Six days after filing for bankruptcy in December, Orange County seized $73 million in restricted money due county bondholders and--perhaps illegally--placed it in the county's own depleted general fund, the California state auditor said Thursday.
State Auditor Kurt R. Sjoberg, whose office is reviewing the county's books at the request of Gov. Pete Wilson, also questioned whether an additional $209 million should have been transferred into the county's general fund from other county funds.
In a highly critical letter to Wilson and legislative leaders, Sjoberg said that because of the irregularities he now doubted "the accuracy and reliability" of the county's estimate of the amount needed to pay its bills through June 30.
The latest discovery represents yet another blow for the shell-shocked county, already shown to have skimmed at least $70 million from others in the county's collapsed investment pool, while saddling them with part of the county's losses.
These questionable transfers will aggravate the county's budget shortfall, Sjoberg said, because the county is legally obligated to return the $73 million set aside for bondholders, and possibly much more.
The state auditor's letter could prove nettlesome for the Arthur Andersen & Co. accounting firm that has pored over the county books since the bankruptcy filing and that one month ago said the county needed $172 million to cover its expenses through June 30.
Paul Sachs, chief of that accounting team, said he was aware of all the issues raised by Sjoberg's report, but does not think they would significantly worsen the county's cash shortfall between now and the end of the county's fiscal year. He cautioned, however, that the continuing investigation into the county's financial records and rulings by the bankruptcy court could change that outlook. "We don't believe there's reason to worry, but future events may change that," he said.
In discussing the state auditor's letter, Sachs also revealed that the county's general fund was $168 million in the red at the time of the bankruptcy, and an infusion of cash was needed to keep county checks from bouncing.
County officials reacted with pained resignation to the possibility of more bad news, with some warning that bondholders may face delays in being paid interest and principal. Bondholder representatives said they have cause for concern.
"I know this makes the (financial) markets very nervous," Supervisor William G. Steiner said, "but when you keep adding up the figures and the picture gets more grim, this potential looms."
Jeffrey Chanin, a financial consultant who works for the creditors committee, said he was troubled but not surprised by the revelations.
"It doesn't surprise me," Chanin said. "It's just one more incident that establishes that the county was not in control."
Daniel Harrow, Chanin's partner who also represents bondholders and other creditors on the committee, said it is important to focus on how to solve the financial crisis and not dwell on recriminations.
"We have problems we all have to focus on and resolve," he said. "It's clear something went wrong to incur these kinds of loss. . . . I think everyone now needs to focus on fixing the problem."
In his report to Wilson, Sjoberg said he had been asked to determine if the county's cash flow analysis for the next six months was accurate, but was unable to complete the task after finding potentially improper or illegal transfers of money into the county's general fund.
In his letter, Sjoberg stressed that one account emptied by county officials had strict legal limits on its use. The fund, which contained $73 million earmarked to repay bondholders, could be used only for that purpose, he said.
"We will obtain a legal opinion to determine the propriety of this transfer," Sjoberg wrote.
The other $209 million was transferred from unspecified county funds into the county general fund on the same date. Chief Deputy State Auditor Marianne Evashenk said that she could not discuss the questionable transfers in detail but that they may include money that belonged to some of the 186 cities, school systems and special districts that invested in the pool.
"There is (a total of) $282 million that we are not comfortable with," Evashenk said.
In addition, state auditors have yet to determine exactly how much the county will have to refund because of alleged improper transfers engineered by former Treasurer-Tax Collector Robert L. Citron.
Last week, Arthur Andersen accountants uncovered evidence suggesting that at least $70 million in interest earnings due other investors in the county investment fund was skimmed into an obscure county fund known as the Economic Uncertainty Fund.
In one month alone, February of 1994, Sjoberg said, Citron diverted "more than $10 million in interest from the investment pool that it did not earn."
"That's the concern we have, when did (the misallocation of funds) start and to what extent it was done month in and month out," he said.