got to have goals.

Although Moorlach jokes that his bankruptcy warnings were his fifteen minutes of fame, I predict he’ll stretch that to a half-hour when he settles into his board seat.

I also predict that shortly thereafter, he’ll start counting the days until the next family vacation and bagging historical marker No. 1002.

1996

August 18

Two years after covering the Orange County Treasurer’s campaign, Chris Knap of the OC Register did a piece titled “Ghosts of Investments Past – FINANCES:  Register survey of local agencies’ investments shows broad disparity in expertise, performance.”  With the issuance of GASB 31, most city and county treasurers manage short-term portfolios.  But, fifteen years after this piece, another comparison of what each city in the county is doing with their cash would be of interest.  Here is the article in full:

Ghosts of past investment strategies still haunt many public portfolios nearly two years after Orange County declared bankruptcy, a Register survey of 39 local agencies has found.

Eighteen cities and special districts show unrealized, or paper, losses in their portfolios, three in excess of $4 million. San Juan Capistrano was farthest down _ 2.6 percent below book value.


The survey also revealed substantial differences in expertise and sophistication among the 35 agencies that began handling their own investments after they withdrew from Orange County’s pool in May 1995.

Anaheim, for instance, uses a computer program that dials a database to update the market value of its investments. Seal Beach keeps up to $1.1 million in a no-interest checking account.

Despite these problems, the overall report was positive for most Orange County cities and special districts. Most are investing conservatively, monitoring the daily value of their holdings, and holding substantial cash reserves as a hedge against market fluctuations, according to data from the last fiscal year.

Had former Orange County Treasurer Robert L. Citron followed these practices, he wouldn’t have lost $1.64 billion, leading to the nation’s largest municipal bankruptcy. Now state law doesn’t give treasurers a choice.

"The industry has gotten a black eye," said Charlene Jung, Anaheim city treasurer. "It’s real important that we don’t have something similar happen again."

The survey also found:

·         Most agencies are earning substantially less interest income than if they had deposited their cash in the state’s Local Agency Investment Fund, historically a conservative and safe fund. Only eight agencies outperformed LAIF’s annual return of 5.71 percent.

·         Several funds lost yield and market value because they purchased floating-rate investments that pay less as interest rates rise. More than 80 percent of San Juan Capistrano’s market loss can be traced to two such investments.  Complex derivatives such as these are leftovers from the days of Citron. State law now bars treasurers from buying securities whose yields can drop to zero.

·         Most of the agencies in the survey topped the yield achieved by Orange County’s revamped, conservative portfolio. Orange County kept the average maturity of its school investments less than a month, reporting an annual yield of 5.42 percent. The average local agency earned 5.52 percent. Some critics said Orange County was overreacting to its former excesses.

·         The new requirement that municipalities calculate market value at least quarterly has met with mixed success. Such a measure, which applies the current market to investments purchased months or years ago, would have provided an early warning sign when Citron’s investments began to go bad.

But finance officers in some smaller cities, such as Laguna Hills and Villa Park, say they do not have the expertise to calculate market value.

Other cities took shortcuts that tended to undermine the effectiveness of the market measure, providing less than a true picture of current value.

For instance, Tustin Finance Director Ron Nault did not report current market values for $11 million in complex securities purchased three years ago, even though yield on some of the securities fell to 2 percent as of June 30. (Basic five-year Treasury notes were paying 6.5 percent in June.)

Nault also credited his city with an $81,658 market gain on its $30 million deposit with LAIF—even though he acknowledged that the city could never cash in on such a gain. LAIF, like the county’s pool, doesn’t pass on market gains to investors.

These practices mean that Tustin’s unrealized losses are likely much larger than the $901,982 Nault reported.

Nault said he was trying to follow the law in showing the underlying value of his deposits in the state investment fund.

He said the market value of his floating-rate notes might be outdated, but said he relies on the bankers who hold the securities to provide a value. Nault said some of the structured notes may be too complex to value with conventional methods.

Nault said he intends to hold them to maturity anyway, making market value irrelevant.

"There’s not an attempt to disguise anything," Nault said. "I don’t want to trivialize market value, but it has to be looked at in context. Cash flow for the next six months has more significance. Our yield is conservative. Overall, the portfolio looks relatively good."

Cypress and Orange were among the other Orange County cities whose portfolios were hurt by devalued floating-rate investments.

Orange County Treasurer John Moorlach distinguished between the small losses (less than 1 percent) shown by most local cities and the 20 percent decline experienced by Citron in 1994. Moorlach noted that Citron exacerbated his predicament by borrowing against his investments and using up his cash reserves.

"Euphemisms that (Citron) used to use – ‘hold to maturity’ and `paper losses,’ – some of those are technically correct," Moorlach said. "Having unrealized losses is not a major problem, as long as there is sufficient liquidity."

Zane Mann, publisher of the California Municipal Bond Advisor, agreed.

"That’s completely normal," Mann said. "As your investments approach maturity the loss evaporates."

A survey of 105 privately run bond funds by Morningstar Inc., a Chicago research firm, showed average yield of 5.46 percent over the last 12 months, slightly below the 5.52 average reported by Orange County’s public funds. The average private fund had unrealized losses of 12 percent – more than 10 times that showed by most local agencies.

Those figures help show why there is a debate over the use of professional fund managers.

Orange County, for instance, spent $1.4 million last year to have Salomon Bros. invest in CDs, commercial paper and government agency notes for county government and local schools – and that represents a discount compared with what it charged in the first few months after the county’s bankruptcy.

Some critics – Mann and Jung – didn’t like Salomon’s methods. Mann said Orange County’s short-term investment strategy was "an overreaction" that was costing it yield. "There’s no need for it to be that short – that’s overdoing it."

Jung worried that Orange County is buying too much commercial paper – essentially short-term loans to corporations – and not enough in U.S. Treasuries – considered an ultrasafe investment.

Moorlach‘s only complaint with Salomon is the cost. He said Orange County’s investment strategy is so basic that Salomon is being paid millions just to "park the cars." He has begun phasing out Salomon’s management and expects to be investing the entire portfolio by February.

After Citron’s big crash, "there may be some uneasiness over this," Moorlach said. "But if I can earn the same return without adding any costs, we would save (county government) $1.5 million."

These days, local agencies are reluctant to trust even the state pool, and even smaller cities are ordering their finance officers to diversify.

"I suspect we’re probably losing (half a percent in yield) by not keeping it all in the state pool," said Fred Maley Villa Park city manager. "But the council was pressured to split the investments. We’re trying to keep it very simple and very safe, but we’re not going to get as good a yield as LAIF. We’re a victim of whatever the market is."

Scott B. Johnson, chief counsel to the special state Senate committee that enacted the new municipal-finance laws last year, said he has heard positive response from treasurers relieved that state law now requires them to put safety ahead of yield.

"Now that treasurers are marking to market, you have a better idea what they are holding," Johnson said. "Ultimately it is the job of the city council, or the board who hired these people, to decide if each investment is appropriate.

2001

August 20

The lead column in the OC Register’s Sunday Commentary section was by Steven Greenhut.  The title was “Public Records – Keeping secrets – Local governments consistently violate the spirit of open-government laws.”  Now that Steven Greenhut is in the Sacramento-area, he’s finding out that the State Assembly is in no mood to release information, either.  It looks like the California Public Records Act can still be gamed, some ten years later.  Here is Greenhut’s opener and the paragraphs where I’m mentioned:

                After writing about local government in Orange County and elsewhere, and following the travails of good-government groups as they try to hold their public officials accountable, I’ve come to this depressing but unmistakable conclusion:

                Despite some officials who are serious about open government, many others are engaged in a neverending cat-and-mouse game with the public and the media to conceal how they spend your tax dollars, regulate your lives and exert their power over you.

                This is how it has always been, no matter what type of government or what era we’re talking about.

When County Treasurer John Moorlach was trying to shine light on county investments that eventually led to bankruptcy, he tried to get public information about the investments.  Moorlach had already obtained the information surreptitiously, but he wanted to get it officially.  But he failed to ask for the documents by their CUSIP numbers – a technical number used for securities information.

“Because I didn’t ask for that, they got the data and gave it to me in a jumbled manner,” he said.  It shows how difficult the task can be to get information from a recalcitrant official – even for someone who knows exactly what he wants.

Government secrecy erodes freedom and accountability, and it also costs taxpayers dearly.  Moorlach blames the county bankruptcy on the way that bad investments were kept from the public.

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