Tustin Pulls Its Money Out of County Portfolio : Finances: City cites what it calls risky investment strategies. Treasurer Robert L. Citron thinks bid to unseat him is motive.

SANTA ANA —  In a move shrouded in politics, the city of Tustin has withdrawn about $4 million from Orange County’s investment pool since last month, citing overly risky investment strategies used by longtime county Treasurer-Tax Collector Robert L. Citron.

The action comes in the midst of a political campaign in which Citron, now seeking reelection, has been criticized for his “aggressive” management of a $7.5-billion portfolio involving funds contributed by 187 public agencies throughout Orange County.

“We made the change because we just weren’t comfortable with the risks that the county was taking,” Tustin City Councilman Jeffrey Thomas said Wednesday. “If you’ve been following the bond market these days, you know that there have been a lot of people getting hammered.”

Thomas is an ally of Citron’s political opponent, John Moorlach, but he said the city’s decision had nothing to do with Moorlach’s campaign to unseat the six-term treasurer. It is the first time in 24 years that Citron has been challenged for his low-profile seat.

“I know this will look very much like politics,” said Thomas, a member of Moorlach’s campaign finance committee, “but I don’t mind it looking that way. I think the city will come out smelling like a rose because of it.”

Outraged, Citron said Wednesday that city officials never expressed concern to him before pulling out of the county pool, and he added that Thomas’ connection to the Moorlach campaign “speaks volumes” about the city’s decision.

“It’s difficult when you have the type of reputation I have to have some people attack your character . . . for purely partisan political purposes,” Citron said.

Tustin Treasurer Ronald A. Nault said city officials had been contemplating the move for some months because of a growing concern for the county’s use of “reverse repurchase agreements.”

Under the complex strategy, the investor typically borrows U.S. Treasury bonds against existing collateral and then sells them to invest in higher-yielding bonds. As long as the county borrows at a lower rate than the return on the security in which it invests, the strategy works.

But with interest rates on the rise and the stock market in flux, Nault said the city’s audit committee advised officials last month to remove all the city’s cash from the county pool, even though the city had earned about $100,000 during the eight months it was a member.

That amounts to an annual return of 3.75% on the city’s investment.

Nault acknowledged that the city saw a respectable return on its investment, but officials there were still wary and decided to pull their $4 million and reinvest it on their own.

The City Council was not required to approve the transfer.

“It was no reflection on Bob Citron or his ability, but the (investment strategy) was way beyond my ability to manage it,” Nault said. “For lack of a better word, it was a risky proposition.”

Nault acknowledged that Thomas played an important role in the city’s decision, but the city treasurer said “politics did not enter the discussion at all.”

Moorlach, a 38-year-old certified public accountant in Costa Mesa and financial planner, said he did not advise the city to pull out of the county investment pool. However, he did say that Thomas--a friend as well as political ally--became concerned about the county’s activities and the city’s investment while researching information for the Moorlach campaign. The two then discussed the issue before Thomas became involved at the city level.

“Did I counsel Mr. Thomas to pull the city’s money out of the county pool? No way,” Moorlach said. “I think the city was just doing its job. Pulling out is nothing dramatic, but it certainly is prudent.”

Since announcing his candidacy, Moorlach has questioned Citron’s investment practices and has submitted a request under the state open records law asking for details about where the county’s funds are invested and what brokers are handling the county accounts.

Specifically, Moorlach said he is concerned about Citron’s use of the reverse repurchase agreements to win higher returns for his clients.

“I’m nervous,” the candidate said, “you better believe I’m nervous. I’m praying that the county money is OK. Everyone should be concerned, because this is public money.”

Hyman Grossman, managing director of Standard & Poors’ municipal finance department in New York, said Wednesday that over-dependence on reverse repurchase agreements can be cause for concern in some cases, but he was not familiar with details of the Orange County portfolio.

“When you try to squeeze out extra yield, sometimes you get burned,” Grossman said.

But Citron said adequate safeguards have been built into the county’s investment strategy for the protection of the pool’s clients.

One of those contingency plans includes a $1.5-billion cash account to cover agency investments should they wish to leave the pool. Citron said Tustin has been the only agency to express a desire to leave the county fund.

Citron said he has been engaging in the repurchase strategy for nearly 15 years with no reported failures.

“I do know there are people on the City Council who are tied to partisan politics who are trying to make an issue out of the safety of this investment pool,” Citron said. “This was not a complete surprise.”

As the only Democrat in an elective office in county government, Citron said Republicans are injecting politics into a nonpartisan race as pay-back for his involvement four years ago in the hard-fought election victory of Democratic Assemblyman Tom Umberg of Garden Grove.

Until that election, Citron has said, he and Orange County GOP Chairman Thomas Fuentes were friends.

“Tom Fuentes didn’t like what I did then,” Citron said. “He told me, ‘I’m going to get you.’ ” Fuentes was out of the country Wednesday and could not be reached for comment.

Moorlach, who is the assistant treasurer for the Orange County GOP Central Committee, has said that he consulted with Fuentes before announcing his candidacy, but only as proper political “etiquette.”

County Board of Supervisors Chairman Thomas F. Riley, a Republican, said the Tustin decision would not shake his longtime support for Citron.

“I would think back with some horror about how we could have done some of things we’ve done in this county without (Citron),” Riley said. “He has my full confidence.”