MOORLACH UPDATE — 3% @ 55 — January 25, 2010

Sunday had two items dealing with pensions.  The first was the lead editorial in the OC Register’s Commentary section on our negotiations with AOCDS.  The website includes my photo, so I thought I would throw it in.

The second was an update on pension impacts in the City of Rialto, which was covered by the San Bernardino Sun.

As a Bonus, I’m providing two articles from the new “CalWatchdog” website.  I’m not sure if they are a blog or a news website.  I’m including these two pieces for your reading pleasure as they also deal with pension issues.

The first is by Anthony Pignataro, who used to write for the OCWeekly.  He has been an editor in the State of Hawaii for some six years.  And now he is back in California.

The second is by Troy Anderson, who is one of the premier reporters dealing with public employee defined benefit pension plans for many years.  Here he addresses the failure of the rating agencies in the SIV scandal.  I agree with CalPERS on this one and support their litigation efforts against the big three rating agencies.  After you read Troy’s piece, you’ll come to appreciate my position.

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Editorial: Deputy deal first step on right path

The Orange County Board of Supervisors and the Association of Orange County Deputy Sheriffs reached a tentative agreement last week on a new employment contract that would slightly reduce pension benefits paid by the county and require deputies to contribute to their own retirement – as other county workers already do. It is an incremental move in the right direction, but it is not enough.

There are two key changes. Under the current county pension program, deputy sheriffs are entitled to "3 percent at 50" retirement benefits, which calls for annual payments at a rate of 3 percent of the average of the three highest years’ salary multiplied by the number of years worked, payable beginning as early as age 50. For example, if a deputy worked 30 years, he or she would be entitled to pay of 90 percent of the average of the highest three years of compensation – and the benefits continue for life, or the life of the beneficiary’s designee, which could be a spouse, domestic partner or a child.

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FILE PHOTO: As members of the Deputy Sheriff’s union rallied outside against pension cuts in January 2008, Orange County Supervisor John Moorlach opened up his weekly board meeting with a look at tough financial times for the county.

Bruce Chambers, Orange County Register

Under the proposed agreement, the pension formula would change for new hires to 3 percent at 55. It wasn’t that long ago the benefits were 2 percent at 50.

On a second front, the existing labor agreement does not require deputies to contribute to their retirement benefits. In the proposed deal, new deputies would be required to contribute 6.6 percent of annual pay to their pensions.

What is the impact on the county’s unfunded pension liability? Short-term savings from the new formula are virtually nonexistent. No actuarial analysis has been done to determine long-term savings, but having another five years to fund retirements will make liabilities a little more manageable.

Supervisor John Moorlach, who has championed pension reform, believes the measures are a good start and "getting [deputies] to start withholding and paying for their portion of the pension plan is good news." But he also advocates an employee contribution that is double the 6.6 percent.

If the deputies union and the Board of Supervisors approve the agreement, the employee contribution measure would be a landmark.

The agreement is good news, and leaders are right to tackle the difficult task of reducing the county’s unfunded pension liabilities, which Mr. Moorlach estimates at $3 billion. But, with what the county is facing, an incrementalist approach won’t be enough. The next step should be a defined-contribution plan – similar to a 401(k) plan – for all new hires.

These are only prudent financial steps to reduce the burden of retirement promises that lack the funds to pay for them, and ease the burden on taxpayers for generations to come.

San Bernardino Sun

Rialto scrambles to fund new pension costs

Josh Dulaney, Staff Writer

RIALTO – At a time when local governments are looking to cut spending every way they can, this city is preparing to spend up to $5 million a year on upgraded pension packages for police, firefighters and other employees.

Budget plans for the 2010-11 fiscal year will have to account for the new "3 at 50" pension plan, which allows firefighters and police officers with 30 years of service to retire as early as age 50 and collect up to 90 percent of their highest annual salaries for the rest of their lives.

A slightly less generous improvement is also kicking in for the city’s 400 general employees.

The combined pensions will account for roughly 10 percent of Rialto’s $52 million annual budget, when they take effect next year.

City Administrator Henry Garcia had no luck in recent weeks trying to convince the workers’ unions to delay implementation of the new plan because of the tough economy. The unions already gave up about $4 million in concessions to close last year’s budget gap.

It’ll be up to the City Council to decide where the money comes from.

"We’re going to use reserves and look for funding sources that can fund it," said Councilman Ed Scott, who was among a 3-2 council majority that voted to approve the pension two years ago.

He added: "I have some faith and belief that the economy is going to turn around and we’re going to find some revenue sources to deal with it."

Officials with the union representing Rialto police officers said their members have already given up plenty to help the city cope with the recession.

"We have given up pay increases, holiday hours. . .We’d given up a lot in advance so it’s not a hardship on the city," said Richard Royce, president of the Rialto Police Benefit Association.

Representatives of the fire and general employees’ unions could not be reached Friday or Saturday.

In the short term, the city will rely on its $31 million in economic reserves, a pot set aside for a rainy day.

Rialto isn’t alone. The 3 at 50 pensions for public safety employees are as common in San Bernardino County as the government officials who worry the pricey benefit is unsustainable.

"I think in general there’s concern about the retirement system across the state, the retirement system that serves government as a whole," Fontana City Manager Ken Hunt said. "Fontana is a very good system and it’s very expensive. The question becomes, can it be maintained."

Last week, Orange County culminated years of negotiations about 3 at 50 when sheriff’s deputies agreed to reduce the pensions for new hires. The move helps the county, but doesn’t solve the long-term pension funding problem.

The thought of more local governments adopting new 3 at 50 plans in the current economy should be of huge concern to taxpayers, said Orange County Supervisor John Moorlach, who has long fought to roll back that county’s 3 at 50 pensions.

"The pension contribution will be an ulcer in the budget because it will always grow and then you will have to bump other things out," he said.

A divided council

The 2008 effort to approve Rialto’s new pensions was not unlike the debate that follows 3 at 50 proposals everywhere.

Supporters argue that police officers and firefighters put their lives on the line for the residents they serve, often shortening their own lives through wear, tear and exposure to a wide range of hazards.

As a result, they deserve earlier retirements and financial security.

"We’re getting guys at 25, 26, 27 and they don’t last much past 50," said Royce, the police union president. "This is a very hard career."

Some police and fire departments also worry about losing good employees if they can’t match the pensions being offered elsewhere.

"I supported it because it’s a tool the police chief needs to recruit some talent into the city," Scott said. "We had a history of not good recruitment, and when you’re surrounded by municipalities that have (it), it’s hard to match that."

Mayor Grace Vargas and Councilman Joe Baca Jr., joined Scott to approve Rialto’s 3 at 50 pensions by one vote.

Vargas did not return a message seeking comment but Baca said the city owes it to the workers.

"We need to take care of our employees," he said. "They do a good job in the city and they should be awarded with a good retirement."

But critics argue the plans are far too generous, given the much more modest pensions typically found in the private sector. Another criticism is that, rather than spending their 50s playing golf, many maxed-out "retirees" take new jobs at other departments, collecting consulting fees or full salaries in addition to their 90 percent pensions.

"In economic terms, these people are millionaires and that’s paid for by the taxpayers," said Steven Frates, senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College.

Councilwoman Deborah Robertson and former Councilwoman Winnie Hanson voted against Rialto’s 3 at 50 plans.

"It was just a very expensive thing and I felt the city could not afford it and I think I was right," Hanson said last week.

But voting against the interests of the police and fire unions might have carried a political price. Hanson suspects the vote might have cost her a 2008 re-election bid against Ed Palmer months later.

Robertson did not return messages seeking her reasons for opposing the pensions.

It’s the type of issue that can make city leaders feel as if they’re in a no-win situation.

"Somewhere, the line between public safety, public good and public costs needs to be debated," said Garcia, the Rialto city administrator. "People want public safety. Here’s the cost, you pay for it and that’s the way it is."

Some seek to roll back pensions

In Montclair, city officials have trimmed services, frozen job vacancies, reduced overtime and benefits, and borrowed $2.5 million in General Fund money to ensure the retirement program is funded.

And even before the current recession, they sought concessions from the unions on 3 at 50.

"Every agency is struggling right now and we all do it in different ways," said Edward Starr, deputy city manager in Montclair. "You don’t want to do it on the back of the employees, but you also don’t want to do it on the back of the community."

Montclair went to a two-tier system in 2005. Safety personnel hired after June 29 of that year would have a "3 at 55" benefit, while those hired before then kept 3 at 50.

Montclair’s experience also illustrates how pension costs can change dramatically with modest changes in the retirement age.

Starr said if all cops in Montclair were on 3 at 50, it would cost the city roughly $1.6 million a year. If all were at 3 at 55, the cost would be about $560,000 a year.

Rialto officials hope to follow suit.

"We’re looking at that," said Scott. "When we go to negotiations, we would ask the labor unions to consider a two-tiered system."

Others want to take the discretion away from local governments.

A group called California Foundation for Fiscal Responsibility has crafted an initiative for the November ballot that would drastically reduce pension benefits for future public employees.

According to the non-partisan Legislative Analyst’s Office, her group’s initiative would amend the state Constitution to limit defined-benefit pensions and retiree health benefits for state and local government employees hired on or after July 1, 2011.

The measure establishes minimum retirement ages, such as 58 for new cops and firefighters, and 60 for other public safety employees. All other new employees would submit to the full retirement age as defined by Congress, which is 67 for persons born in 1960 or after.

"It’s sucking money out of our economy," said Marcia Fritz, who helped craft the initiative. "It’s our money and then people start drawing on these investments and then they (retire out of state)."

Fritz estimates the measure would reduce costs statewide by $14 billion over the first six years and $533 billion over 33 years.

In the meantime, Rialto officials realize they need to increase revenue. There are high hopes for a San Bernardino County expansion of the landfill here. Also on the table is a plan to lease out the city’s water department and save maintenance costs. Consolidations of city departments are also being considered.

"Right now we’re going to have to make some tough decisions," Baca said.

Some officials worry it might already be too late for some cities.

Moorlach, the Orange County supervisor, pointed to the Northern California city of Vallejo, which filed for bankruptcy in 2008, in part, because of expensive retirement packages.

"We’re all trying to figure out who files for Chapter 9 bankruptcy first," he said, "whether it’s in Orange County or San Bernardino County."

Cal Watchdog — Your eyes on California Government

Tilting at pension reform

Jan. 22, 2010

By ANTHONY PIGNATARO

What to do about public employee pensions is the thorniest, nastiest, most difficult question facing Sacramento lawmakers today. Few issues cause such disappointment and despair. Yet one group of activists and accountants is plugging away, trying to get a new pension reform initiative passed.

Their only real ally is recent history. In the last three years the California Public Employees Retirement System (CalPERS) has lost about a billion dollars investing in Newhall Ranch residential development, $100 million in Palo Alto apartment conversion and another $500 million or so in Manhattan apartments. These and other losses have considerably sapped CalPERS’ investment returns—so much so that a Jan. 20 Los Angeles Times story reports they “raised concerns about the ability of the country’s largest public pension system to cover the cost of retirement for 1.6 million state and local government workers, retirees and their families.”

Paying pensions and benefits for retired state workers is a huge drain on the state budget that robs other programs and services (health care, education, parks, etc.) of much needed funding. What to do about steadily (sometimes even retroactively) rising pension benefits for state workers at a time of declining tax revenue and economic calamity has long been one of  Gov. Arnold Schwarzenegger’s priorities—and one of his biggest disappointments. “I ask the Legislature to join me in finding the equivalent of a water deal on pensions, so that we can meet current promises and yet reduce the burden going forward,” Schwarzenegger said during his Jan. 6 State of the State Address, but few believe the Legislature will do much about it.

With such officials as Ron Seeling, CalPERS chief actuary admitting that current state worker pension benefits are “unsustainable,” you’d think Schwarzenegger would have no trouble getting action on pension reform. But no.

“I don’t think it’s in the interests of the Democrats because they’re protecting public employee unions,” Assemblyman Ted Gaines, R-Roseville. To be fair, most Republicans dip into the public employee till as well—last April newly elected Republican Assembly leader Martin Garrick accepted $2,000 from the California Correctional Peace Officers Association, for instance—which makes the power of the unions even stronger.

“Given the fact that public employee unions hold such a deep stranglehold over the Legislature, it will take a Don Quixote to crusade against any and all barriers,” Marcia Fritz, a Citrus Heights-based certified public accountant. As president of California Foundation for Fiscal Responsibility (CFFR), the group currently trying to qualify a pension reform initiative for this year’s ballot, Fritz knows all too well about tilting at Quixotic endeavors.

The seven-page measure—called the “New Public Employees Benefits Reform Act” until the Attorney General’s office writes an official title—would “provide for fiscally responsible retirement benefits for new public employees” hired after passage.

“[T]he current system of retirement benefits is too costly, overly generous, and cannot be sustained for new public employees,” the proposed initiative states. “Under the current system, some public employees can actually receive more income in retirement than they earned while working. The current system could result in billions of dollars in new taxes to meet the retirement obligations for public employees. Many local governments may be threatened with bankruptcy if no change is made.”

Currently, there are all sorts of pension formulas used by the state’s 2,000 or so public agencies and municipalities. Because of the “3 Percent at 50” plan—which calculates pension benefits by multiplying 3 percent of the worker’s salary for each year of employment—that was sponsored by then-Assemblyman Lou Correa,D, Santa Ana, in 1999, many municipalities allow workers to retire at 50 with close to 90 percent of their salaries. Fritz said her group’s initiative eliminates all that by setting up a single formula for calculating pensions for all public workers statewide.

Under the initiative, firefighters and police officers would receive 2.3 percent of the salary multiplied by each year of service upon retirement at 58. The multiplier for public safety employees would be 1.8, and they would have to wait until 60 to retire. For public employees that work for agencies that don’t require Social Security contributions, new employees would retire at “no less than the full retirement age, as defined in the United States Social Security Old Age and Survivors Insurance Program” to get 1.65 percent multiplied by their years of service (the multiplier for public workers who have to make Social Security contributions is 1.25).

It is, taken as a whole, only a slight reform. The initiative’s benefit package doesn’t affect current pensions at all, and in many ways is still more generous than private sector plans. Because the initiative is still in the signature-gathering phase, CalPERS hasn’t done any kind of cost analysis of it, according to Edward Fong, CalPERS spokesman.

“It’s similar to Social Security,” Fritz said. “And that is a huge threat to unions, because it takes away their negotiating tool. California is the only state that allows pension benefits to be negotiated in a contract. Other states have more open methods.”

Fritz says her CFFR has met with Schwarzenegger, but he has yet to formally approve the measure. Though a pension reform advocate, Gaines said he doesn’t yet know enough about the CFFR initiative to endorse it.

This isn’t to say Fritz completely lacks supporters. “I think it’s great,” Orange County Supervisor John Moorlach said when asked about the proposed initiative. “Pension reform has to be done—there’s been too much abuse. CalPERS does funny things. New benefit improvements are automatically retroactive. That’s not in the Constitution! CalPERS has taken everything actuaries have in their toolboxes and used it to the max. If we have another downturn like this one, CalPERS will implode.”

Moorlach, who got elected Orange County treasurer in the wake of that county’s 1994 bankruptcy and promptly put the county on a more or less strong fiscal footing, brings considerable clout to CFFR’s effort. But he also has recent, actual experience reforming pensions.

Last October, Schwarzenegger approved a deal hashed out between the Orange County Board of Supervisors and the Orange County Employees Association (OCEA) that creates a two-tiered pension plan for county employees. Under the deal, county employees can now choose between the current benefit package or a second plan that would require them to retire at a later age (65 instead of 55) but would get far less money taken out of the monthly paychecks than those opting for the current plan.

“It’s an experiment,” Moorlach said. “A lot of new hires are young, and may not want a pension plan. Current employees could drop into the lower tier, where they would get a raise of sorts because their withholdings would go down. We negotiated it the old fashioned way. It wasn’t easy.”

Nick Berardino, the OCEA’s general manager, says his county’s pension reform effort should be the model for the state. “Our feeling is that, obviously, pensions are an issue that requires considerable examination and evaluation,” he said. “But changes should be made at the collective bargaining table, not through an initiative. You can’t have a cookie-cutter resolution—you have to go to the bargaining table and work out the problem. We were able to do to this in one of the most conservative counties in the state, so it can be done.”

Berardino’s acceptance that state employee pensions need work is far from universally held among union officials. In fact, most look at CFFR’s proposed initiative not as a moderate change—the substituting of a single, still generous benefit for a motley mix of extremely generous benefits—but as something dangerous and sinister that must be stopped at all costs.

“We’re very, very strongly opposed to it,” Californians for Healthcare and Retirement Security chairman Dave Low told Investment Management Weekly in December. “It’s draconian. It dramatically cuts pensions for every new public employee.”

Fritz bristled at such criticism. “Dave Low says it reduces health benefits 50 percent,” Fritz said. “It does not. The cost is reduced by 50 percent—not the benefit. The benefit only goes down three percent. You have to work longer to get more benefits.”

For officials like Gaines, that’s the whole point.

“I’m not saying we shouldn’t have decent pay, decent benefits for public employees,” Gaines said. “We’ve just gone too far.”

CalPERS blames rating agencies

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Jan. 21, 2010

By TROY ANDERSON

In recent congressional hearings, inaccurate credit ratings were described as a major contributing factor in bringing the nation to the “brink of financial collapse.”

In September, California Attorney General Jerry Brown opened an investigation into the rating agencies’ role in fueling the financial crisis – hoping to determine if the firms broke the law when they “recklessly gave stellar ratings to shaky assets.”

Now, a legal battle between the rating agencies – known as the globe’s second “superpower” – and one of the most “sophisticated and powerful investors” on the planet promises to provide a behind-the-scenes look into the world of high finance at the center of the financial meltdown.

Robert Fellmeth, the Price Professor of Public Interest Law at the University of San Diego Law School, said the lawsuit recently filed by the California Public Employees’ Retirement System against Standard & Poor’s, Moody’s and Fitch Ratings involves the “most important ethical issue of our time.”

“I think one of the lessons we’ll learn from this case is the inherent problems that conflicts of interest pose in our commercial sector – including the reliance on credit reporting agencies that are financially profiting from the instruments they are rating,” Fellmeth said. “We have lots of problems that were exacerbated by this heads-I-win, tails-you-lose structure. One of the safeguards is supposed to be these credit reporting agencies, which failed so miserably.”

In the lawsuit, CalPERS alleged it purchased $1.3 billion in “structured investment vehicles” with top credit ratings that turned out to be “wildly inaccurate.” The nation’s largest pension fund alleges it was only after it lost more than $1 billion that it learned the underlying assets consisted of subprime mortgages and other risky investments.

The case comes as CalPERS is under increased scrutiny for record losses involving risky leveraged investments and allegations of undue influence by placement agents.

“This lawsuit shows a basic mismanagement in their investment department,” said Marcia Fritz, president of the California Foundation for Fiscal Responsibility. “They have made changes in management and are implementing new standards of quality control to make sure they don’t make these mistakes again. But the losses are on the backs of the taxpayers. That is the tragedy of it.”

Late last week, the attorneys for the rating agencies filed a motion to dismiss the CalPERS lawsuit.

“The claim is without legal or factual merit and we are taking action to have it dismissed,” said Frank Briamonte, spokesman for The McGraw-Hill Companies, the parent company of Standard & Poor’s.


Fitch Ratings declined to comment.

“Moody’s believes that it has strong defenses to the CalPERS litigation and is moving to dismiss the complaint,” Moody’s spokesman Michael N. Adler said.

In the motion to dismiss, the attorneys for the rating agencies wrote CalPERS is asking the court to do what no other court has ever done: find that the rating agencies, which publish opinions about the likelihood securities will pay off, are liable when those investments go south. In similar cases, courts have ruled in the rating agencies’ favor, finding their opinions are generally entitled to the same level of free speech protections enjoyed by newspapers and other media.

The attorneys alleged CalPERS is seeking damages for its own failure to act as a prudent investor on behalf of 1.6 million public employees and retirees. The fund, now valued at $200 billion, is down 26 percent from a high of $270 billion in 2007.

“Under the circumstances, CalPERS’ allegations of its sole reliance on credit rating agency ratings coupled with its frank – and remarkable – admission that it had no knowledge of the SIV’s assets and made no inquiry beyond the ratings cannot be justified as a matter of law,” the rating agencies’ attorneys wrote.


In the CalPERS lawsuit, San Francisco attorney Joseph J. Tabacco, Jr. wrote the pension fund relied on top ratings given by the rating agencies in purchasing the SIVs.

“The rating agencies … were indispensable players in the structuring and issuance of SIV debt, which they subsequently rated for huge fees paid by the issuers – ‘rating their own work’ according to a recent Securities and Exchange Commission report highly-critical of the rating agencies,” Tabacco wrote.

In the past, investors paid a subscription fee to the rating agencies for access to the ratings. In the 1970s, the agencies moved to a model in which the agencies are paid by the issuers whose debt is receiving the rating. In 2000, the agencies became involved in the creation and operation of SIVs, Tabacco wrote.

“Structured finance was lucrative,” Tabacco wrote. “Rating a typical SIV commanded $300,000 to $500,000 or more, and some fees for rating SIVs claimed to the $1 million level…. What is more, the fees were contingent on the SIV ultimately being offered to investors. This meant the rating agencies had a contingent fee interest and thus every incentive to give high ‘investment grade’ ratings, or else they wouldn’t receive their full fee.”

The fees became the dominant source of income for Moody’s and Fitch. In the first quarter of 2007, SIVs accounted for 53 percent of Moody’s revenue. From 2000 to 2007, Moody’s operating margins averaged 53 percent, Tabacco wrote.

“These margins outpaced those of Exxon and Microsoft,” Tabacco wrote. “For five years in a row, Moody’s had the highest profit margin of any company in the S & P 500.”

Quoting internal S & P documents, Tabacco wrote analysts openly mocked SIVs, saying “it could be structured by cows and we would rate it” and “Let’s hope we are all wealthy and retired by the time this house of cards falters.”

In an October 2008 hearing before the House Oversight and Government Committee, U. S. Rep. Henry A. Waxman, D-Calif., testified the rating agencies revenues doubled from $3 billion in 2002 to more than $6 billion in 2007.

“The story of the credit rating agencies is a story of colossal failure,” Waxman testified.

In September, the committee held another hearing to examine what role inaccurate credit ratings played in the financial crisis. CalPERS Senior Investment Officer Eric Baggesen testified the “market impact of credit ratings failures” have been estimated at anywhere from $2.5 to $4 trillion worldwide.

“The … rating agencies … and their excessively optimistic ratings of subprime residential mortgage-backed securities in the middle years of this decade played a central role in the financial debacle of the past two years,” testified Lawrence J. White, a professor of economics at the Stern School of Business at New York University.

In response, CalPERS is seeking congressional support for legislation – “The Wall Street Reform and Consumer Protection Act of 2009” – to plug regulatory gaps and prevent the corporate malpractice that contributed to the nation’s financial crisis. It calls for a new SEC office to oversee credit rating agencies.


In September, the SEC Commission voted to take several actions to bolster oversight of the rating agencies. The proposed measures are intended to improve the quality of credit ratings by requiring greater disclosure, fostering competition, helping to address conflicts of interest, shedding light on rating shopping and promoting accountability.

But Orange County Supervisor John Moorlach said he doesn’t have much confidence the SEC’s actions will hold rating agencies accountable.

While the CalPERS lawsuit is not an ideal solution, Fellmeth said it could help the pension fund recover some of its losses and help reduce its unfunded liabilities – a tab that will require the state to increase taxes on “our children and grandchildren” in a “wealth transfer between generations.”

For Fellmeth, the real solution is to make the rating agencies independent of the companies and investments they rate. Instead of the current model, Fellmeth suggested businesses that want the services of the rating agencies to pay into a neutral, third-party fund. The fund would pay the rating agencies.

“You’d have an independent fund that could not be influenced and there wouldn’t be any impact on the rating agencies’ bottom lines based on what they say,” Fellmeth said. “You’d have a system that provides accurate information.”

FIVE-YEAR LOOK BACKS

January 25

2000

Ten years ago the LA Times printed Orange County related Letters to the Editor in their special Sunday editorial section dedicated to the county.  But, midweek, on a Tuesday, they printed this letter, under the heading “Bond Dealers,” which followed an interesting time of dealing with the parties that tried to sell the 91 Express Lanes to recently established nonprofit organization.

Re “Panel Backs Bond Dealers Against Moorlach’s Advice,” Jan. 14:  Orange County Treasurer John M. W. Moorlach is the most honest and reputable public servant in Orange County. 

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