California County government approaching bankruptcy because politicians RETROACTIVELY increased sheriff pension contributions 50% when money was easy during earlier real estate price runup. (this is called buying votes...)
In Orange County, California, they were getting tons of extra property tax income during the recent property value increases. So, the Sheriff Deputy's union pushed through a spending bill that promised them a 50% increase in the fixed pension funding they did have and now, after the real estate bust, that bill has resulted in a $2-billion UNFUNDED liability for future pensions just for the Sheriffs.
Below is the email newsletter I get from one of the County Commissioners (because I used to live there), and related newspaper articles as he pushes a lawsuit to try and reverse the costly pension benefit. It is important to mention that most corporations stopped giving fixed pensions years ago, and only some governments still try to increase future taxpayer costs with unfunded liabilities like this instead of using 401k programs where the employee must contribute a percentage of their salary.
The lesson to be learned here is that the public must demand proper and accurate forecasting of such spending bills, and not let them be pushed through by politicians and staff who don't understand analytical methods that would provide a true picture of the costs. (Does this sound like the local Lake County argument over the cost of impact fees???)
Fortunately, Moorlach is a CPA and was recently elected and knows how to analyze the taxpayer cost of these types of excessive boondoggles.
Vance
================================================
From County Commissioner John Moorlach, Orange County, California
We had a lengthy morning Board
session on the matter of the Constitutionality of retroactive pension benefits
yesterday. My Chief of Staff, Professor Mario Mainero, gave a scholarly
PowerPoint presentation which can be observed on the County’s website (http://172.31.0.87/PPPortal/agenda/webcast.aspx).
As this e-mail is large enough, I am not attaching a copy of the presentation.
I also gave a brief PowerPoint presentation on the financial costs of granting a
retroactive increase of 50 percent at the end of a public safety member’s
career. There is a 50 percent increase in the retiree’s benefits that costs the
taxpayers more than 4 times what they set aside during the employee’s career,
when they thought their commitment was met. In other words, during 25 years of
service the County set aside some $400,000 to meet the obligation. Changing the
rules at the end of the game requires another $1,312,000! It’s like having paid
off your mortgage, only to be told that you have a new debt of $560,000 due over
the next 30 years at a 7.75 percent interest rate. Ouch! We’ll try to have
both presentations up on our website later today.
The recommended motion (http://cams.ocgov.com/Web_Publisher/Agenda07_31_2007_files/images/ASR%20MEMO%20TO%20BOS%20FOR%20RESCISSION%20VERSION%203.PDF)
was modified slightly as a result of the dialog, including moving back the date
of the next hearing in order to obtain one more independent legal opinion (after
already getting about a half-dozen of them to
date).
The OC Register has plenty of
coverage on the meeting. We’re mentioned on the Opinion page, which is my
starter below, on the front page of both the Main and Local sections, and
addressed by the world famous Frank Mickadeit. All of these articles are
included. We are covered by the Daily Pilot (http://www.dailypilot.com/articles/2007/08/01/politics/dpt-pensions01.txt).
The LA Times had Evan Halper assist with their piece, which is good news. Evan
is very strong in the area of public employee benefits. Their piece is included
below. The LBReport.com covers the matter in a more detailed fashion, see http://www.lbreport.com/news/jul07/pens1.htm.
Courage
at the Board of Supervisors
From Steven
Greenhut:
Those of us who had
gotten accustomed to the principle-lacking, vision-less, status-quo politics of
Republican In Name Only supervisors — think Tom Wilson, Chuck Smith, Cynthia
Coad and Jim Silva — can’t believe what we’re seeing in the Hall of
Administration these days. Led by John
Moorlach and Chris Norby, with frequent support by Bill Campbell, Pat
Bates and Janet Nguyen, the board is actually setting its own agenda rather than
relying on the go-along, get-along advice from staff. The board actually is
putting taxpayers and citizens above the constant whining and demands from the
coddled public-employee unions.
Today, the board voted
5-0 to take the next step toward challenging the constitutionality of the
retroactive pension spike for deputies that amounts to an obvious gift of public
funds. This decision is likely to spark statewide challenges that will unravel
the most egregious abuse of the taxpayer. This takes guts. All five supervisors
deserve credit for pursuing this important issue.
LISTENS: Orange County
JEBB HARRIS, THE ORANGE COUNTY REGISTER
Supervisors move toward trimming
pensions
They
want court to rule on whether deputies' retirement benefits are
legal.
By MARTIN WISCKOL
The Orange County Register
County supervisors took the first step Tuesday toward
slashing pension benefits paid to retired deputy sheriffs, starting what could
be a landmark legal battle with the deputies union. Chapman University
Supervisors
unanimously called for staff members to return next month with a plan to
challenge the constitutionality of some retirement benefits. If the benefits are
found illegal, supervisors could cut millions in pension costs and set a
precedent that could be followed by local governments statewide.
“I know
this would affect people who’ve served the county, but the (pension) benefits
cost taxpayers,” said Supervisor John
Moorlach, who proposed the measure as a way of reducing the county’s
massive unfunded pension liability. “This could provide some very necessary
relief.”
The move was opposed by Sheriff Mike Carona and union
representatives, who argued the pension benefits were legal and that supervisors
had a moral responsibility to uphold a commitment made to deputies.
“Why
you’re jumping to this nuclear approach … speaks volumes to the employees of
this county,” Carona told supervisors while asking for more moderate
options.
The issue boils down to an increase in pension benefits to
deputies that was approved by supervisors in 2002. Until then, those retiring at
age 50 or later received a pension of 2 percent of their salary multiplied by
the number of years they worked for the department. The change increased the
amount to 3 percent.
For active employees, the increase applied to years
of service after the change was approved as well as to prior years of service. A
bill passed by the Legislature in 2000 said this retroactive increase of pension
benefits was permissible, and public labor unions throughout the state
negotiated better retirement plans.
But Moorlach presented research that argued
that such retroactive increases, when funded by the county rather than the
employees, violate constitutional provisions on government debt and gifts to
government employees. The state constitution supersedes legislative
action.
Rolling back the increase would help address an unfunded
liability for county pensions that has been estimated at as much as $2 billion.
Moorlach has proposed eliminating
the extra 1 percent of benefits given retroactively, estimating it would save
between $184 million and $550 million.
John Eastman, a constitutional law
professor at
At the urging of District Attorney Tony Rackauckas, the board
also agreed Tuesday to hire an independent constitutional-law expert to provide
an unbiased analysis of the legality of the 2002 increase.
Moorlach’s assault on the deputies’ pension
is the latest in the battle between the supervisor and employee unions – and it
increased tension between the supervisor and Carona.
“Unfortunately, I
think Mr. Moorlach has a personal
vendetta here,” Carona said.
He cited Moorlach’s proposed oversight board for the
Sheriff’s Department, a plan under development. He also cited suggestions that
the Harbor Patrol be removed from the sheriff’s authority, although that idea
predated Moorlach’s election to
the board last year.
In that election, Moorlach was opposed by a union-backed
candidate.
Moorlach denied
any personal agenda in his latest proposal, saying he just wanted to do what was
right for the county.
His proposal received strong support from the
Lincoln Club, a Republican group of wealthy businesspeople that has backed
Carona in the past but more recently endorsed the proposed oversight
board.
Contact the writer:
714-285-2867 or [email protected]
|
Supervisors
move toward trimming pensions JEBB HARRIS, THE
ORANGE COUNTY REGISTER |
|
Cops'
pay has been ripe for backlash
FRANK
MICKADEIT
Register columnist
[email protected]
The Board
of Supervisors says its decision yesterday to begin considering whether to roll
back some sheriff's deputies' and D.A. investigators' retirement benefits is
necessary because the supervisors must uphold the state Constitution.
And, yes,
if the benefits are ultimately cut, it will be because a court rules the 2001
benefits deal violates the Constitution.
But don't
make the mistake of believing that at its
core this is about fealty to the Constitution. That's a means to
an end. That end? Well, the noblest would be fiscal responsibility – not driving
the county deeper into unfunded liability. That's undoubtedly a motive, and Supervisor John Moorlach says it is his.
But what I
believe this really is about
in the global sense – the reason there's support for this beyond one
number-crunching supervisor – is because of growing backlash against what are
perceived as overly generous contracts for law enforcement. And against police
unions' ability to extract those contracts from politicians.
Three- or four-day
work weeks. Liberal overtime and vacation policies. Retirement
after 25 years at age 50 at 75 percent of their highest salary. (The so-called
"3-percent-at-50" that is the subject of this debate.) Stress-related
retirements that allow cops to retire with 100 percent of their salary at almost
any age.
I'm not
just talking about O.C. cops. I'm talking about cops statewide, perhaps best
exemplified by a prison-guard union so powerful we're about to be put under
total federal control. Politicians who try to rein in compensation find
themselves facing election opponents funded by police unions.
The
citizenry gives cops tremendous police powers to begin with. When it comes to
believe cops are also so powerful they can write their own tickets financially?
That breeds a sense the checks and balances are out of
whack.
This
perception – true or not – has been building now, for at least two decades, with
a significant break after 9/11, when we realized just how much these brave men
and women mean to us. It's no coincidence that the 3-at-50 deal was cut in
December 2001. I'm not here to argue for either side; I'm just analyzing what I
believe to be the real driving force, where the overall political will to do
this comes from. Grocery clerks' bennies cut. Other hourly jobs go overseas.
Cops get fat increases? Backlash city.
See, this has huge
statewide implications. Other cities and counties are watching. They were just
waiting for someone like Moorlach
to come along and make the first move. Moorlach's chief of staff, Mario Mainero, estimates public agencies
statewide have $13 billion in unfunded liability because of retroactive
pensions.
Here's a
very telling indication of how big a deal this is: Mike Capaldi, Dale Dykema, Buck Johns, Tracy Price, Rich Wagner. You know who these guys are?
They are leaders in the Lincoln Club, the high-rolling conservative Republican
group founded here in 1962. Some are also members of the even more high-falutin'
New Majority.
These guys
don't play politics at this level. They're kingmakers. They sit back, give
audiences to would-be politicians and write checks. They help put supervisors in
office; they don't deign to attend their meetings, for God's sake. But there they
were yesterday, sitting in a pack in the Board Chambers. I asked each when he
last attended a Board meeting. This is, after all, the most powerful elected
local body in Orange County
Wagner, the
president, got up and told the Board that his board had already voted on whether
the county should challenge the 3-at-50. The vote: Yes, 24: No, 0.
It was interesting
to see the two men the Lincoln Club helped breathe life into
at their political infancies – Mike Carona
and Tony Rackauckas–
get up yesterday and more or less side with their employees. Both men were
somewhat cautious – although Carona called cutting 3-at-50 now "go(ing) to guns"
– and urged the supes to take time to study the matter.
T-Rack came
off as about the most even-keeled speaker of the day, drawing on his staff
lawyers' analysis (do I sense the hand of B.
Gurwitz?) and his own experience as a judge to caution the
five-member non-lawyer Board that if they go to court, it won't be the slam-dunk
victory they might have been led to believe. Can't wait.
Contact the writer:
Mickadeit writes Mon.-Fri. Contact him at 714-796-4994 or [email protected].
O.C.
may scale back deputies' pensions
Supervisors say
the 2001 contract on which the retirement formula is based is unconstitutional.
The battle appears likely to end up in court.
By Christian
Berthelsen, Times Staff Writer
August 1, 2007
Orange
County
The move comes as local governments throughout the state struggle to cover the ballooning cost of public pensions, which some project will force officials to slash government programs and services in coming decades.
Over the objections of the sheriff, the district attorney and the sheriff's deputies union, supervisors unanimously agreed to consider rescinding portions of the deputies' pension packages, which were approved in 2001.
In wading into the fray, the county is pursuing a novel legal strategy contending that part of the deputies' contract is unconstitutional. Public safety officials say the contract is legal and binding, and that it would be unfair to take it away now from retired deputies.
The fight appears likely to wind up in court, and the county's aggressive stance is accompanied by a fair degree of uncertainty. Politicians and government workers throughout the state will probably be watching the outcome.
"It's the first significant thing of this sort to be done," said Steve Frates, a senior fellow at the Rose Institute of State and Local Government at
Claremont
McKenna
College
. "We don't know what the results will be."Orange
County
is one of scores of public agencies facing a crushing debt from generous pension packages approved in the wake of the stock market run-up of the late 1990s. Others include theLos Angeles
Unified
School District
andLos Angeles
, Contra Costa and Marin counties.Politicians typically signed off on the benefits when pension funds were flush with cash, adding tens and sometimes hundreds of thousands of dollars in value to the retirement packages of rank-and-file employees.
Agencies face debt
When investments declined, many found themselves with bills they could not afford to pay.
The fight in
Orange
County
could be extraordinary. Orange County Sheriff Michael S. Carona predicted that the consequences could be "cataclysmic" for his rank and file. A union official said the families of fallen officers could suffer.Under the deal approved by the county and the Assn. of Orange County Deputy Sheriffs in 2001, deputies were allowed to retire at age 50 with 3% of their highest year of pay, multiplied by their years of service. The plan's proponents say the average pension of a deputy who retired after the new agreement took effect in 2002 is about $70,000 per year.
The agreement added a percentage point retroactively to a deputy's years of service, which created an immediate pension shortfall because additional funds hadn't been set aside for the boosted retirement pay of veteran officers.
Supervisors focused on rescinding this retroactive portion of the agreement, which some county officials estimate may have created as much as $550 million in pension costs over 30 years — a debt they say they cannot cover.
Rolling back that retroactive portion of the agreement would save the county nearly a quarter of the county's total $2.3 billion in unfunded pension liabilities.
Led by Supervisor John Moorlach, the county is arguing that the agreement violated the state Constitution because it created an unfunded debt, amounted to a gift of public funds and constituted extra pay for work already performed.
"An illegal contract can and must be rescinded," said Mario Mainero, Moorlach's chief of staff, in a presentation to supervisors at Tuesday's hearing. "The county cannot agree to a deal that burdens future generations."
As a candidate for county treasurer in 1994, Moorlach famously warned that
Orange
County
's money was invested in high-risk vehicles. He lost that election but was vindicated six months later, when the county declared a $1.7-billion bankruptcy.He was appointed to fill the remainder of treasurer Robert L. Citron's term and was reelected twice. He was elected to the Board of Supervisors last year; he and the deputies union have become frequent adversaries.
Moorlach's argument will run headlong into a large body of state and federal constitutional and legal protections that have generally safeguarded pensions from employers seeking to roll them back, particularly for governments and their public employees. But there also have been a few cases in which agreements were invalidated because their basis was found to be illegal. It will also face stiff opposition from politically powerful public employee unions.
"I
personally think that this claim is from left field," said Stephen Silver, a
Santa Monica Orange County
The plan also had the
backing of conservative legal scholars and the Lincoln Club, a powerful
"The Constitution is a higher law," John Eastman, the
dean of the law school at Chapman University and a former clerk for U.S. Supreme
Court Justice Clarence Thomas, testified in support of the plan during the
hearing.
"You can't just ignore it."
Sheriff objects to plan
Some of the
fiercest opposition to the plan came from Carona, who complained that he had
been left out of the discussion even though the plan would have the most effect
on his department.
Carona called the plan a "nuclear bomb" for the
deputies, and he and Dist. Atty. Tony Rackauckas, who also has employees who
would be affected by the rollback, urged the board to take a more cautious,
cooperative approach to resolve the problem.
"That is the most draconian
of any of the options I can think of," Carona said of the effort.
Wayne
Quint, president of the deputies union, made an emotionally charged presentation
highlighting deputies who had died in the line of duty or become ill, and how
they and their families depend on the pensions.
Supervisors are scheduled
for another vote Sept. 18 to move forward with the plan, which involves hiring
legal counsel to seek an injunction in state court relieving the county of the
payment obligations for the retroactive portion of the agreement.
County
officials said the deputies union could head off a court fight if its members
agreed to pay for that portion of the benefit themselves through concessions in
future salary negotiations.
[email protected]
Times
staff writer Evan Halper contributed to this
report.
Retroactive
Pensions
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JOHN
MOORLACH |
|
By JOHN MOORLACH
To appreciate why government employers
are reeling from recent retroactive retirement benefit increases—which well
could violate California county of
Orange California West County
Let’s say an employee starts working for
you at age 25.
You provide a starting annual salary of $54,000 and
promise that when he or she retires in 25 years, you will pay 50% of their last
year’s salary for the rest of their life, plus an annual 3% cost of living
adjustment. This formula is known in the public sector as “2% at
50.”
Your actuary tells you your 25-year-old employee is expected to live
to age 80.
Your money manager tells you to expect a net annual rate of
return on your investments of 7.75% to help fund the benefit.
Your
business plan tells you that your employee should average an annual raise of 4%
a year.
Believe it or not, the worker’s salary will be $143,955 at the
time of retirement. The annual retirement pension benefit in the first year of
retirement will be $71,978, which increases by 3% per year for the next 30
years.
Your actuary will tell you to contribute 17.3% of the annual
salary at the beginning of the year. The first year’s contribution: $9,333. By
the 25th year, the annual contribution will be $24,881. The funds available at
retirement will be $1.1 million, which will last until the former employee
reaches age 80. At age 80 the annual benefit will be some $169,620.
The
power of compounded interest is one of the marvels of investing. You will have
made your annual salary and pension plan contribution commitments and your
employee will enjoy lifetime benefits until his or her anticipated death.
If the employee dies before age 80, you have an actuarial gain. If the
former employee lives well past age 80, which is probable with advances in
medical science, you will have an actuarial loss.
Other issues could
occur. What if the investments don’t earn 7.75% per year? If they are higher,
then your contributions will decrease. If you earn less, then your contributions
will increase to catch up to the financial target where you should be.
In
technical terms, the difference between where you should be in your funding
level, as a result of contributions and net investment earnings, is the unfunded
actuarial accrued liability.
What if the retirement formula is changed
during the term of employment? It is unlikely that the formula will decrease the
expected benefit, as pension plans tend to be a vested right. If it increases,
then you will have an unfunded liability that will require increased
funding.
Now if you increase the benefit and make it retroactive, then
you will have a significant unfunded liability to deal with.
Let’s say
that the benefit is increased, retroactively, to “3% at 50” when the employee is
near retirement age. Well, the new benefit at age 51 jumps from $71,978 to
$107,966 (a 50% increase). If the funding level is not changed, instead of
ending with zero at the 80th year of life, the funds would dry up at age
65.
In year 66 someone would have to come up with $168,208 to pay that
year’s benefit. To fund the extra 15 years, someone would have to fund $561,500
in the 26th year! This is approximately half of what you have earned in 25 years
of methodical contributions and investments.
That is what government
employers are facing by retroactively granting higher benefits to
workers.
But how can a governing body give such a rich benefit, creating
such a large debt, for services already rendered? If you believe in the state
constitution, you can’t.
Article XVI, Section 18 states that if you want
the taxpayers to absorb a debt, you had better get a two-thirds approval from
them.
Article XVI, Section 6 states that elected officials “have no power
to make any gift or authorize the making of any gift of public money to any
individual.”
And “Lamb v. Board of County Peace Officers Retirement
Commission of Los Angeles County” states that “a pension is a gratuity when it
is granted for services previously rendered.”
Article XI, Section 10
states “a local government body may not grant extra compensation or extra
allowance to a public employee after service has been rendered.”
Numerous
elected officials have been approving potentially illegal benefits ever since
Gov. Gray Davis signed “3% at 50” and retroactivity into law.
Even though
“3% at 50” is extravagant, I have no quibble with that. But going from “2% at
50” to “3% at 50” overnight and gifting the extra 1% back to the date of hire is
unconscionable. It’s also unconstitutional. That’s why my office is supporting
legal action to rescind this burden on the taxpayers and returning the county to
some semblance of fiscal responsibility.
What burden, you ask. Well, for
the
The retroactive portion of the contracted benefits is unfair,
unreasonable and unconstitutional. And if it is not addressed, and soon, then it
will be the straw that breaks the financial backs of municipalities around the
state of
Moorlach is a county supervisor representing the 2nd
District covering
O.C.
supervisor still at odds with deputies
Pension
is the main issue in a fight that is increasingly personal and
growing.
By Christian
Berthelsen, Times Staff Writer
July 30, 2007
John
Moorlach sat on a restaurant
patio last fall with a few of his staff members when a union official
representing sheriff's deputies approached the table and asked to shake his
hand. Orange County Orange County U.S. Orange County France
The chance encounter soon turned ugly.
Moorlach, then
In just one year, the new
Union officials have blamed Moorlach for having to work for nine months
without a labor agreement and sought to bar him from attending any deputies'
funerals. Even union officials from other parts of the state have joined in the
fight against the supervisor, with the Los Angeles Police Protective League
declaring Moorlach "an enemy to
law enforcement."
The bitter feud climbed to new levels on July 20, when
Moorlach proposed that deputies'
pensions be pared back, saying the 5-year-old agreement defining benefits was
unconstitutional because the sweetened retirement packages contained a
retroactive clause that constituted a gift of public funds and gave extra pay
for work already performed.
The union has rejected the claim, saying the
deal can't legally be undone. The county board is scheduled to take its first
vote on the matter Tuesday.
Moorlach's proposal has reverberated across
the state as politicians and government workers wait to see whether the
challenge to the popular retirement packages will be successful. In recent
years, more than 1,000 local and state agencies have awarded retroactive pension
benefits to public employee unions, including virtually all of those
representing public safety officers.
As a result, according to the
conservative California Foundation for Fiscal Responsibility, the state faces at
least $12 billion in pension obligations that it has no money to cover.
"He's developing a reputation as sort of a zealot on this issue," said
Dave Low, a lobbyist for the California School Employees Assn. and chairman of a
group of public employee unions seeking to safeguard pension benefits.
Moorlach insists there is
no personal animus to his proposal and that he wants only to restore fiscal
health to the county's pension fund, which faces a $2.3-billion deficit over the
next 30 years.
Moorlach
was the candidate for county treasurer in 1994 who famously warned that the
county's money was placed in high-risk investments that would implode if
interest rates rose. He was dismissed as "Chicken Little," and voters reelected
incumbent Robert L. Citron. Six months later, as interest rates shot up, the
county was forced to declare the largest municipal bankruptcy in
As treasurer, Moorlach began criticizing the deputies'
2001 pension agreement as fiscally irresponsible. The deal allowed deputies to
retire at age 50 with 3% of their highest year of pay multiplied by their years
of service. It also granted the benefit immediately to each deputy, causing a
pension shortfall because the additional funds hadn't been set aside for the
veterans' boosted retirement pay.
Moorlach's office estimates that $70,000 is
now the average annual pension for deputies who retired after 2002, and the
retroactive portion of those pensions generates as much as a quarter of the
pension system's unfunded liability.
When he ran for supervisor,
Moorlach used the looming pension
debts as a campaign issue, much as he had the county's investments a dozen years
before. He portrayed underfunded pension packages as the county's next potential
financial catastrophe.
County employee unions fought back. The deputies
union poured at least $80,000 into the campaign for Moorlach's opponent, David Shawver. It also
sent out mailers and aired a television commercial saying Moorlach was seeking to take pensions away
from the families of slain officers. Moorlach said he had never proposed that
and felt the ads were unfair and misleading.
The campaign did little to
dent his popularity in the Republican-dominated northern coastal region he
represents — he won with nearly 70% of the vote. Emboldened by the results, on
election night he declared he would take on public employee unions that want "to
make
Other unions called
and made peace with Moorlach. In a
board vote Tuesday, the Orange County Employees Assn. is now set to receive a
new contract that both sides appear happy with. But the fight with the deputies
escalated.
In a speech during his swearing-in ceremony, he proposed
merit pay for county employees rather than raises through across-the-board union
contracts. He also advocated an audit of the deputies union medical trust fund
as a part of any new labor agreement, which also angered them.
In
reported comments, he said he viewed union leaders as "thugs," which prompted
the union to seek to bar him from attending any deputy's funeral in his capacity
as a supervisor if they are killed in the line of duty.
The union's
president, Wayne Quint, further criticized Moorlach during a board meeting in
January. Moorlach replied by
questioning Quint about the money he made as a union president in addition to
his sheriff's deputy salary.
Both sides are at a loss to explain how
things got so bad so quickly, though both suggest it probably stems from bruised
feelings during Moorlach's last
campaign.
Moorlach said he
expected the union to come after him, but the campaign rhetoric went too far.
"They warned me, 'You're going to have to run the gantlet.' It was no surprise
for me and no surprise for them. It kind of went over the top."
Mark
Carre, acting general manager of the deputies union, said in a recent interview
that Moorlach took what "happened
during the campaign very personally."
