MOORLACH UPDATE — Proper Etiquette — December 4, 2012

Supervisor Bates asked that a little research be done on a new provision of the Brown Act that was added this year as a result of certain activities that occurred in the city of Bell.  Her concerns were verified and the Orange County Transportation Authority will have an interesting vote at its December 10th meeting to determine how to handle the vote to appoint a successor CEO made at its November 26th meeting.  I addressed the matter in MOORLACH UPDATE — OCTA — November 30, 2012, which is also referred to in the first OC Register piece below.

Bond underwriters played a part in Orange County’s bankruptcy by participating in the issuance of “casino” bonds, unnecessary Tax Revenue Anticipation Notes (TRANs), and an unsupportable Pension Obligation Bond.  The rest of the leverage was provided by reverse repurchase agreements.  Not understanding the proper role of debt can kill any organization.  Orange County is no longer the largest municipal bankruptcy in U.S. history because Jefferson County, Alabama, abused a unique form of debt, called interest-rate swaps.  Bond underwriters sell their services, and gullible elected officials should be fully aware of what they are agreeing to.  As Treasurer, I found that school district boards were among the most gullible.  The California Association of County Treasurers and Tax Collectors tried to pass legislation to prevent some of the inappropriate products and services, but bond underwriters are a powerful (and generous) special interest group, and they successfully defeated our attempts to address what we observed as poor stewardship tactics.  Yesterday’s OC Register provided an editorial on another unique debt instrument, capital appreciation bonds (CABs), that need to be carefully reconsidered.  Even my friend, State Treasurer Bill Lockyer, agrees on this matter.  It is the second piece below.

The Voice of OC provides a repeated attempt to address a situation where a frustrated taxpayer has abused a system (see MOORLACH UPDATE — OC Register — November 14, 2012).  On November 26th, one individual pulled 19 items and spoke for some three minutes on each, which takes an hour from everyone else in the boardroom.   Today, the Board voted 4-1 to approve a cap of nine minutes total for public speakers.

BONUS:  Put December 12th on your calendar (if there is room), for our annual Christmas Open House.  This year it will be from 1:30 to 3:30 p.m.  You can R.S.V.P. by calling my office at 714-834-3220.

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Appointment of OCTA chief thrown into doubt

By ANDREW GALVIN

Last week’s appointment of an inside candidate to head the Orange County Transportation Authority was done in violation of state law, so OCTA’s board will have to vote again, county Supervisor Pat Bates said Sunday.

A re-vote would throw the appointment of Darrell Johnson to OCTA’s top job up in the air because several board members will see their terms expire before a new vote can take place.

Bates said Ken Smart, OCTA’s general counsel, acknowledged that last week’s vote was improper because it took place at a special meeting of the agency’s board. The Brown Act, California’s open meeting law, forbids local agency boards from calling special meetings to consider the compensation of agency executives.

The board’s vote on the appointment included a contract with Johnson that was later signed, Bates said. Smart couldn’t immediately be reached for comment on Monday.

Joel Zlotnik, an OCTA spokesman, confirmed Monday that "our counsel believes we were in violation of the Brown Act … The plan is to ask the board to take up the issue at its meeting on Dec. 10. "

Johnson, OCTA’s deputy CEO, was chosen Nov. 26 by the agency’s board to succeed CEO Will Kempton, who plans to step down early next year. The vote to appoint Johnson was 11 to 3 with two abstentions.

Those objecting or abstaining on the appointment of Johnson to the $255,000 position said they had been kept out of deliberations about the appointment and pointed out that the full board had never discussed or negotiated Johnson’s contract.

A small committee of board members – most of whose terms are about to expire – selected Johnson for the job without launching an outside search and then sent his appointment to the full board for a final vote.

The Brown Act violation means the board will have to again vote on whether to appoint Johnson, Bates said. The next regular board meeting is scheduled for Dec. 10. In the meantime, some of those who voted for the appointment will leave the board as their terms expire.

All five members of the county’s Board of Supervisors sit on OCTA’s 17-member board. Four of the five supervisors either voted no or abstained on Johnson’s appointment.

Bates, who abstained, said her objection was not to Johnson but rather to the process by which the appointment was handled. She added that because Johnson has already signed a contract, she is concerned he may have standing to sue if the board voids his appointment.

John Moorlach, chairman of the Board of Supervisors, voted against Johnson’s appointment, as did Supervisor Shawn Nelson. Supervisor Janet Nguyen abstained. Supervisor Bill Campbell voted for the appointment.

Moorlach said he thought OCTA’s board vote last week "was in poor form," and that the agency would be better served by conducting a full search for a new CEO. "It sort of protects, say, Darrell Johnson, so it doesn’t have this odd appearance. Even if the best guy for the job is right in front of us, at least we went out and did the formalities."

Moorlach also objected to a six-month severance package in Johnson’s contract, calling it "a strategy that I now abhor – based on my recent experience with the previous county CEO." In an email to constituents on Friday, Moorlach wrote that " If Darrell Johnson is a dud, and the Board wishes to remove him, it will cost $128,000 to do so."

OCTA’s 17-member board will get at least nine new members in December and January as representatives from city councils see their terms expire and are replaced by new members appointed by a coalition of Orange County mayors.

Editorial: School districts fail basic math with bonds

Bonds require payment of up to 15 times principal.

Local school bonds in California in some cases will cost several times what voters were led to believe when they approved them. That includes 30 separate bonds issued by 15 school districts in Orange County. According to the Register, the districts "engaged in a form of risky, long-term borrowing that will require them to pay back up to 15 times the principal – a move that critics describe as irresponsible and dangerous."

The story quotes figures from the office of California Treasurer Bill Lockyer. The bonds will slam the school districts – that is, their property-owning taxpayers – for $2 billion, paid off at rates up to 15 times the principal. "Conventional bonds typically carry a 2-to-1 or 3-to-1 debt ratio."

We checked the database of these bonds for examples. Cypress Elementary School District took out three bonds from 2009-11. On one bond for 2011, the principal was $9.7 million, but the total repayment cost – debt service – will be $89.4 million. Debt ratio: 9.2. Maturity length: 37.3 years.

Placentia-Yorba Linda Unified School district took out two bonds, one in 2009. For the other, in 2011, the principal was for $22.1 million, with total debt service of $281.8 million. Debt ratio: 12.7. Maturity length: 38.3 years.

Who will pay? Property owners, including homeowners and business owners, within the school district. Renters also will pay as landlords’ higher property taxes are reflected in rents.

A lot depends on the individual bonds and possible renegotiations of the financial terms. But a typical bond costs a typical Orange County homeowner $120 a year. In such a situation, the worst-case scenario is that a homeowner might get hit up with $1,000 a year in extra tax to pay off the excessive financing, Orange County Supervisor John Moorlach told us; he warned of Orange County’s faulty finances in 1994, just before the county went bankrupt.

"Taxpayers will have to pay it," he said. "It’ll be on your property tax form. It’s not part of the 1 percent limit of taxes on the purchase price from Proposition 13," which also allows 2 percent increases in the property tax per year.

He also said that most people are used to certainty in lending. For example, if they buy a car or house, they can calculate the monthly payments until the asset is paid off. But with these risky bonds, uncertainty is thrown into the equation.

"Taxpayers are caught holding the bag because elected officials are not financial experts," Mr. Moorlach said. This is one reason why, for decades, these pages have opposed local bonds. Schools and other governments, especially in these lean economic times, should be frugal and operate on a pay-as-you-go basis.

What should be done? First, voters should stop voting for new bonds. Second, repeal Prop. 39, passed by voters in 2000. It dropped to 55 percent from two-thirds the threshold for passing local school bonds. In the recent election, four of six O.C. school bonds passed; but only one received two-thirds approval. The two-thirds rule is needed to make less likely the abuses just uncovered.

Finally, as Mr. Lockyer urged, "They are terrible deals. The school boards and staffs that approved of these bonds should be voted out of office and fired."

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Supervisors Likely to Impose Cap on Public Comments

Faced with a displeased resident who attends every board meeting to repeatedly accuse them of being in an “unholy alliance,” the Orange County Board of Supervisors appears set this week to approve new limits on public comments.

After months of comments from Michael Wayne Klubnikin, who has increasingly used items on the weekly agenda as a platform to discuss a dispute he has with the county’s Public Guardian and the Social Services Agency, patience among supervisors has run thin.

“It’s time theft,” said Supervisors’ Chairman John Moorlach. “I’ve got people who spend all day there waiting for an item to come up.”

The move comes just months after the county won an American Civil Liberties lawsuit alleging that supervisors violated the constitution when they interrupted Anaheim resident William Fitzgerald during public comments.

The new rules would limit speakers to addressing only three agenda items per meeting, and require attendees to complete a speaker form that asks for their name and home address.

A similar proposal was narrowly turned down last month on a 3-2 vote, but has since gained support from Supervisor Bill Campbell.

“Bill had his fill,” said Moorlach, referring to his colleague’s change of heart at the most recent board meeting where Campbell – who originally voted against limitations – expressed interest after Klubnikin insulted the board over their reluctance to take action on his case.

Klubnikin often finds seemingly loose connections between his dispute, which involves the county taking over several family-owned homes, and various meeting items ranging from child support contracts to purchases of computer software and air conditioning.

“He has to deal with the courts, and the judges have already looked at him and said ‘no,’” Moorlach said.

“I appreciate someone wanting to vent,” said Moorlach. “But when you’re just there to badger, you’re stealing time from everyone else.”

The effort to limit public comment, however, has generated legal questions from a leading open government expert.

Terry Francke of Californians Aware – who also consults with Voice of OC on open record issues – takes issue with the speaker card requirement, saying local government agencies can’t require people to give their name or address in order to speak.

“Disclosure of one’s address cannot reasonably be made a mandatory precondition to one’s right to address the body,” said Francke.

He cites state law backing up a right to anonymous attendance of public meetings and U.S. Supreme Court cases protecting a right to anonymous political speech.

“Making self-identification a mandatory precondition of speech in a public meeting is statutorily and constitutionally impermissible without a compelling state interest, which is absent here,” he added.

Asked about Francke’s assessment, Moorlach agreed that speakers’ names and addresses should not be required, and said he’d talk with the county’s top lawyer.

As for the speaking limit, Francke agreed that supervisors could cap speaking time to a certain number of items. But he suggests that a fairer approach would be to set an overall time limit, for example 10 minutes per person.

“A speaker might want to comment on 10 items for one minute each. Another might want to spend three or four minutes on three items,” said Francke. “Why should the person confining himself to only brief comments be at a disadvantage?

Moorlach agreed, saying it’s “a good suggestion.”

“I just don’t know how we’d do it in practice,” he added, suggesting changes could be made at a later time.

Moorlach acknowledged that the new item limit could also impact Westminster resident Darrell Nolta, who frequently comments on multiple agenda items.

Yet Moorlach indicated that if a person has constructive comments on more than three items, he would likely allow them to speak.

“It’s a sad thing, but we’ve got a guy who watched Darrell and he abused it.”

You can reach Nick Gerda at ngerda@gmail.com, and follow him on Twitter: @nicholasgerda.

FIVE-YEAR LOOK BACKS

December 2

2002

The “Business Monday” calendar section of the OC Register, under “Work & Careers,” announced my upcoming appearance on a radio program.  I usually don’t include calendar mentions in my LOOK BACKS, but the host of the program has just been elected to the Laguna Niguel city council.  Congratulations, Jerry!

                How Is Orange County Doing?  The O.C. Bankruptcy, Social Security & Investment Strategies, 2:30 p.m., radio program, Jerry Slusiewicz’s Money Talks, KPLS/830 AM.  Guest:  Orange County Treasurer John Moorlach.  Live call-in.

There was also a perceptive submission to the Letter to the Editor section in the OC Register, titled “Wishing success for secession,” that elaborated on my editorial (see MOORLACH UPDATE — OCTA — November 30, 2012).  My submission was edited down by the OC Register’s editorial staff.  It originally included the following paragraph:  “Every time I turn around, you’re throwing my money to the wind.  Well, Ralph Kramden (of television’s the “Honeymooners”), I’ve had enough of your crazy schemes.”  The letter writer got it, even though it was shortened.

                Orange County seceded from Los Angeles County in 1889, so John Moorlach’s idea to secede from Davis’ state of California, which is now in such a mess, might not be a bad idea.  We could get along on our own without the rest of the state.

                Wouldn’t it be nice to have our own senators?  I know it is only a dream, but, “How sweet it is!”

                Gordon Walker

                Anaheim

December 3

2002

Jonathan Lansner of the OC Register decided to ponder on who should fill an important vacancy in “Musing over a new SEC boss.”  He was three years early on his first suggestion.  Here are the opening paragraphs, with the remaining paragraphs starting with Bill Gross, Sam Yau, Bill Popejoy, Mike Scioscia, Paul Presser, and Milan Panic (which put me in great company):

                As President Bush ponders who might be the next chair of the Securities and Exchange Commission, I offer some help.

                This SEC job is a pain, practically a no-win spot.  The agency’s morale is shot, and every action will be over-scrutinized.  All that’s at stake is investor confidence in American markets.  (Funny, investors pushed up Nasdaq’s stock index 6 percent since SEC chair Harvey Pitt quit.)

                Given that the myopia of Washington, D.C., might prevent some worthy names from making the short list, I’ve noted here a few potential candidates as seen through my orange-covered glasses.

Chris Cox.  The veteran congressman from Newport Beach seems a natural.  He’s a respected Republican leader with a background in securities law.  However, his previous sponsorship of securities-litigation reform laws targets him for scorn.  His nomination would surely resurrect the tale of First Pension, a corrupt money manager that then-attorney Cox had as a client.

John Moorlach.  If the SEC job were really making sure the books aren’t cooked at U.S. corporations, wouldn’t an old accountant be a good choice?  It would be quite a leap for the O.C. treasurer, who gained a national reputation after trying in vain to warn the county in 1994 about his predecessor’s financial hijinks.

December 4

1992

Peter Ryan of the Daily Pilot did an informational piece, titled “Embezzlers:  They seize an ‘opportunity’,” where my professional background was called upon.  It’s fun to see me quoted along with two County officials, long before I journeyed on the road to County public office.  Stephen Wagner embezzled significant amounts of money while serving as the Chief Business Officer for the Newport-Mesa Unified School District.  When he was eventually caught, it was big news.  The city of Newport Beach had been victimized not too long before Wagner’s crimes were detected.  Both of these incidents would be recalled two years later, when one Robert L. “Bob” Citron would create another financial fiasco for these two municipalities.  Here are a few selected paragraphs:

“It’s a crime of opportunity,” said Carl Biggs, the Orange County deputy district attorney prosecuting the case of Stephen Wagner, who is accused of stealing more than $3 million from the Newport-Mesa Unified School District.  “A lot of people don’t take a job with the intent to embezzle.  But they see an opportunity, and they take advantage of it.  Some will even wit years before they take advantage of it.”

“A lot of embezzlement happens because people get behind in their lifestyle,” said Thomas Kroopf, a Newport Beach attorney who now defends embezzlers after having spent nine years prosecuting them.  “They see some money, and it starts out where they just want to ‘borrow’ it.  Then, things just kind of spiral from there.”

“There certainly isn’t an average profile,” says Curt Hoopes, an investigator for the fraud division of the Orange County Sheriff’s Department.  “There are some guys who are good at it, and it’s their sole purpose in life.  With others, the opportunity just avails itself.”

To demonstrate the contrast, Biggs alluded to the cases of Wagner and former Newport Beach utilities director Bob Dixon, who is in prison after having been convicted of stealing $1.8 million from the city.

“With Dixon, he had a prior embezzlement conviction before coming to Newport Beach,” Biggs said.  “Somehow he got hired, and somehow he got placed into a position of trust.  Wagner, meanwhile, had no prior record.”

The accused Wagner, in fact, had an image of being squeaky clean.

“Embezzlers are the nicest people,” said John Moorlach, a Costa Mesa accountant whose [sic] has done audits for numerous corporations.  “They’re so hard-working and courteous.  People just can’t believe they would ever steal.  They believe that, ‘We’re lucky he even works for us.’

“Everything about them points to the opposite.  They are very deceptive.  The guy who’s ripping you off is the one who’s nicest to you.”

That certainly was the case with Dixon, and it may well end up being the story for Wagner.  While Wagner had an affinity for a high life he obviously could not afford, he gave no outward indications of other character flaws.

“There’s usually some sort of Achilles’ heel,” Kroopf said.  “Drugs, alcohol, gambling or, if they’re women, it could be shopping.”

Such compulsive behavior carries over into the crime of embezzlement itself.  In most cases, embezzlers are simply unable to quit.

“They make their first move, and it’s not detected,” Moorlach said.  “It becomes a compulsive thing.

“They eventually get caught because they can’t seem to cover everything.  And when they get caught, it’s because they made mistakes.”

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