There are behind-the-scenes stories that the public rarely sees, but the actions have significant consequences.
At the time of Southern California’s Orange County Chapter 9 bankruptcy, despite the national attention focused on this fiscal fiasco, the two joint Orange County Transportation Corridor Agencies (TCA) successfully sold bonds to build the San Joaquin and Foothill/Eastern toll roads.
The reason for the dual agencies is that when this entity was initiated, one Orange County supervisor wanted his own agency, as did another. Such is the joy of parochialism in the political world.
Over time, the Foothill/Eastern Agency (241) would do fine. But the San Joaquin (73) would not.
After the initial bond sale, revenues did not meet projections. A municipality is allowed to refund (refinance) its bonds once, which was done by the TCA, but to no avail. The original and subsequent forecasts of usage and user fees were still too optimistic.
The only supposed solution was to merge the two agencies and do another $4 billion combined bond deal. When asked for my support by then TCA CEO Wally Kreutzen, I simply recommended obtaining an Internal Revenue Service Private Letter Ruling to obtain official approval of the strategy. Who needs to consummate a major deal that would later be disrupted by the IRS? To his credit, Kreutzen was able to obtain the Ruling. So, I gave my thumbs up to the potential merger.
Next came the actual financial details and the related politics. Would both boards approve the merger and the financing recommendations? There were disconcerting components to the deal, the major one being the structure and the second being the amount of fees that would be generated, some $160 million. They gave me cause for concern and prompted me to do more due diligence.
I asked for the Excel spreadsheets of projected revenues and expenditures of both agencies and found that the Foothill/Eastern was generating enough revenue to subsidize the San Joaquin. Agency cash funding transfers could be done, based on their own forecasts, without even having to merge. I communicated my observations. The debate got a little heated at times and I’ll spare you the details.
Because I had watched how a rise in short term rates had caused the ultimate filing of Chapter 9 bankruptcy for Orange County in 1994, I was not a fan of the interest rate swap component of the strategy. I was the Orange County Treasurer-Tax Collector at the time. Fortunately, working with two of the County’s supervisors, we were able to put the kibosh on this risky remedy.
After the proposal was rejected, the Orange County Register’s lead editorial of May 16, 2004, “Toll-road deal dies a deserved death,” read:
“County Supervisors Bill Campbell and Chris Norby and Treasurer John Moorlach did yeoman’s work in turning the tide against an ill-advised and costly merger and refinancing deal for the toll roads, one of which is facing tough financial times. The Transportation Corridor Agencies board rejected the plan at Thursday’s board meeting.
“'What Campbell did is he worked on the spreadsheets and double-checked the numbers,’ said Mr. Moorlach. ‘These consultants made arithmetic mistakes. I heard he worked until 2 in the morning, figured out how [the consultant] made the mistakes, and then dressed the guy down in the meeting ... It was incredible drama.’”
The Register’s editorial board would not only understand the crux of the financial costs of the deal, but also profoundly prophesied the potential future downside of utilizing interest rate swaps in the deal:
“The consultants, financiers and insurers stand to reap very large profits from such deals. That’s their business, and that’s great. But the pressure becomes so intense to make the deals happen, and the momentum so strong, that it is hard for anyone to stand back and consider whether the project or deal really is in the public’s interest, especially as time moves along, and some of the early assumptions perhaps change. Too often, the projections made by those who want the deal to happen don’t pan out years down the line.”
In the case of the TCA, the projections did not pan out—and only a few short years later, when the Liquidity Crisis of 2008 hit the nation. Short-term interest rates went into double-digit figures for several weeks, increasing the cost of interest rate swap payments exorbitantly.
Why the history story? Well, one of then Orange County’s private citizen fixed income advisors met with me and Supervisor Bill Campbell and provided us with sage and useful recommendations with this proposed transaction. He was bright, experienced, and professorial. He would become a friend.
Tim Schaefer would later go north to serve former State Treasurer John Chiang in Sacramento and his successor, Fiona Ma, with whom I served on the California Debt and Investment Advisory Commission my last two years in the State Senate.
Once, when Treasurer John Chiang came and spoke to the Senate Committee reviewing the efficacy of a proposed ballot measure, I knew I could get a much more technically nuanced response from Tim Schaefer, who was sitting by his side. Tim would be a great resource for me when I had concerns, and his role in the State Treasurer’s office assisted me often in my deliberative processes when I served in the State Legislature. He always took my calls and was always the same sage and professorial advisor.
Thanks a billion, Tim. You played a key role on behalf of Orange County residents in avoiding another fiscal fiasco, potentially caused by another interest rate spiking scenario, and I will be eternally grateful. Rest in peace, my friend.
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