MOORLACH UPDATE — Awarding and Assuming — May 15, 2013

While serving as the County’s Treasurer-Tax Collector and investing billions of dollars on behalf of the taxpayers, it became apparent that greed would create embarrassing issues for just about every broker-dealer in the nation. If I limited my investment officers to utilizing only those broker-dealers that had no blemishes, we would have no one to trade with.

Orange County has just suffered a major embarrassment with the actions of Carlos Bustamante. As Chair, I worked with my Board to pursue accountability. We made major changes and are in the process of implementing more. We had a bad apple, not a barrel of bad apples nor a bad apple barrel.

These are two perspectives that I brought to yesterday’s meeting. The Voice of OC, which provides the first piece below, has its biases as it has been funded by public employee union money. Yesterday, the largest OC employee union voiced its concerns about SAIC during the Board meeting. The Voice of OC usually does its best to keep its journalism neutral, but there are days when the reporting has a decided slant. Headlines with the words “center of massive fraud” and “scandal” are certainly attention grabbers, but the article reads more like a weak grand jury report than hard-hitting investigative journalism. It would seem that SAIC, with national attention focused on its contract with the city of New York, will be going out of its way to demonstrate ethical behavior and to deliver high levels of service to its customers. Another employee failure would jeopardize the livelihoods of 44,000 people that SAIC employs. Not only did SAIC provide the technical solution that scored the highest among all of the bidders, but it was also the lowest bidder. If SAIC reduces overall County expenses and we can eliminate a few unnecessary positions as well, that’s a big win for the taxpayers, especially with a Governor who has no compunction about taking serious money from our General Fund. To protect the entirety of our workforce, the Board must look for ways to cut costs and this decision does just that.

The Manhattan Institute For Policy Research, whose mission is to develop and disseminate new ideas that foster greater economic choice and individual responsibility, provides an interview of me at their Public Sector Inc. website. It is the second piece below.

BONUS: If you want to see a quick interview of me by Leslie Layton of Time-Warner Cable, then go to

. Leslie Layton was an anchor for OCN (the Orange County Network) in the day when the OC had its own 24/7 news network.

BIKE RIDER BONUS: The third item below is an invitation to attend the OCTA Bike Workshop Thursday evening at the Garden Grove Community Meeting Center. If you’re an avid bike rider and interested in recommending improvements, this would be worth your time to attend.

County Awards $74 Million Deal to Company at Center of Fraud Scandal

By NICK GERDA

Orange County supervisors on Tuesday awarded a lucrative $74 million IT contract to SAIC, Inc. – which paid out half a billion dollars last year to avoid prosecution of a massive fraud case.

On a 4-1 vote, with Supervisor Janet Nguyen dissenting, supervisors approved the contract, saying staff had known about the fraud issue since last year and that SAIC gave them the best overall deal.

“I just have a strong comfort level” with assurances from the company’s management, said Supervisor Shawn Nelson.

With Tuesday’s approval, SAIC will be taking over management of the county’s data center and desktop computer support for the next five years.

The vote came after a heated debate over allegations of underbidding and whether the county did its proper due-diligence in vetting the company.

Supervisor Nguyen directly accused SAIC of underbidding the project.

“My concern is still that I truly believe there was a lowballing on the part of SAIC,” said Nguyen. “I fear this contract is heading for a train wreck.”

A competitor, HP, came forward at the meeting and wanted to be allowed to re-bid on the project given that SAIC’s price went up by $13.7 million after it was chosen as the preferred vendor.

“We did not have an opportunity to submit a new proposal,” said HP representative Amer Syed.

County staff, meanwhile, attributed the increase to additional services requested by the county.

SAIC admitted last March to defrauding New York City on a computer project, forking over $500 million to the authorities in one of the largest cases of municipal contract fraud in U.S. history.

On Tuesday, Supervisor Todd Spitzer accused SAIC Senior Vice President Bob Genter of not being forthcoming with supervisors when he described the New York fraud as being “a story of two bad apples.”

Spitzer pointed out that the company itself has admitted that its higher-level managers were warned about the fraud but failed to investigate.

“How in the world could you stand here today and say it was ‘two bad apples’?” asked Spitzer, adding that “it was a culture of corruption” within a unit of the company.

Genter at first said it was unclear if the problems extended beyond two former managers, but then later agreed with Spitzer’s assessment.

Spitzer also questioned county staff for not verifying the company’s claims that a third-party monitor, approved by federal prosecutors, was giving it a clean bill of health.

“We should have known that before coming in today, shouldn’t we have?” said Spitzer, adding that he was “very bothered” the county didn’t have the monitor’s latest report.

“I think there has to be an ongoing, clean bill of health letter from the monitor,” said Spitzer. “This is a company on probation.”

At the end of the day, the federal monitor helped seal the deal for SAIC, with Spitzer voting for the contract after he got the company to agree to have the monitor send reports to Orange County.

Other supervisors steadfastly stood by SAIC at the meeting.

Nelson took issue from the dais with a Voice of OC story Tuesday morning raising the fraud issue, arguing that the problem in New York was in no way emblematic of the company.

The fraud case “certainly was thoroughly vetted,” said Nelson, in addition to the company paying a half-billion dollar fine and agreeing to federal oversight.

Supervisor John Moorlach said a good side of SAIC’s federal prosecution is that it resulted in oversight by the third-party monitor.

“It appears to me that we’re getting free monitoring,” said Moorlach, adding that if the federal monitor finds something wrong then SAIC loses its federal contracts.

Reached by phone after Tuesday’s meeting, the federal monitor confirmed that he would be sending his reports to Orange County.

Michael Eberhardt, of Contractor Integrity Solutions, LLC, also declined to say if SAIC has had any major issues since monitoring began, adding that his information is provided in the official reports.

County officials pointed to SAIC’s experience with local and state governments as an upside for going with the firm.

“We have what we believe is a solid contract with SAIC, a well-experienced vendor who will meet our goals,” said county IT chief Mahesh Patel.

At the same time, a top SAIC official has said the company is largely pulling out of local government work.

“It’s a hard business that has no money, and we don’t do it well. So why would we do more?” said Stu Shea, the firm’s chief operating officer, in a newspaper interview.

Orange County has a sore spot for ballooning IT costs, where tens of millions have been spent on contract increases and extensions.

Several recent IT chiefs have resigned under fire, and performance audit reports indicate a culture of sole-source contracts and cost overruns.

While the IT contracts are an critical part of the 17,000-employee county bureaucracy, which serves 3 million residents, the debate is often extremely technical and difficult to follow.

That frustration played out at Tuesday’s meeting, where staff had a hard time explaining much of the increase from SAIC’s bid to the final contract.

“I don’t feel that that’s been addressed,” said Moorlach, referring to $13 million of the increase. “You should have an answer.”

After Patel replied with general background information, such as “we’re buying a certain level of certainty with this contract,” Nelson took his turn asking about the increase.

“Help me here. I need to know the answer to my question,” said Nelson.

“It is having to do with the units, and it is still part of the scope as well with respect to some of our requirements changing,” replied Patel.

The data center contract and a related voice and data network contract have been lucrative for supervisors, with the top bidders providing more than $23,000 in political contributions to their campaign coffers.

Westminster resident Darrell Nolta asked supervisors on Tuesday to disclose their campaign contributions from SAIC, though none of them did so.

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

"Everyone assumes the economy will save them": A Public Sector Inc. Q&A with John Moorlach, member of the Orange County (CA) Board of Supervisors

John Moorlach has been on the Orange County Board of Supervisors since 2006. Prior to that, he served as county treasurer for over a decade. John, a CPA, is credited with being one of the few to predict the 1994 Orange County bankruptcy, which until very recently was the largest municipal bankruptcy in American history. Throughout his two decades in public office, John has been a leading voice for fiscal reform in Orange County and California. Public Sector Inc. editor Stephen Eide recently interviewed John about fiscal distress, municipal bankruptcy and the California political process. Below is an edited transcript.

EIDE: Orange County in 1994 and Stockton and San Bernardino in 2013: what are the similarities, what are the differences?
MOORLACH: The differences are the easiest. Orange County happened instantaneously: a quick run-up in interest rates that jeopardized a revenue structure predicated on the assumption that rates would decline. So it caught everybody by surprise. (Except for some of us.) Stockton is like Charles Dickens: if, every year, you spend a little bit more than you make, that leads to misery. A slow-motion train wreck.
They’re similar in that everyone assumes the economy will save them. That the stock market will go up to 30,000 or that interest rates will turn around and ease, and that will save the Orange County portfolio. They all had a misplaced trust in things they couldn’t control.

EIDE: In neither case did California state government make any effort to intervene. Why doesn’t California deal with Stockton like Michigan is now dealing with Detroit: take it over instead of sending it into bankruptcy?
MOORLACH: One reason is that Michigan does not permit cities to file for Ch. 9. Also, I would doubt that Michigan is in the same financial position that California is in. Michigan has the financial wherewithal to at least be of assistance. California has far more liabilities than it does assets. Every dollar in the bank that the state controller manages is borrowed from somebody else. Michigan, out of 50 states, based on their unrestricted assets per capita, places 34th; California places 46th and has an unrestricted assets per capita ratio almost 7 times worse than Michigan.

There’s also an attitudinal difference: if the state can’t take care of itself, who are we to assume they can fix things? In the case of Orange County, there was actually a sense of glee in Sacramento. The speaker of the house Willie Brown was elated! (Even though the local official who perpetrated the crisis was a registered Democrat.)

California state government is dysfunctional. To balance the budget, Gov. Brown takes money from schools, counties, redevelopment authorities, lets them flounder, and then says hey, only two cities have filed for Ch.9, so it can’t be that bad.

EIDE: One reason to prefer takeover to bankruptcy is that, in a takeover, the state can actually drive structural reforms of a city, whereas bankruptcy is purely a debt-adjustment process. Would you say that its run-in with Ch. 9 reformed Orange County?
MOORLACH: Absolutely. Even though we were a rather lean and mean machine before 1994, we made rather dramatic cuts, and we implemented discipline. We do a five to ten year strategic plan. We are constantly monitoring it, so we will not have surprises on the horizon (except when assumptions change). Our revenues are 92% real estate taxes, which makes it easy to project into the future. We began performance measurement, which enables us to quantify our operations.

EIDE: Corporate bankruptcy is far more common than municipal bankruptcy, because the entry barriers are lower. Do you think we should make it easier for local governments to declare bankruptcy?
MOORLACH: I don’t know if ease of entry is a big factor. Local governments do not want to declare Ch. 9 because it’s a scarlet letter. When you talk Ch. 9, what comes up, still 20 years later? Orange County, New York City-and they never even filed. I don’t think city councils ever want to talk about the "b" word outside of closed sessions.

But things may be getting interesting with Ch. 9. When Vallejo went through Ch. 9, Judge McManus put out a white paper that clearly stated that federal court had the ability to change contracts. He told the city we’d be more than happy to do that for you—although he recommended the city address most issues outside of the courtroom. Vallejo put in new tiers for new hires, adjusted OPEB, had layoffs, and asked employees to pay a greater share of their pensions. Vallejo was threatened by CalPERS and they did not have the resources to take that one on. But Stockton does have the resources, via bond insurance companies who do not believe CalPERS has made enough concessions. So, for example, in Stockton, Judge Klein might say to the city council: "Back in the early 2000s, you approved pension formulas and allowed them to be retroactive to date of hire. Well, I’m going to nullify those and put back in the old formulas, which were good formulas to begin with." That would eliminate a major amount of the liability. You would need the wisdom of Solomon to deal with those already retired. But the big issue is how do you cut your debt without making bondholders take all the hit?

EIDE: I think one reason why bankruptcy appeals to people is that they have become so frustrated with the political process in California that they now look towards a legal remedy.
MOORLACH: The majority of elected officials in California are Democrats for whom public employee unions are an ATM. The unions of California run this state and there’s no way you’re going to get the votes to do anything political. But in a federal courtroom, you can change contracts. You can do that. If the Stockton and San Bernardino judges have read the Vallejo decision, they will see how it points to way to reduce our debt.

As for ballot initiatives, the two issues that we keep facing is that the voters don’t seem to grasp the severity of the pension and OPEB problems, and, because unions have so much money, major donors are extremely reluctant to donate to campaigns. They’ve told me this to my face: "if we’re going to spend money, we want to win." In Orange County, a group attempted to make it mandatory that employees check a box if they want money to go to political activity. The unions spent a boatload of money and it lost. In California, reform through ballot measures has a low victory potential.

Now I like the Michigan idea of some kind of auditing or turnaround approach. We do have a model for school districts. If your reserves go below a certain level, the state will come in, but we don’t have it for cities or counties.

If we could just build some standard fiscal reform metrics, and show some leadership around the state, that would be really impressive. But you do face this dilemma of, shouldn’t we be running this locally instead of having someone from the state come in?

EIDE: Right, with any state oversight program, you wouldn’t want to stifle whatever local reform efforts may already be underway.
MOORLACH: What we’ve done here in Orange County has been very difficult for unions to get around. We’ve said that we will not increase your compensation higher than anticipated growth in real estate taxes. So our total compensation has gone up 16%, but that’s not wages-that’s pensions and healthcare. We’re saying you better pay more for the employee portion of your pension, or you get a pay cut, because we can’t allow total compensation growth to be higher than revenue growth. It’s not a formal law in place, and "policy" may be too strong a word, it’s just an agreement that the board of supervisors has in messaging to our negotiators. This is our metric, and it’s just math. Because of changes in California law, 92% of general fund revenues are property taxes. We don‘t have a diversified portfolio, so compensation is going to have to follow what the real estate market is doing. I’m not saying the property tax metric is right, it just happens to be the cards we’re dealt.

EIDE: Would you prefer a more diversified revenue system?
MOORLACH: Having real estate be a major component of your revenues is not a bad deal. Even with Prop 13, it always seems to go up, if you have turnover. It’s usually a steady, rising type of revenue, although it can be volatile. When the real estate bubble burst, many Stockton and San Bernardino residents went back to renting and those cities were hit very hard.

California has no clue how to deal with cycles. In a good cycle, you don’t immediately start giving out raises, you have to start adding to reserves. When the dotcom boom hit, you saw a big push to increase benefits. What you should have seen is a push for moving into fixed income, away from equities. Had that happened, we wouldn’t have seen so many pension plans in trouble.

Income taxes are a problem. Capital gains revenues out of Silicon Valley—those are one-time revenues. We need to be a little better in our foresight and not just make knee-jerk concessions to unions. Fortunately, now, we’re on an upswing. Had the recession gone on longer, you would have seen more Stocktons and San Bernardinos.

EIDE: Thanks for taking the time to talk to Public Sector Inc.

OCTA Bike Workshop for Supervisorial Districts 1 and 2

OCTA will host a roundtable discussion on efforts to improve regional bicycle transportation in the northwestern part of Orange County.

OCTA, Caltrans, County of Orange, and cities in supervisorial districts 1 & 2 will come together to create a regional strategy to identify regional bikeway corridors that improve connectivity across jurisdictional boundaries.

Participants will be encouraged to share their input to help identify priorities in their community. To keep up-to-date on this planning effort, please visit www.octa.net/bikeways

May 16, 2013, 5:30 to 7:30 p.m.
Garden Grove Community Meeting Center, Room A
11300 Stanford Ave., Garden Grove, CA 92840
RSVP by May 10: www.surveymonkey.com/s/OCTABikeways

Take the Districts 1 & 2 Bikeways Collaborative Survey
English Survey
Spanish Survey

FIVE-YEAR LOOK BACKS

May 15

2008

The initiative to postpone developer fee payments until the end of the production found some media attention. Jonathan Lansner of the OC Register jumped in with “O.C. aids builders. Why not small fry?”

Joining the growing roster of government agencies helping housing-ravaged fat cats (say, perhaps, Bear Stearns?) … O.C.’s Board of Supervisors Tuesday unanimously approved deferring certain development fees for builders in what the board is calling — now get this — “an economic stimulus package.”

For the next year, the county will now charge developers when they actually build a home, not when they file building plans. (Fees included are some road, library, park and other development taxes.)

Your blogger dialed up John Moorlach, chair of the Board of Supervisors who dreamed up the builder break. Not that we begrudged builders any help, I was asking when the county’s small fry might see county financial aid. Moorlach did note that builders employ people who’d be considered small fry, and what’s good for the building companies might be good for their worker bees.

And Moorlach was fairly cool to my consumer-based “tax holiday” suggestions — say, cutting auto sales tax for a weekend, or the like — suggesting that state law may prevent the county from reducing or delaying many of the levies it collects.

But Moorlach says he’s open to suggestions.

The Daily Pilot’s “The Political Landscape” columnists Alan Blank and Brianna Bailey did with “Moorlach Defends County Move to Defer Building Fees.”

Orange County Board of Supervisors Chairman John Moorlach on Wednesday defended a move to give real estate developers in the county a one-year break from fees for developing housing construction.

The board voted unanimously Tuesday at Moorlach’s urging to give real estate developers in the county a one-year deferral from fees on housing construction. Critics say county officials did not study or talk about what economic effect the plan would have before the vote. Moorlach claims the plan will help stimulate the economy and have only a small effect on county revenue.

Building industry groups are pushing similar plans in cities and counties across the state in response to a troubled housing industry.

“We’re earning less than 3% interest on the building fees…why would you need to do a study?” Moorlach said. “…Is this going to change the world? Probably not. Hopefully it reflects a healthy partnership with developers.”

Moorlach said he hoped the deferment would boost county construction jobs and development plans.

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