As if losing $1.64 billion in public money wasn’t humiliating enough, bankruptcy turned Orange County into an international laughing stock.

“From now on, all Orange County investments will be made on the advice of Wayne Newton, Burt Reynolds and Willie Nelson,” said one Top Ten list called “Changes in Orange County Due to Bankruptcy.” Other laugh lines included “Ethiopia to make food drops over Orange County,” and “South Coast Plaza converted to giant Pic ‘N Sav.”

Twenty-five years ago — on Dec. 6, 1994 — Orange County filed what was then the largest municipal bankruptcy in U.S. history. The legal maneuver was supposed to shield the county’s highly-leveraged investment pool from massive losses triggered by the treasurer’s wrong-way bets on interest rates. But it didn’t work. Wall Street soon sold off Orange County’s collateral at fire-sale prices nonetheless, making “paper losses” all too painfully real.

Eventually, about 1,600 county jobs were slashed, while some county-owned properties were sold for cash. And many public programs — everything from library hours to aid for the poor and homeless to education spending — were reduced.

That one of America’s wealthiest counties could go bust — largely because nobody in power seemed to understand the county’s own investment strategies — shocked the nation, and still stings.

But, long-term, it wasn’t all bad. Today, public treasuries, locally and around the country, are safer and more transparent because of reforms triggered by Orange County’s financial face plant.

“It’s a chapter we’re not proud of, but we came out of it as a much better, much stronger government,” said Orange County Executive Officer Frank Kim, whose first job offer, in 1994, was rescinded in the bankruptcy’s immediate, chaotic aftermath.

“Our policies have become standard in other large urban areas,” Kim added. “… (And) the board is focused on making sure none of the things that happened in ‘94 happen again.”

Orange County’s credit rating has returned to sterling. Fitch, Standard & Poor’s and Moody all give top grades to the county’s fiscal health.

But observers note that threats, locally and elsewhere, still loom.

Financial illiteracy remains a huge problem for elected officials around the country. And as the slow-motion crisis of public pensions unfolds — with many communities having promised to pay retirees far more than they may be able to pay — officials who handle public money will need to know what they’re doing.

‘SKY FELL’

“The land of Disney has given the nation a modern moral: Don’t wish upon a star with taxpayers’ money.” -USA Today

Then an upstart certified public accountant from Costa Mesa, John Moorlach was dismissed as “Chicken Little” when, in 1993 and early ’94, he publicly rang alarm bells about the investments being made by then long-time county Treasurer Robert Citron.

Today, Moorlach is a state senator representing the 37th district. And his car has a license plate that reads, ‘SKY FELL.’

In the bankruptcy’s aftermath, after Citron resigned, Moorlach was appointed county treasurer. In that role, he shepherded many still-existing accounting guidelines to prevent another collapse. But he says he might be most proud of a rule known as “marking-to-market,” which is now required of every public treasury in the nation.

Simply put, it means that government treasurers must disclose losses and gains in their investment portfolios in real time, as market prices fluctuate.

Citron refused to do that. He said at the time that he “didn’t believe in taking paper losses and paper profits.” Today, his strategy wouldn’t be an option. Mark-to-market is now required by the Governmental Accounting Standards Board.

If the rule had been in place 25 years ago, Orange County’s fiscal story might have turned out quite differently.

“Mark to market did become a key component in accounting for investments,” said Orange County’s current treasurer, Shari Freidenrich, who chose to work in the public sector because of the bankruptcy.

“It meets the objective of consistency, objectivity and transparency. The County of Orange now obtains market values on a daily basis and calculates compliance with the investment policy on a daily basis, using fair values.”

Other local reforms have caught on in the state and nation. Citizen oversight committees now scrutinize what the treasurer, auditor and public financing folks are doing. And governments now publish their investment policies to explain the philosophy and mechanics of where and why and how treasurers may sink public dollars. In Orange County, that policy is updated and approved annually.

Also, borrowing money just to invest in the market and boost interest earnings — a strategy Citron disastrously employed in an attempt to replenish public coffers drained by the passage of Proposition 13 — is forbidden.

And, today, elected treasurers in California must have basic qualifications in accounting before they’re entrusted with investing public money — something never required of Citron.

“This has made a big difference,” Moorlach said of how public accounting has changed in the wake of the county’s bankruptcy.

“We haven’t seen another Orange County. And I’ve been looking.”

Threats still loom

“How could such fiscal chaos reign in the former heartland of Reaganism and seeding ground of American free-market values?” – the Independent in London

But in many places, treasurers are still elected, something that some experts say is bad for the public because it turns a highly technical job into a political popularity contest.

Also, county, city and some state governments still invest in complex investment products, such as interest-rate swaps, something that became clear when many governments suffered during the 2007-’09 recession. Other exotic investments, such as reverse repurchase agreements, also remain in use, though on a far more limited basis than the way Citron used them, Moorlach said.

And while today’s transparency is a great leap forward — anyone can see public investments with a click of a mouse, as opposed to the laborious public records requests and giant stacks of paper that were the norms in Citron’s day — some worry about a false sense of security.

“If the people in charge of authorizing those investments have no real understanding of what they’re authorizing, transparency doesn’t solve the problem,” said Paul Nussbaum, one of the bankers who in the mid-1990s helped former county Chief Executive William Popejoy rebuild the county’s finances.

“You had five elected supervisors who had no clue what a reverse repo was. And, to this day, do they have any idea what this transparency is affording them?” added Nussbaum, who today is president of the Los Angeles Museum of the Holocaust.

“If people don’t understand the risks embedded in these instruments, what difference does transparency make?”

Mark Baldassare, president and CEO of the Public Policy Institute of California, has similar concerns about the lack of financial literacy among elected officials. He was a professor at UC Irvine during the chaos, and wrote “When Government Fails,” a book about the Orange County bankruptcy.

“There is still a lot of other kinds of risk-taking,” Baldassare said. “If certain things change with the economy, things could go in the wrong direction very quickly, similar to what O.C. experienced.”

Many of these threats stem from the pricey pensions governments have promised public workers, but which their investments might not be able to fund.

“There are always new things to worry about,” Baldassare said. “Some of the things that happened with OC, they wouldn’t happen again. But that doesn’t mean everyone’s fiscal’s house is in order.”

Baldassare supports the idea of requiring elected officials to study municipal finance. Nussbaum thinks increasing oversight from experts in the private sector can help.

Still, Moorlach notes that there’s always a new financial risk.

“People just kind of assume, as Citron did, that we can control these things, that we understand how this works.

“But you don’t.”

The Orange County Public Affairs Association will revisit what happened before, during and after the nation’s third-largest municipal bankruptcy on Wednesday, December 11, from 11:30 a.m. to 1:00 p.m. at The Pacific Club, 4110 MacArthur Blvd., Newport Beach. Speakers will include Moorlach, Kim and former county supervisor William Steiner. Information: 888-246-7424.