Citron Quits as Crisis Deepens : Federal Regulators Pore Over Fund Records : Finance: O.C. treasurer-tax collector resigns post he held for 24 years over $1.5-billion plunge in investment portfolio. Officials continue closed-door sessions.

In the midst of a worsening financial crisis that has federal regulators poring over records of the county’s beleaguered $18.5-billion investment fund, Orange County Treasurer-Tax Collector Robert L. Citron resigned the position he had held for 24 years, officials announced Monday.

Six months after winning a bitter electoral contest that focused on his risky investment strategies, Citron chose to step down rather than deal with the $1.5-billion loss suffered by the investment pool he managed for the county and more than 180 other public agencies across the state.

“After much thought and soul-searching and with much regret, I have decided for the benefit of the County of Orange to resign my elected office,� Citron, 69, said in a two-sentence letter of resignation. Although it was given to the county’s administrative officer Sunday, it was not revealed by county supervisors until Monday.

By law, Citron’s assistants in the treasurer-tax collector’s office were temporarily named to the top posts in the two departments. Matthew Raabe, 38, became acting treasurer and Gary Cowan the acting tax collector. Citron’s permanent successor is not expected to be named before January, when he was due to begin a new four-year term.

“It’s a sad day, but Bob resigned in the best interests of the county,� said James Kenan, finance director of the Orange County Transportation Authority, with more than $1 billion the largest single investor in the investment pool Citron managed. “From a financial market standpoint, I think he just wanted stability to return.�

Following a two-hour, closed-door meeting of the Board of Supervisors, officials declined to discuss details of their deliberations, saying only that they would hold another closed session today to resume discussions about the financial crisis. In calling Monday’s meeting, they cited the possibility of litigation over the losses as their reason for barring the public from the meeting.

In other developments that came to light Monday:

* Officials disclosed that investigators from the Securities and Exchange Commission spent the weekend examining the county’s portfolio and Citron’s financial documents. Investigators were looking to see if the county illegally used borrowed money to pay investors who made withdrawals from the fund, or to meet so-called margin calls, which require additional cash to make up for the decreased value of securities the county pledged as collateral in seeking loans.

* The city of Irvine broke ranks with the county, and announced that it is withdrawing $25 million in retirement funds from the pool and would sue if the county tried to withhold 20% to cover eventual losses. Officials said they had decided in October to withdraw the money in January, but news of the portfolio’s plunge prompted them to change their timetable.

* Orange County bond prices dropped about 10% and few of the county’s bonds were sold Monday. “The whole Orange County market is off,� said Steve Kelleher, bond trader with Sutro & Co. in San Francisco. “Nobody is buying and nobody is selling. We’re just waiting because this loss could just be the tip of the iceberg.�

* Officials already are worried that the fund debacle could jeopardize some county projects and programs. R.A. (Burt) Scott, the head of the county’s General Services Agency, said Monday he was concerned that any downgrading of the county’s bond rating would affect the county’s ability to finance a massive $94-million law enforcement communications system the board was expected to approve this month.

* Local school officials worried that they will be the biggest losers in the crisis. Unlike municipalities and special districts, which can invest their surplus funds in many different ways, school districts must keep all of their funds with the county treasurer. Four local districts that borrowed as much as half their annual budgets and put it into the fund to earn interest are particularly at risk. Although Citron’s office lured them into the investments with a special guarantee their capital would be protected against any loss, the districts did not receive anything in writing extending the guarantee for this, the second year of the investment. County officials said there never were any such guarantees.

* Moody’s Investors Service announced it has placed Orange County’s investment pool under review. Standard & Poor’s, the other major rating agency, has already put the county on a negative credit watch, a step prior to a possible downgrading of the county’s credit rating. Lower ratings would raise the cost of borrowing for the county’s government agencies.

With Citron gone, county officials and investors wondered what to do next. Some officials privately expressed fears that only Citron, who was paid $104,353 a year, truly understood his own financial game plan, which relied heavily on borrowing money short-term to invest in longer-term bonds, using investors’ funds as collateral.

While interest rates remained low, Citron’s plan worked extremely well, bringing in some of the highest yields paid by any governmental investment pool. But this year proved disastrous for Citron as interest rates soared, undermining the value of the long-term bonds he had used for collateral, as well as those he had bought with borrowed money.

Because Citron had leveraged $7.8 billion worth of securities belonging to cities, school districts and other public agencies into a portfolio worth nearly three times that amount, his losses have been magnified.

Securities firms that loaned the county money demanded that the county put up more cash as collateral to guarantee the loans, digging considerably into the fund’s available reserves, which declined from roughly $1.5 billion in August to less than $350 million two weeks ago.

Those in the investment banking world are nervous about the developments of the past week.

Kemper Securities in Chicago published a report Monday that laid out the problems in Orange County and took particular note of a $110-million bond issue sold by the county in September. Buyers could demand that the bonds be redeemed on seven days’ notice, adding to the county’s cash crunch.

Citron did not come to Monday’s meeting, and spent most of the day at his Santa Ana home. Peering through the stained glass bordering his front door, he told a reporter who rang his doorbell that he had no comment to make. A messenger who said he had been dispatched to Citron’s home by an unnamed county official brought Citron an envelope in late afternoon, and Citron took it through a crack in the door.

The former treasurer, who had held office longer than any other current county official, will draw a pension of $89,000 a year.

Some officials praised Citron and his ability over the years to bring needed extra revenues to governmental entities.

“I think the person should be judged on the whole history of his investment strategy,� said Laguna Beach City Manager Kenneth C. Frank, whose city has invested about $7 million in the fund.

“We have made almost $1.4 million in the last 3 1/2 years by investing in the county pool over what we would have made with the state pool--$1.4 million.�

But others were less complimentary.

Peer Swan, chairman of the Irvine Ranch Water District--which is threatening to withdraw $300 million from the pool if it doesn’t get a voice on a proposed financial advisory board overseeing the pool’s operations--said he was concerned “that Bob has all the information� and appears to be the only person who “knows what is going on. . . . “

“We must have access to that information,� he said, adding that “it is critical that Bob be on our side. He had a long history of being good to the county, but there was no option (other than his resignation). The world changed.�

City councils throughout Orange County will be reviewing the status of their investments in the county pool and deciding how to react.

Most city finance officials said they were refraining from withdrawals that they feared might cause a “run on the bank� and jeopardize their cities’ investments. They said they could not afford to take the 20% loss that county officials are projecting.

The officials added, however, that they did not intend to continue making deposits into the now-controversial fund.

The City of Irvine, however, demanded a large chunk of its investment, announcing Monday that it was withdrawing $25 million of the $209 million it has invested in the pool.

City Manager Paul O. Brady Jr. said the City Council will meet Wednesday to consider taking legal action if the county insists on the 20% penalty it has said it will impose on withdrawals.

There were hints that Irvine’s reason for announcing a withdrawal now may be political as well as fiscal. One official suggested that the city may use this issue to leverage concessions from the county on other contentious issues, such as development of a commercial airport at the El Toro Marine Corps Air Station, which the city opposes. County voters approved the project in the November election.

Irvine City Councilman Barry J. Hammond stopped short of making an overt threat but listed El Toro as well as the city’s proposed annexation of the base among the “good, strong deal points that can be discussed� between the city and the county.

“There’s just a lot of things going on and individuals always have to do what’s best--what’s best for the community first and the county second.�

Brady nonetheless sounded relatively supportive of Citron, declining, as he put it, “to get involved in all the politics� of the current situation. The county treasurer-assessor has “done a good job for us,� Brady said. “Sometimes that gets lost in all the criticism.�

Huntington Beach City Treasurer Dan Watson said the news of Citron’s resignation left him more concerned than before. “If I thought he had good solutions or potential solutions or (could) work his way out from under this, I’m not sure he would have offered his resignation.� The city has about $43 million invested in the pool.

Other city officials declined to pass judgment on Citron.

“At least in part (Citron) has become a victim of both political statements and the media. . . . “ La Habra City Manager Lee Risner said.

Buena Park Chief Financial Officer Greg Beaubien said he was “in favor of the county taking any steps necessary to deal with the situation.� Even so, he said, “it’s easy to throw stones at people.� Buena Park has $18 million of city money and $10 million in redevelopment funds in the pool, he said.

The Securities and Exchange Commission, meanwhile, sent investigators to Citron’s offices in Santa Ana to cull documents.

There is concern that there could be a run on the fund, and that the ones who demand money first might get it, leaving less available for others.

“In general, if there’s a run, the rule is first-come, first-served, without attention to the relative equities of those who may not make a claim� immediately, said one of the SEC sources.

The officials said any of the investors in the fund might file a lawsuit, asking a court to put the fund into receivership. In a receivership, a court-appointed official would be assigned to supervise the fund and make decisions about how money is paid out and invested.

SEC investigators were said to be looking at whether securities used as collateral for loans made to the fund may have been used improperly. While these securities were supposed to have been set aside as security for just one borrowing, they may have been used simultaneously, and illegally, to secure other loans. But the sources offered no details.

Officials were also seeking to determine whether the fund is being adequately supervised now, and whether any payout of money from the funds would be made equitably among the various municipalities and agencies that are investors. Questions were also raised about possibly improper use of securities to collateralize loans the county sought.

Meanwhile, Citron’s political opponent in this year’s race, who had repeatedly warned that the portfolio was highly leveraged, was astonished by the resignation.

“I didn’t anticipate he would do it,� said John M.W. Moorlach, a Costa Mesa certified public accountant and financial planner who lost to Citron in the June primary.

Moorlach, who wrote county officials Monday offering to sit on any committee that may be formed to oversee the operations of the pool, would not say if he would seek the position himself.

More Coverage

* MARKET DRIES UP--The market for Orange County bonds continued to evaporate. A18

* PROJECTS IN DOUBT--An overhaul of county police emergency communications is among potential casualties. A18

* TAX OFFICE IRONY--Some find humor in waiting to pay bills sent by ex-tax collector, who others say should be jailed. A19

* CITIES’ SITUATION--All but two cities have money in Orange County’s investment pool. A23

Key Figure Steps Down

After nearly a quarter-century, Robert L. Citron’s political career as Orange County’s treasurer-tax collector came to an end Monday when the Board of Supervisors accepted his resignation. County Assistant Treasurer Matthew Raabe was appointed as treasurer until January, when a permanent successor will be named.

Citron resignation: “After much thought and soul-searching and with much regret, I have decided for the benefit of the County of Orange to resign from my elected office of Orange County treasurer/tax collector.

“My resignation will be effective upon acknowledgment of receipt of this resignation by the county administrative officer.�

CAO’s acknowledgment: “Regrettably, I acknowledge receipt of your Dec. 4, 1994, letter or resignation, effective at 4 p.m., Dec. 4, 1994.�