Orange County’s financial crisis that became visible last month when the State of California sued the county for using $73.5 million of education money to balance its budget continues to swirl. Shortly thereafter, it was reported (here) the Auditor-Controller resigned in December after disclosing a $30,146,000 shortfall in “Reserves for Contingencies”, his Assistant turned down the lucrative promotion and retired after secretly warning the CEO in March the county was suffering severe cash flow problems, then recently the Treasury Oversight Committee Chairman resigned after it was reported (here) the Treasurer secretly lent hundreds of millions from local schools’ payroll and savings accounts to the county to make interest wagers. The crisis took another ugly turn this week when Orange County was forced to disgorge $2.7 million siphoned from local schools and other depositors in the Orange County Treasurer’s Investment Pool.
The Orange County Auditor-Controller under Government Accounting Standards Board (GASB) rules at fiscal yearend on June 30th sweeps all unspent budget dollars from each county department into the unallocated Fund Balance Available account. Monies are then required to be allocated to the appropriate owners. During the fiscal years from 2006-07 to the first business day of 2011, the former Orange County Treasurer reduced the Treasurer-Tax Collector’s Budgeted Net County Cost spending by at least $12.7 million compared to his predecessor and now Chairman of the Orange County Board of Supervisors, John Moorlach in 2005-06.
Approximately $4 million of savings came from lower spending on administration than budgeted to manage the Treasurer’s Investment Pool. Given that local schools generally account for 65% of Investment Pool deposits, John Moorlach knew the county owed schools $2.7 million of unallocated Fund Balance Available and should have made sure schools were paid their money.
But in 2011 Orange County was suffering a credit crunch due to increased spending and lower tax collections, Orange County’s “Cash” (free cash and float on un-cashed checks written) dangerously plummeted to $109.5 million from $182 million the prior fiscal year. Its Reserve for Contingencies also plunged to $44 million versus the required $91 million. Facing a $65 million bi-weekly payroll, it appears that the county was already kiting checks to make payroll. In order to avoid cutting spending, Orange County seized $73.5 million of local schools’ share of property taxes to balance their budget. According to page 6 of the just discovered County of Orange Proposed 2011-2012 Key Budget Message, the county converted all $17.2 million of unallocated Fund Balance Available into Reserves. Such blatant action appears to have included the embezzlement of another $2.7 million rightfully belonging to local schools.
Orange County Internal Audit recently exposed the county’s $2.7 million conversion of education dollars. Desperate to avoid having to publicly restate the County of Orange’s false and misleading 2010-2011 Comprehensive Annual Financial Report under GASB, Board Chairman John Moorlach sought to attempt to disguise the alleged school embezzlement schools’ as $2.7 million in over-spending by the current Orange County Treasurer Shari Freidenrich. Such a dishonest spin appears to rise to the level of straight forward accounting fraud.
With investors withdrawing large sums from the increasingly illiquid Treasurer’s Investment Pool and rumors swirling that Orange County was not paying its bills in a timely manner, a California Public Records Act demand was sent to the county on April 19th for copies of the county’s “accounts-payable-aging” to quantify the amount of county has slowed payments to vendors to conserve tight cash. Although the law requires 10 day delivery of documents, on
April 30 the county sent a legal letter composed by Mark Servino, County Counsel, stating:
The letter attempts to stall discovery of readily available county documents and seems to ominously warn the county may refuse to disclose how far they are behind in paying vendors. Running out of free cash, threatened by litigation and money being pulled from the Treasury, maybe hiding behind lawyers is the only strategy left in the Orange County financial crisis.
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