Interview with John Moorlach

Read our in-depth Q&A with the Chairman of the Board of Orange County Supervisors.

Photo By Ralph Palumbo

n 1994, during John Moorlach’s first campaign for public office, that of Orange County treasurer against incumbent Robert Citron, he made a name for himself: Chicken Little. At least, that was the one we could print.

During his campaign, Moorlach almost literally ran around the county waving pointers, documents, arms… yelling with his booming voice that, thanks to Citron’s risky investments, OC’s financial sky was about to fall. But no one listened. Instead, they made him a cartoon – in more than one paper.

Needless to say, he lost the election. Then the sky fell.

And though a 2004 survey showed that almost 85% of county residents haven’t a clue that Orange County ever filed for bankruptcy, the fact is we not only filed, we set the world record: $1.6 billion in realized loss – not counting the lawyers.

Suddenly, Moorlach (who got a vanity license plate reading “SKYFELL”) was the man of the hour. Everyone courted him, including the county, who suddenly thought it wouldn’t be such a bad idea to have him clean up Citron’s financial mess. And instead of squawking and turning his back, Moorlach served as treasurer for 12 even-keeled years.

But while acting as treasurer, a post he thoroughly loved, he again saw impending problems for the county thanks to a financial boom he knew couldn’t last, coupled with rising county worker benefit packages. And while he’s quick to point out that these are not nearly as catastrophic as Citron’s investment portfolio turned out to be, again no one was listening.

So he ran for supervisor of Orange County’s second district (which includes, among others, Costa Mesa, Huntington Beach and Newport Beach) and won, taking office in 2006.

This January, he was elected chairman of the board of supervisors, despite the fact that his first term as supervisor has been nothing if not contentious, with Moorlach practically declaring war on unions.

Through it all, however, he maintains that his goal is only to make sure the county is fiscally responsible to all, including its public servants. “My main point is, what good is a benefit if we’re not solvent when it comes due?” he says. “Balance works for everyone.”

We spoke to him about balancing his wild ride from Chicken Little to Chairman of the Board.

You have a long history with Orange County politics.
Yes, I grew up in Cypress and Buena Park and in the mid-1960s my uncle Edward Devore was on the Republican Central Committee with Walter Knott and a few of the other leaders of the last generation. He also ran for city council and I helped drop literature for him as a kid and even then, I was interested in current events.

Still, it took a while before you began your public service career.
I went to college at Long Beach State, got my CPA, then worked at a firm until I was a partner. That’s when I started thinking of running for city councilman and giving back to the community, or even taking a sabbatical and running for the California State Assembly. Finally, I was approached by Assemblyman Mickey Conroy to run for Orange County treasurer against [Robert] Citron in 1994.

And that’s when you’re life got really interesting.
You could say that. I pointed out [the looming bankruptcy], spelled everything out and still lost. Then, six months later, Mr. Citron had to announce that his portfolio was underwater and he resigned, leaving a $1.6 billion realized loss, plus all the fees to lawyers and accountants. So the county hired an interim until they appointed me treasurer/tax collector.

Was it hard to keep crying out warnings with no one listening?
It was very tough. I spent so many nights looking at the ceiling wondering why I was seeing but couldn’t get the press or the rating agencies or the auditors to figure it out. I had one endorsement of any stature and that was Hugh Hewitt [political radio show host and author].

So you lost, and everything you predicted came true. How?
Interest rates kept creeping up and by October, there was an article in the Wall Street Journal about Cuyahoga County, Ohio, and they had a treasurer who was doing the same thing as Bob Citron, and his portfolio imploded. They lost $125 million, a national record. It held for six weeks.

Were you certain the whole thing was going to crash?
Yes. In fact, before the election, I wrote an eight-page letter that was later used in the state and congressional hearings. It laid it all out and warned that they had better hope interest rates don’t go up because if they do, it’s going to be a huge mess. Another perfect example is David Evans, a good reporter, then from Bloomberg News. Long before the bankruptcy, he interviewed me for radio and I laid out all the problems and even gave solutions. Months after the bankruptcy, I asked how that all went and he said his editors wouldn’t let him air it because they thought I was nuts, just way out there. Unfortunately, everything I said pretty much happened.

But you were finally vindicated, just not the way you wanted.
Right. On December first, Citron announced [the portfolio troubles], and for six days solid, I was wanted from 8 a.m. to midnight by reporters from Orange County to Indonesia. I had TV crews coming in and was on CNN and in Time magazine and instantly famous. It was all so weird, because before all this I was a gadfly; I was a nutcase.

An emotional time.
Very. Finally, Melissa Balmain from the Orange County Register called and said she’d been reading my articles from the campaign. She said, “You really did try to tell us.” I said, “Yeah, I even wrote a letter to your publisher!” So she asked for that and other information. This is 10:30 at night, December 6, the night the county officially filed for the largest municipal bankruptcy ever and I was at the fax machine putting this letter through and I just lost it. I started crying uncontrollably. I had never cried like this and I was telling myself, you’re 38, be an adult, but I just couldn’t stop. It was because it was the first time that week that someone actually said, “You know, you really tried.” And it felt so… good. I’ve never had better medicine.

How hard was it to clean up when you became treasurer?
The portfolio was sold off, which was tragic because that could have been avoided. [The county] had already hired consultants and Arthur Anderson and Solomon Bros. and used bankruptcy protection to work with the creditors. Finally, we put together a revenue diversion program and issued bonds and then paid off everybody in the pool. Then we waited a few years on litigation settlements.

How much were those?
We got $400 million from Merrill Lynch and $400 million combined from all the other firms that were pursued. So that was half of it. In the end, they said, “On the front end [the county] got a higher yield and you just squandered it, so that’s not our problem, so let’s split the baby.” At the end of the day, that was as fair as you could get it. So we had to restructure county government.

What made you decide to run for supervisor after 12 years serving as treasurer?
Because I could see things coming up on the horizon that needed to be addressed. We had a housing market that was overpriced and you could see that with the affordability index. You could sense that we were cresting and so when you get on the other side of that economic cycle it gets real dicey from a budget standpoint. Then my predecessors had implemented some poor financial strategies with the defined benefit pension plan for the county and I could see that becoming a substantial problem. And the other unfunded liability problem was retiree medical. For me it became an issue of me taking my skill sets as a CPA and certified financial planner and deciding that, if I can’t convince the supervisors as treasurer not to do these crazy financial shenanigans, then I should try to become a supervisor and argue my points as one voice out of five. Basically, it was a case where someone had to stand up and provide some fiscal sanity.

Did you also see the current financial crisis coming?
Having managed a $6 billion portfolio, I could see how a lot of mortgages getting wrapped up into bond portfolios could result in the risk of poor mortgages being transferred to the fixed income markets. You could see what was happening in the sub-prime market. In fact, we’ve seen it before. In the early to mid ‘90s, we were in a real estate crunch for much of the same reasons and cycles have a way of repeating. It’s the extent of the sub-prime mortgage crisis on so many investments, [domestic] and global, that wasn’t expected.

Is it a problem as worrisome as the ’94 bankruptcy portfolio?
There’s no comparison. It doesn’t seem to be a big problem for the county in its pension plan system. Certainly, we have a little bit of it with our county treasurer [Chriss Street] in some structured investment vehicles [SIVs], but it seems to be a minimal percentage of holdings that are in sub-prime.

What about the world economy?
That’s the big question, because we’re seeing things we’ve never seen before. We’re seeing groups out of places like Dubai buying big chunks of our national institutions. If that works to keep them intact and it becomes a good investment for those countries, then good for us and them and we continue to be an economic powerhouse. But if we have a worldwide recession and things really go up silly hill, like Countrywide going under and being saved by Bank of America, who knows what could happen? We’re realizing that things can change overnight.

You’ve been a critic of state planners too.
We have a huge state budget deficit but Schwarzenegger was told that we’d have a problem in this budget year three years ago. He just didn’t do anything about it. He wasn’t part of the solution. Schwarzenegger had an opportunity to really get something done and he didn’t. He got his butt kicked in ‘05 in initiatives and he turned into a girlie man and disappeared. Now he’s saying let’s build infrastructure, but if you can’t pay for it, you just create a bigger problem. Frankly, I’m just confused by Sacramento. I can’t explain what the thinking is up there. All I know is, when Schwarzenegger came in he said, “I’m out of money, but the counties have squirreled some away so I’ll just take theirs.”

How can he take county money?
Prop. 58 allows the governor to declare an economic emergency and call a special session. Prop. 1A says that in that emergency, with a two-thirds vote of the legislature, he can take our money from us. We saw Pete Wilson do it and we saw Schwarzenegger do it. So there’s a real disincentive for counties to save and prepare for economic down cycles. My point is get in front of these things and fix them at the state level. These things are fixable but you must show some leadership.

Speaking of which, you’re trying to lead on a number of issues that you see as looming fiscal disasters.
When I arrived in 1995 as treasurer, we paid $50 million a year for pension benefits; now we’re paying $256 million. Our pension plan has generated an annual return of 9%, which should mean we’re flush, but we’re only funded 73%. We’re just like the City of San Diego, except they’re called Enron by the sea. So I’m very concerned about unfunded liabilities and what that does to our budget and forcing our kids and grandkids to pay for a select few who are getting very attractive benefits. It’s mind-boggling to me that it happened and if we have a recession we’ll have an even tougher time paying this nut off.

The county is not alone in this type of thing.
No, it’s a national problem. GM, for instance, loses $2,400 for every car it sells because they’re paying for all these legacy costs – the retiree medical and pension plans. So they can’t compete with Toyota, which makes $1,400 on every car. And Toyota’s workers still have good benefits, they’re just not gold-plated. It also means Toyota can invest in research and development, so they’ve told the Michigan car industry, “We’re not just going to beat you, we’re going to destroy you.”

You have had some success.
Yes, retiring medical is the second leg of the unfunded benefits and we’ve taken a $1.4 billion unfunded liability down to $500 million. It was a collaborative effort with many arguments over the past year and a half, but it was successful for all sides. It’s not like I’m anti-worker. I’m for balance. What’s the best we can offer that’s fair to everybody, that’s competitive with the private sector, and affordable?

Still, you’ve taken a lot of heat for being outspoken. Is that tough?
I don’t mind confrontation, because I don’t need to be an elected official. A lot of people need it, it’s who they are. But it wouldn’t hurt me to be a private citizen tomorrow. I’d get a nice pay raise and get back on with life. But I feel an obligation. So my attitude is, I’m not here to go to social events; I’m here to get things done. I get four years, so let’s identify initiatives where we can have an impact and let’s get staff focused on it. That’s the legacy.

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