MOORLACH UPDATE — PLUNDER — April 20, 2010

One of the fun aspects of my life is that I not only get quoted in newspapers and periodicals, but I also get mentioned in books.

Today’s new book is “Plunder!  How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives, and Bankrupting the Nation” (The Forum Press, Santa Ana, California, Copyright 2009) by former OC Register Editorial Writer Steven Greenhut (and is still a regular Sunday column contributor).

I received a “galley” copy from the publisher (an “uncorrected proof, not for resale”).

First, a quick book review.  (Fortunately, this paperback is not long or printed in small font.)  Then I’ll provide the two sections where I’m mentioned in the book. 

Looking back on one of Greenhut’s Sunday columns, “The fine art of plunder,” October 6, 2002, the first paragraph is just one word:   Plunder.  This has been a long-standing theme with Greenhut.  (And me, too.)

Plunder is a great chronicle of recent current events in the areas of pensions and public employee unions.  It reads like a compilation of articles and editorials from the clipping service www.PensionTsunami.com.  Consequently, it is more like a series of vignettes than a well-organized, centralized thesis with an over-arching theme.

It has a quickly thrown and slapped together feel and lacks an index.  But, you’ll sense Greenhut’s style and prose throughout with plenty of supporting data and examples to back up the points being made in the first seven of eight chapters.

The last sentence of the concluding chapter reads “the time for anger and action is now.”  The book is more about anger than action.  There are seven chapters that will get you angry.  There is only one chapter on action.  And in that chapter, the solutions are neither well defined nor detailed.

This is a book to rile the masses.  It is not a how-to book that provides well documented and successful solutions.  The good news is that it pays homage to Orange County for its recent accomplishments.  The bad news is that they are dealt with superficially and Greenhut doesn’t provide enough of the stories needed to serve as models for others to follow.

The famous management guru, Tom Peters, wrote the Forward to the book “Confessions of a Civil Servant – Lessons In Changing America’s Government and Military,” by Bob Stone.  Of Tom Peters’ many observations, this one fits best what I’m trying to communicate:

Several prominent students of leadership, notably Harvard’s Howard Gardner, have argued that stories are the leader’s . . . most potent tool.  Such stories take on added potency when there are – a la Bob Stone – leave-behind props that illustrate graphically the Main Point.  Addendum:  There were . . . and are . . . Great Storytellers.  Effective leaders need a Garrison Keillor gene, perhaps.

Greenhut cites one of Orange County’s huge successes, retiree medical benefits, giving it about a half paragraph, only to minimize a $1 billion reduction (72 percent) in unfunded liabilities by stating that “there is some hope, however slim.”  (He also misstated the new unfunded liability; it was actually reduced to $412 million.)

Orange County’s successful Measure J (November of 2008) received three sentences.  Although a neighboring county’s Grand Jury recently encouraged its Board of Supervisors to put the same charter amendment on its ballot, Greenhut laments, “It’s too late to reverse the damage done the past decade.”  True.  But, it wasn’t designed to reverse past sins; it was proposed in order to prevent them in the future. 

On Orange County’s litigation pursuing the unconstitutionality of granting retroactive pension benefits, there are three paragraphs and an “attaboy” – “practical” – but he sucks the wind out of our sails with the passing comment – “longshot.”  And then he gets the case facts incorrect (at least in the galley copy).  It was a retroactive benefit increase from “2% @ 50” to “3% @ 50.”

If you want to share my frustrations of where we now find ourselves, up against the proverbial wall without too much hope, then this is the book for you.  If you’re like me, looking for a book that’s a “how to” guide on fixing the mess, this one comes up short.

Let’s hope Greenhut is working on a sequel.

Chapter 2 – Unbelievable Pay and Benefits – Pages 31 – 33 (also see MOORLACH UPDATE — CalPERS — December 21 and 22, 2008):

                This is from an Orange County Register blog post of mine in December 2008:

Orange County Supervisor John Moorlach has long predicted that the public employee retirement systems could not sustain their high rates of return. These union-dominated boards take high risks to keep the returns high so that their members can continue to get higher and higher levels of benefits. CalPERS amortizes its costs over unusually long periods, which is like taking a 15-year loan on a Ford Focus. They’ve got every reason to play these games. If their strategies create good returns then it’s easier to get increases in pay and benefits. If they don’t, their current absurd level of benefits are guaranteed by taxpayers anyway. It’s a good example of the economic principle of ‘moral hazard,’ which explains why those protected from risks will act in riskier ways. This is the ultimate in privatizing gain and socializing risk. Most people are focused on financial frauds on Wall Street, which is understandable, but some of these legal scams are bigger problems.”

I went on to explain about those risky CalPERS investments that went bad—often using as much as 80 percent of borrowed money to invest in new housing developments in strange places at the height of the housing boom.  The Wall Street Journal featured a front-page article on this craziness:  “CalPERS has said in recent weeks that it expects to report paper losses of 103 percent on its housing investments in the fiscal year that ended June 30.  That’s because CalPERS invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails.”

In a November 9, 2008 Sacramento Bee article, however, CalPERS President Rob Feckner defended the soundness of these pensions:  “It seems that every time the stock market suffers a major setback, those who don’t fully understand how government pensions work begin sounding alarm bells that it will absolutely drive up the cost of government pensions.  A close examination of history and the facts suggests it’s way too early to make such assumptions.  First, the California Public Employees’ Retirement System employs a long-term investment strategy designed to weather periodic financial storms.  This strategy, along with professional investment management, has produced an average annual investment return of nearly 10 percent over the past 20 years—which included two market downturns—well above our target of a 7.75 percent average annual return to fund benefits.”

Moorlach is best known because as a candidate for county treasurer in 1994 he blew the whistle on the leveraged investment schemes that ultimately caused Orange County to become the largest municipality to go bankrupt.  He rebutted Feckner in an Orange County Register column:  “What Mr. Feckner fails to mention are two critical concerns in his effort to calm state employees and the public is that nearly a decade ago CalPERS was fully funded. Consequently, with the great yields that he touts, CalPERS should be more than fully funded. The reason it is not is the second small concern that he failed to mention: Ten years ago he supported formula enhancements that increased benefits by some 50 percent!   Changing retirement formulas in the middle of the game is a recipe for disaster.  It shows a severe case of not fully understanding how government pensions work.  They are not there to be plundered and pillaged by their employees.”

But plunder and pillage are the key words here.  Moorlach, who has tried to rein in some of the excessive retirement benefits for public employees, relayed to me a conversation he had with a financial planner, who had just met with a public employee.  The employee had to do absolutely no financial planning.  His retirement was guaranteed, period.  Come hell or a stock market crash, it didn’t matter.  He understood the defined benefits he was promised, which freed up a large portion of his workaday budget for vacation homes, RVs, fancy vacations and home remodeling.  Only now is it becoming obvious that such obscene benefit levels cannot be afforded by the public at large.  And even if this is affordable, do we really want a society where there are such large disparities in retirement living between government workers and the people who pay their salaries?

Chapter 8 – Conclusion:  It’s Time for More Than Outrage – Pages 238 – 239:

One practical (although long-shot) idea, formulated by Orange County Supervisor John Moorlach and supported by the majority of the other supervisors, is to challenge the retroactive portion of a pension increase that a previous board had granted to the deputies union.  Although an Orange County lawsuit, this idea could set a precedent that saves tens of billions of dollars throughout California.  In 2001, in the height of the up market and as municipalities statewide were increasing pension formulas for police unions, the Orange County Board of Supervisors voted 5-0 (all Republicans) to give the deputies’ union a retroactive pension increase from 2.7 percent at 55 to 3 percent at 50.  This was a large boost and it was made for past service.  There is no reason for retroactivity.  As Girard Miller of Governing magazine explains, “[T]he practice of awarding pension benefits on a retroactive basis is the devil’s doing.  Retroactive pension increases neither attract nor retain employees.  They serve no purpose except to buy favor with incumbent union members in order to get a contract signed – at the expense of future taxpayers who don’t even know what hit them.

In 2008, the new board of supervisors decided to challenge only the retroactive portion of that benefit increase.  As the Register reported, Supervisor Moorlach argued that “when the Board of Supervisors approved the new formula, and applied it retroactively, it violated three provisions of the California Constitution:  Debt limitations on local governments; The ban of gifts of public funds; The barring of extra compensation for work already performed.”

The board lost the first legal round, as expected, but voted 4-1 in August 2009 to challenge the ruling.  The deputies complain about the $2 million the board is spending on legal fees, but a successful challenge could save many billions of dollars.  It is ironic that a union that has never seen a public dollar it hasn’t wanted to spend on its members had suddenly gotten concerned about wasteful tax expenditures when it came to that lawsuit.  The challenge was ongoing as this book goes to press, but this type of aggressive strategy is just what’s needed to start chipping away at this enormous and nearly insurmountable problem.

County voters also passed an initiative to require a countywide vote for any pension increases.  It’s too late to reverse the damage done the past decade.  Bit (sic) it’s an important reform once the economy picks up and the unions get back to their business of demanding more.  The county also reformed the retiree medical system, thus reducing the county’s unfunded liability from $1.4 billion to $598 million.  Costs for these benefits were skyrocketing.  Thanks to a previous benefit deal, retirees were kept in the same pool with current retirees.  That meant they got to pay lower rates, given that retirees are older and generally have more health problems than younger workers.  If they were in their own pool, costs would be much higher.  The county negotiated a deal to split the pool, which ended up costing retirees a few hundred dollars extra a month.  In return, the county agreed to increase its contribution to the trust fund.  It was a reasonable deal, and is a model for other government agencies struggling with health-care liabilities.  The county retirees sued the county (of course), but lost.  Those health-pooling benefits were never vested, which meant that the county had every right to renegotiate them.  The Orange County situation is worth discussing because in this county the new political leadership is deeply committed to pension reform.  Without such commitment, which means a willingness to directly confront the unions, it is nearly impossible to enact meaningful reform.  There’s got to be the will to find a way out of the morass.  Moorlach took them on directly in supervisor (sic) election and won with nearly 70 percent of the vote.

               

               

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