Colbeck Capital Highlights the Lessons We Need to Learn From Orange County

Home to the Los Angeles metropolitan area and more than three million people is Orange County, California. While it continues to be one of the major tourist destinations in California with prominent attractions including Disneyland and the Honda Center, Orange County has had a complicated financial past tracing back to 1994.

Once described as a revered destination for orange groves and mansions, Orange County image has shifted with the economic fallout of investment malpractices and political fighting. At the center of this storm was Robert Citron, treasurer-tax collector when the county filed for Chapter 9 Bankruptcy in 1994.

First Major Municipal Casualty of Malpractice

As referenced in Colbeck Capital Management’s newsletter Former President Ronald Reagan described Orange County as a place where “the good Republicans go to die.”

Orange County became the first official municipal casualty to fall victim to investment malpractice. The county filed for Chapter 9 Bankruptcy on December 6, 1994. The decision led to a loss of more than $1.64 billion from the county’s investment pool and the largest bankruptcy in U.S. municipal history. The county would spend the next 20 years importing trash from other counties to help pay off this debt.

Sadly, Orange County was not the last example of investment malpractice at a municipal level. Within the next several decades, places like Detroit and Jefferson County also succumbed to bankruptcy, though for vastly different and more understandable reasons.

Prop 13, Tax Revolts, and the Castle of Cards

For more than 20 years, Orange County thrived with relatively impressive yields, many of which were laid at the feet of Robert Citron when he took over in the dual role of treasurer-tax collector. Citron helped to oversee an average yield north of $8.52 percent, a number that compared favorably to Los Angeles’ 3.88% at the time. The county was in great economic health with more than 18,000 employees and $3.78 billion in budget.

Before Citron’s success had run its course, his exploits were held in high regard, if not entirely understood. Thomas Riley of Citron’s Board of Supervisors stated at the time, “He makes us all look good.” Little did anyone know that Orange County was on the brink of collapse.

Previously keeping his investment strategies a tightly held secret, the true source of his decision-making power was revealed during the bankruptcy trial proceedings. There, Citron admitted to relying on astrologers to help him make investment choices. This Las Vegas-style investment strategy was not built to last, and his risky bets soon collapsed inward. To understand how this castle of cards fell apart, you need to understand the state of property taxes and political advocacy in Orange County in the 1970s.

California has often been ridiculed by outsiders for its rising property taxes, but this has not always been the case. The trend began in the 1970s as rising taxes hit inflation, enraging homeowners and future homebuyers throughout California. As property taxes continued to explode, homeowners like Deloris McCormack laid out what was happening, “An octopus (is) just gobbling up all our little homes.”

The so-called tendrils of Proposition 13 soon wrapped themselves around the housing market. Prop 13 was one of the most comprehensive tax reform bills ever introduced at the time, inspiring Californians to loathe raising taxes while preventing places like Orange County from tapping into tax resources during emergencies.

Bob Citron Meets Chicken Little and Orange County Pays

While Robert Citron is a fascinating character, he was also a very real person who had genuine long-term and negative consequences on the residents of Orange County. His personality was also his downfall. Lacking any background in finance, Citron rose through the county ranks by working through the tax department after a career selling cars. Landing the title ‘tax man’ in the 1960s, the unqualified Citron politicked his way into the Treasurer-Tax Collector position.  One such story involved Citron yelling at Orange County officials over a missing $12 from his paycheck.

Citron earned as much trust as distrust but was undeterred in his decision making. In 1978, he followed up the controversial Proposition 13 with a legislative suggestion that would allow treasurers to push investments through leverage, something known as reverse repurchase agreements or repos.    

When Citron’s lucky streak finally ran out, it was largely due to the Federal Reserve hiking interest rates numerous times throughout 1994. As a result, Citron’s OCIP bonds reversed in value, leading investors to clamor for their money.

At the same time, John Moorlach introduced himself as a challenger to Citron for the role of treasurer-tax collector. Moorlach was a Bible study-attending Republican who crafted his image around his career as a CPA. With actual financial understanding, Moorlach believe he could unseat Citron. Unfortunately for Orange County, Moorlach was dismissed as ‘Chicken Little’ by Citron, and the nickname stuck.

Citron told Moorlach to stop “eroding investor confidence,” quickly parlaying Moorlach’s fiscal conservatism into a mummery of Republican zealotry. On June 8 Citron was re-elected. Soon after the OCIP diminished in value from $1.5 billion to $350 million, and the county was forced to file for bankruptcy. Later on, Moorlach remarked, “Elected officials believe they can rely on rosy economic trends, (and) that’s when a fiscal calamity is just around the corner.”

Only later was it revealed that Citron had consulted with astrologists, psychics, and five-dollar star charts to make interest rate forecasts. Citron denied responsibility for his role in Orange County’s bankruptcy and was sentenced to a year of work release, performing more than 1,000 hours of community service. Citron died at the age of 87.

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Colbeck Capital co-Founder Jason Colodne

Colbeck Capital Management was founded in 2009 by co-managing partners Jason Beckman and Jason Colodne. Colbeck specializes in providing strategic loans to companies that are experiencing transitional periods while looking for additional sources of capital. With 20 years of experience, Colodne has managed credit investing and underwriting businesses at Goldman Sachs and Morgan Stanley.