December 6, 2014 marks the twenty-year anniversary of Orange County filing for bankruptcy. For 18 years, Orange County Treasurer Robert “Bob” Citron had been a municipal government legend for producing investment returns rates that were consistently double bank CD rates. But when Barron’s magazine editor Alan Abelson published an interview with me on Friday December 2, 1994 claiming that the “OC” was a ponzi scheme, the county filed the largest Chapter 9 municipal bankruptcy in history after margin calls caused $2.7 billion of its investments to evaporate.

After collecting about $1 billion in settlements from its bond brokers–who had allowed Citron to engage in leveraging the county, schools and other agency’s $6 payroll accounts to $26 billion–the County of Orange suffered a net investment loss of $1.64 billion.

The County would also pay over $100 million in legal fees to the bankruptcy law firms of Stutman, Treister and Glatt and of Hennigan, Mercer & Bennett; plus lawyers for about 125 agencies and school districts that invested with the OC.

To pay back the losses back without suffering any direct pain, the county Supervisors put a tax increase on the ballot. But after the measure failed miserably, the county fired 4,000 employees and would eventually be forced to pay $1.585 billion in interest and principal payments over a 30 year period.

Despite all the smoke screen about Democrat Treasurer Citron being some type of rogue liberal bureaucrat, he had been a star contributor to the county budget in “America’s Most Republican County.” By leveraging the county’s short term payroll accounts through “reverse repos” (a form of margin speculation), Citron forecasted that he would book an 11%% profit in 1994.

In the twenty years since the bankruptcy, many former politicians and faux conservatives that were intimately involved in Orange County government in the 1980s and early 1990s claim that it was all Citron’s fault and that obtaining a copy of Citron’s portfolio required a Public Records Act requests and paying a large fee.

But when I called the Treasurer’s office to ask for a copy in October of 1993, Bob Citron’s secretary printed the most recent copy, and I picked it up on the same day. The printout stated clearly that Citron had taken $6.2 billion of the customer “Short Term Investment Fund” (STIF) and leveraged it to $26.4 billion.

The County of Orange, as a result of a settlement with the Securities & Exchange Commission, has minimum qualifications for public treasurers and auditor-controllers. The county also has several layers of oversight committees staffed with financial experts that receive certified audits of the county treasury’s investments, assets and leverage.

Twenty years after the bankruptcy, the County of Orange has a strong “AA” credit rating from Standard & Poor’s. But those 4,000 jobs cut during the bankruptcy have all been brought back.

The real future risk for the county’s solvency is the Orange County Retirement System’s $5.4 billion unfunded pension liability. That debt breaks down to about $5 billion for pensions and $412 million for retiree health care. 

To put these huge numbers in prospective, the unfunded liability is a stunning 1.7 times the county’s annual budget.