MOORLACH UPDATE — Nation’s Cities Weekly — June 21, 2010

Pension reform efforts here at the County were mentioned in this week’s edition of Nation’s Cities Weekly.

A couple of observations.  The first is that our declining sales tax revenues have nothing to do with our retirement funding at OCERS (which is below 70 percent).  The second is that, while on hold, we are actively working with the Department of the Treasury on a favorable ruling.  The last update that I have received was very optimistic.

The Look Backs will show that our disappointing pension funding is not a new story.

Strengthening & promoting cities as centers of opportunity, leadership, and governance

Local Governments Look for Ways to Shore Up Pension Plans During a Down Economy

by Gregory Dyson


This is one in a series of Nation’s Cities Weekly articles drawing on the resources and expertise of NLC’s Corporate Partners.

The economic downturn of the past two years has hurt the funding status of state and local pension plans across the nation.

According to a recent brief published by the Center for State and Local Government Excellence (SLGE), most local and state pensions were more than 80 percent funded in 2008 — before the stock market meltdown.

At the end of 2009, only 36 percent of the plans studied in the brief were at that level, and because of the chilly forecast for the stock market over the next three years, most defined benefit plans aren’t expected to return to that 80 percent threshold anytime soon without an increase in contribution levels.

Yet despite the gloomy realities, some city and county officials across the country have at least been trying to implement changes that may ultimately help ease the burden.

“There is no denying that the economic downturn has taken a big toll on local and state pension plans, and those impacts will likely be with us for years to come,” said Joan McCallen, president and CEO of ICMA-RC, a Washington, D.C.–based retirement products and services provider to more than 900,000 public sector employees.

“But in some municipalities and counties, we have seen rule changes for new hires, retirement eligibility and vesting, as well as the launch of hybrid plans and the inclusion of supplemental defined contribution plans.”

In Jacksonville, Fla., for example, a city facing more than $1.3 billion in combined unfunded liability among its three employee pension plans, officials recently added a new defined contribution option to its General Employees Pension Plan. Through the plan, employees contribute 7.7 percent of their salary and the city matches that amount. The long-term goal of the new option is to help reduce the city’s unfunded liability.

This spring, city leaders in Kingsport, Tenn., announced they were considering a new defined contribution plan in lieu of the city’s current participation in the Tennessee Consolidated Retirement System (TCRS) as a way to trim its pension obligations. The city’s contributions to the state system have increased over the years and stand to top 18 percent of payroll by 2012.

Officials in Orange County, Calif., are themselves faced with a nearly $3 billion gap in the Orange County Employees Retirement System, part of which is due to investment losses and part of which comes from lower sales tax collections during the down economy.

John Moorlach, Orange County supervisor, said the county has undertaken several initiatives to pare down pension costs. For example, as of mid April, officials were working to approve an option for new county employees: a hybrid plan that would pay a defined benefit of 1.62 percent for employees retiring at age 65 and also include a 401(k)-type retirement account. However, due to new proposed regulations imposed by the Internal Revenue Service, the option has been placed on hold.

The hybrid option could save Orange County up to $10 million in its first year and should prove more appealing to employees who want to see more take-home pay or who might work elsewhere in the future.

Other options for local and county governments to address pension issues include limiting cost of living increases, and establishing defined contribution plans for new hires and, like Orange County, moving to hybrid or cash balance style plans.

“The economic situation has not made it any easier for local governments to fund their pension and retirement obligations,” McCallen said. “But there are options out there, and some local governments are being proactive. They are taking a step in the right direction to restore the financial health of their pension plans.”

SLGE’s brief also includes measures a number of other cities and states have implemented in various retirement programs in the wake of the financial crisis. To view the complete listing, visit the SLGE website at www.slge.org.

Gregory Dyson is senior vice president and chief operations & marketing officer for ICMA-RC.

FIVE-YEAR LOOK BACKS

June 18

2005

Martin Wisckol of the OC Register had the headline that is now the norm with “Report predicts pension debacle – Consultant finds county expenses will be $1 billion more than thought.”  The article reminds me why I ran for the position of Supervisor.  It also reminds me that I need to constantly remind my colleagues and the County’s workforce that we need to go back to the old pension formulas and drop the retroactive nonsense if we’ll ever see fiscal sanity in the future.

                At the beginning of the year, OCERS hired a new consultant to draw up actuarial predicting future benefit costs, which at that time had been estimated at $1.3 billion more than its assets and expected revenues.  The new consultant, the Segal Co., bumped that number up to $2.3 billion.

                The news comes as the county is wrestling with another $1.3 billion in unfunded medical liabilities for retirees, with state cuts and with nearly $1 billion in debt left over from the county’s 1994 bankruptcy.

                County Treasurer John Moorlach, who sits on the OCERS board, said the new OCERS consultant is one of the state’s best – and suspects his numbers are accurate.

                “We’re going to be in the worst financial condition the county’s ever been in, worse than during the bankruptcy,” said Moorlach, who predicted the bankruptcy and who is expected to run for supervisor next year.

David Reyes of the LA Times also covered the topic in “O.C. Pension Shortfall Figure Soars – Supervisors are surprised when a new study puts the problem at $1 billion greater than previous estimates.  A recheck is ordered.”

                County Treasurer-Tax Collector John M. W. Moorlach said the worsening pension outlook, if confirmed, is a “real concern” that could require the county and the 15,000 employees covered to boost contributions starting in July 2006.

June 19

2005

I was one of the lead editorials in the Sunday Commentary of the OC Register.  The title:  “GOVERNMENT SPENDING:  OC’s pension time bomb is ticking – The San Diego analogy is not precise, but it’s close enough.”  Here it is in full.  Five years hence, the conclusion appears to be precise.

Now that we’re talking indictments in the city of San Diego concerning their public employees’ defined-benefit pension plan, it’s time to compare and contrast what’s happening south of our border with what’s happening here in Orange County.

 

Lately reporters have been asking me the following question: “The unfunded pension plan ($1.2 billion) and retiree medical ($1 billion) liabilities for Orange County are similar to those in the city of San Diego, so why are they getting all this press?”

 

Well, the San Diego City Council, its support staff and members of the city’s retirement board made decisions that caused the U.S. Attorney’s Office, the Securities and Exchange Commission, the FBI and the San Diego County District Attorney’s Office to invite themselves over for a visit.

 

Orange County is guilty of making similar decisions, but not ones that are necessarily of a criminal nature.

 

Pension plan boards do not set benefits. The board of the Orange County Employees’ Retirement System is rather emphatic about this. San Diegos board has a parallel policy.

 

Both boards have to make sure that benefits granted are fully funded over the life of the system. Both boards are encouraged to keep employer contributions as low as possible. Both boards should work together with municipal to meet their mutual goals. But they must not conspire to accomplish mutual goals by improperly sweetening the pot for those who can assist them.

 

However, that is just what San Diegos retirement board did. Even after years of steady increases in pension benefits, the board allowed its plan sponsor, the City Council, to resolve city budget problems by artificially reducing annual pension plan contributions. This was done against the advice of the plan’s actuary. Why? Because in return, the City Council raised benefits for certain plan members – specifically members of the retirement board. One board member, the president of the city’s firefighters union, increased his monthly retirement benefit from $2,530 to $9,703!

 

The retirement board also sold additional years of retirement credits on the cheap, against the advice of its actuary, to City Council members. On Friday, April 22, the Voice of San Diego – an independent news Web site – disclosed that the city’s mayor purchased five years of additional retirement credits for $71,760. This increased his annual retirement benefits by $17,500, which would allow him to recoup his cost in only four years. Mayor Dick Murphy resigned the following Monday.

 

Quid pro quos are dangerous when both sides are making unreasonable requests. Conflict of interest is a serious offense. Covering it up makes it all that more dicey.

 

In San Diego, the cover-up extended to large amounts of debt the city issued in recent years to build infrastructure, including the city’s new baseball stadium. Municipal debt issuances require an official statement that accurately discloses the financial condition of the issuer. San Diegos officials decided to not disclose

their recent pension plan shenanigans. When this was revealed, it brought in the SEC.

 

What brought in the DA’s indictments was the fact that six current and former members of San Diegos retirement board received exorbitant retirement benefit increases as a result of assisting the city in its now-failed cash-flow management. These six now face the possibility of three years in jail – and I’m sure indictments of the City Council aren’t far behind. Given these circumstances, the benefits now have the appearance of being illegally bestowed, and should be rescinded.

 

Meanwhile, San Diegos large underfunding – think of it as being like a mortgage that has low payments up front and higher balloon payments at the end – is already causing problems. The result will be layoffs (more than 300 are proposed) and the cutting back or discontinuing of certain programs.

 

It gets worse. Now that San Diegos retirement board has been caught with its hand in the cookie jar, it has decided to be uncooperative, withholding documents from the city’s external auditors and outside investigators. No documentation results in no audited financial statements. No audited financial statements result in no federal funding. No federal funding brings about even more budget cuts.

 

Some of the details of San Diegos problems may be unique, but all local governments that were too generous in granting more retirement benefits will eventually face similar fiscal headaches.

 

Which brings us to Orange County.  

In more than 10 years on the county retirement board, I do not recall witnessing any acts of self-dealing or flagrant conflicts of interest. If it was a close call, board members excused themselves.

 

In almost every instance, our retirement board has bent over backwards to assist county leadership. But because the board is independent, this is not automatic. Recently we’ve voted contrary to the county’s wishes on such issues as lowering our projected rate of annual earnings and shortening the period to pay for new benefits that are granted retroactively. With our hiring of a new actuary, we’ve also adopted more conservative assumptions about funding future benefits, which may raise our unfunded liability to an amount much higher than the anticipated $1.5 billion, effective July 1.

 

Unfortunately, the Orange County Board of Supervisors has twice recently raised retirement benefits for groups of employees without including retirement board members in the decision-making process. I was not contacted in 2001 on the efficacy of increasing public safety retirement benefits by 50 percent and making them retroactive. In 2004, I was very vocal in opposition to the significant increases to benefits for the county rank and file (even though I personally stood to gain) to no avail.

 

The problems this has caused could get much worse. That’s because some county retirement board members – those with employee union affiliations who backed the enhanced defined benefits for county employees – now want the Board of Supervisors to transfer the county’s retirement funds to the California Public Employees Retirement System.  Why?  Because CalPERS has recently implemented “smoothing” formulas designed to lower employer contributions, as the Sacramento Bee’s Daniel Weintraub detailed last month. Thankfully, a majority of the county retirement board prefers to listen to its actuary and not manipulate the numbers in this fashion.

 

This is crucial, because disregarding sound actuarial advice by going actuary shopping is the main reason so many public pension plans are so far underwater in this state. One begins to think that the pension plan train wreck just south of our borders has gone completely unnoticed by the leadership of Orange County’s employee unions.

 

Now San Diego, like Orange County and many other municipalities around the state, must face reality and deal with very difficult fiscal issues to remedy this pension underfunding.

 

Make no mistake: There will be budget cuts, there will be layoffs, and new hires will receive less generous retirement benefits – perhaps much less generous. So keep your eyes on San Diego. Orange County may face these same tough choices in the not-too-distant future.

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  San Diegos reputation as a well-managed city has been tarnished by its public-employees pension scandal.

June 21

2000

Jean O. Pasco of the LA Times covered the County’s budget passage in “Unanimous Board Backs Big Raises for Top Executives — $4.5-billion budget contains hikes for as many as 4,200 county employees, up to 19% for some.  Chairman Smith says it’s needed to keep good people, might not be enough.”

The portion of the story that affected the Treasurer’s department was provided at the conclusion of the article.  It inaugurates the formation of the Extended Fund in our mix of investment pools.  This policy change would have a major positive impact on our net investment yield since its inception.

                Supervisors also approved changes to the county’s investment policy, allowing Treasurer-Tax Collector John M. W. Moorlach to achieve higher yields on some of the money he invests for the county government and school districts.

                The new policy gives Moorlach discretion to invest some money for up to three years, instead of the current 13-month cutoff.  The county has a conservative financial policy because of the risky investments that resulted in the loss of $1.7 billion in 1994 that led to the bankruptcy.

                County Chief Financial Officer Gary Burton called the proposal “a good move” that will allow greater yield without jeopardizing public funds.

2005

The lead editorial in the OC Register was titled “The pension bubble suddenly inflates – A consultant’s report says shortfall in county retirement system is worse than expected.”  Here it is in full (sans personal references).

Orange County taxpayers ought to demand accountability from the Board of Supervisors regarding its pension decisions, and leadership in finding a way out of the mess.

 

News stories on Saturday reported that a respected consultant, hired by the Orange County Employees Retirement System to examine its obligations, predicts an additional $1 billion in unfunded pension liabilities. The county pension plan is now $2.3 billion shy of the predicted amount of income necessary to pay its retirement obligations, and it remains $1.3 billion short of funding its retiree medical obligations.

 

“If accurate, the new figure would cost the county $114 million more a year – a 4 percent dent to the county’s general fund that would likely necessitate layoffs and service cuts,” reported the Register on Saturday. It could also result in tax increase proposals.

 

Supervisor Bill Campbell and other officials immediately questioned the accuracy of the consultant’s report, arguing that the county should review the study. Treasurer John Moorlach, who has been warning about pension problems, told the Register the consultant, Segal Co., is one of the best in the business and said the county is in its worst financial situation ever – the 1994 bankruptcy included.

 

How did this happen?

 

The county has long succumbed to union pressure by granting an unsustainable level of benefits to government workers, far exceeding what most private-sector employees earn. Last summer, three supervisors . . . made the problems worse by voting to spike the pensions for county workers.

 

They created an instant $300 million liability, in part because they granted the increase retroactively. Even county employees who were ready to retire, and had contributed under the old system, were given a 62 percent windfall in their benefits. The county employees on both sides of the negotiations gained from this generous benefit, which perhaps explained the lack of zeal for protecting the taxpayer, who is ultimately responsible for paying the bill if the financial assumptions are wrong and the numbers don’t pan out.

 

The benefit increase – it now is a binding contract – took county employees, in shorthand, from a respectable 1.67 percent at 57 years old to 2.7 percent at 55. Government employees previously could retire with 1.67 percent of their final pay times the number of years worked, which meant they could retire at age 57, after 30 years of work, at 50 percent of pay. After the vote, they could retire at age 55 with 81 percent of pay (2.7 times years of service). Police and firefighters already can retire with 100 percent of their final pay after 30 years of service. Not bad benefits if you can get them.

 

At the time of the vote, Treasurer Moorlach argued that the benefits would not only require an increase in contributions from employees but could cause a bankruptcy-like crisis that would impact other programs and, ultimately, hurt taxpayers. He said the union-promoted financial estimations were unrealistically optimistic.

 

According to the report, $365 million in the pension liability deficit is the result of direct costs from the enhanced benefit supported by [the three supervisors]. An additional amount of approximately $290 million is a predicted indirect cost of that vote, as employees changed their behavior (i.e., retiring earlier) to take advantage of the generous new benefits, Mr. Moorlach explained Monday.

 

Last summer, when the pension spike was before the board, the county’s pension liabilities were unclear. “We were driving in the fog,” Mr. Moorlach said. “Instead of hitting the brakes and waiting, someone hit the gas.” Only two supervisors – Chris Norby and former Supervisor Chuck Smith – favored slowing down and studying the matter before voting.

 

Now this assessment comes in. Here’s a good lesson: When finances are the subject, it’s better to work to understand all the implications rather than rely on self-interested union leaders and politicians who carry their water.

 

The board needs to quickly examine what options there are regarding the contract – if any – before the benefits go into effect next month. Otherwise, Orange County might soon be joining the city of San Diego, as a pension problem balloons into a full-fledged fiscal and political crisis.

David Reyes of the LA Times stayed on the topic and provided another twist in “O.C. Wants Pension Fund Gap Validated – After being told that the predicted shortfall is nearly twice the previous figure, a board is having a consultant check the math.”  The twist?  Pension shopping.  Wow!  Can you imagine if we had repositioned from OCERS to CalPERS, knowing what we know now about CalPERS?  Incredulous.  Here are selected paragraphs.

            The Orange County retirement board said Monday it would give a consultant a month to review findings that the long-term funding of pensions for county workers was short about $2.3 billion — almost twice the shortfall previously estimated.

County officials said that if the financial assumptions in a report released Friday were confirmed, the county would have to increase its employee pension contributions more than 50%, to $300 million a year from $190 million, starting July 1, 2006. County employees also would be asked during contract negotiations to increase their contributions to the pension pool.

                The county’s unions, unhappy with the retirement fund’s recent performance, suggested in a May 23 letter to county executives that the county switch to the California Public Employees Retirement System.

Nick Berardino, general manager of the Orange County Employees Assn., said CalPERS was better managed, since it had allowed the state to reduce its pension contributions for the coming fiscal year by 4.7%.

Orange County’s 10-member retirement board includes representatives of taxpayers, current and retired county employees and public officials, including Orange County Treasurer-Tax Collector John M.W. Moorlach. The board helps develop investment strategies to fund retirement for county government’s 9,400 retirees, a number that will grow as the 15,000 employees currently covered by the pension plan retire.

Jack Leonard and Susannah Rosenblatt of the LA Times had an article, titled “Hot Home Sales Fill Counties’ Coffers,” on our frothy real estate market.  Real estate owners were paying their taxes and paying them in a very timely manner.  In fact, that year we collected 98.9 percent of our assessed taxes.  This may have been the high water mark for the best collection percentage in our then 116-year history.  With lower late payment levels, we also had lower defaulted real estate to auction off.

The rising value in Orange

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