Robert Citron, 1925-2013

Robert Citron, the former Treasurer of Orange County, CA, recently passed on. Citron was the figure centrally responsible for Orange County’s bankruptcy in 1994, the biggest municipal bankruptcy in history until Jefferson County, AL in 2011.

That one man could be centrally responsible for a municipal bankruptcy already indicates something of the uniqueness of the Orange County affair. The cause was neither unions, pensions nor economic collapse, but rather an attempt to fund basic government operations through investment income. The county had become extremely reliant on interest from the Orange County Investment Pool, in which it kept its cash, as did most other cities, school districts and special districts in Orange County. Citron managed the pool. This image from the Orange County Register shows how the arrangement worked.

OC Investment Pool.png

Citron was an elected official, not an appointed professional. He had no education or background in finance. But he managed to develop the reputation as a “wizard of high finance” because of his pool’s consistently high yields throughout the 80s and early 90s,  and the fact that no one understood what he was doing. County and city officials were content to keep raking in double-digit returns, no questions asked. In FY95, interest income was budgeted to be the Orange County general fund’s single-largest revenue source, and to provide an amazing 35% of total general fund revenues.

In the wake of Proposition 13 and local governments’ demands for more revenue options, the California legislature had substantially deregulated county treasurers’ investment operations. Citron used this newfound freedom to purchase complex investments and leverage up his bets through so-called “reverse repurchase” or “repo” loans (ring a bell?). Citron would buy a security, then use it as collateral for a short-term loan from Wall Street, then use these funds to buy long-term bonds. The point was to exploit the gap between short-term and long-term interest rates, and the premise was that rates wouldn’t rise.

You see where this going. In early 1994, the Federal Reserve began to raise rates, increasing Citron’s cost of borrowing and lowering the value of his long term bonds. By the fall, the pool was insolvent. The county declared bankruptcy to freeze the pool to prevent a run caused by local governments withdrawing their deposits and Wall Street seizing its collateral. Citron was forced to resign and ultimately pled guilty to six felony charges that he falsified losses and shifted funds around to prop up some depositors at the expense of others. He got off with a $100,00 fine and less than a year in a work release program.   Citron kept his $92,909 county pension, which cost of living increases had boosted to over $150,000 by the time of his death.

The pool’s losses of $1.65 billion left Orange County with a 41% drop in revenues for the next fiscal year and massive debt. Local government depositors expected to be made whole, as did Wall Street creditors. Voters rejected raising the county sales tax from 7.75% to 8.25% to pay off the debt, leaving the county no choice but to issue $880 million in bonds backed by taxes from other county agencies diverted to the Orange County general fund.  This debt the county continues to service up to this day, $90 million in interest annually, and it won’t be fully paid off until 2017.

No Harry Truman he, Citron declined to take full responsibility for Orange County’s collapse, blaming his subordinates and Wall Street. In fairness, Citron’s scheme did bring out the worst in many other parties, such as the local depositors in the pool. Though furious over their losses, the city of Irvine and several other localities also had used leverage to increase their returns. Other blameworthy parties include the Orange County Board of Supervisors, who failed to exercise oversight, and perhaps even the Orange County voting public itself. The decision to reject the 50 cent sales tax increase to pay for Citron’s mistakes, though understandable, simply forced the County to pay off the bankruptcy with more debt, meaning that the current generation is now burdened with the consequences of the 80s’ generation’s blind trust in Bob Citron.

Left-leaning interpretations of the affair blamed Prop 13′s alleged legacy of distorting state and local fiscal policy, as well as Republican hypocrisy. The conservative Orange County public wanted low taxes but also high services. Citron found a way to give them something for nothing.

But looking to structural causes fails to account for the simple fact that what happened to Orange County was totally unique and remains unprecedented to this day. Chief blame must be assigned to Citron himself. Seems crazy, doesn’t it, that someone with no formal financial training should be authorized to direct a $20 billion investment pool? Then again, most state Treasurers are elected politicians who are entrusted with primary responsibility over tens of billions in pension fund investments.

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