MOORLACH UPDATE — Pensions — June 22, 2010

The lead editorial in the OC Register addresses the Governor’s negotiating efforts with four bargaining units.  It’s great to see the Governor following Orange County’s lead.

Under existing California law, you can impose most salary and benefits when you reach an impasse, but you cannot impose changes to retirement plans.  This you must negotiate.

That is what Orange County did with its two major bargaining units last year, which was a major change.  Public employee unions are aware of the fiscal realities facing every municipality.  They are stepping up.

There is one major rule you need to remember in dealing with negotiated financial transactions:  Ask!  The County asked its bargaining units to provide a new tier, to take no pay increases, and, for one union, to increase withholdings.  It did not come easy, but you have to protect the financial integrity of the employer in order for the employees to receive their retirement benefits in full.  It takes two.

Since I’m addressing an editorial, allow me.   If you want to use terms like “precedent-setting” and “beginning a trend,” then those would apply to Orange County.  If you want to use words like “following a precedent-setting model,” then those words would apply to Sacramento.

The second piece is from the Voice of OC.  I was not interviewed for this story/editorial.

Fifteen years ago, when I was appointed to the position of Treasurer-Tax Collector, I opted out of the County’s pension plan.

This started a fun conversation with Gaylan Harris of Human Resources.  It went something like this:

“John, if you opt out, then you’re subject to F.I.C.A. withholding.”

“Gaylan, that’s fine.   I’ve been paying F.I.C.A. withholdings my entire career in the private sector.”

“John, if you have F.I.C.A. withheld, then every employee in the County will have to have F.I.C.A. withheld.”

“That’s fine with me.”

“Well, that just won’t work.  That would wipe us out financially.”

“Well, Gaylan, then why did you ask me if I wanted to opt out, if I can’t really opt out of the pension system?”

This situation has since been corrected and the County now has some employees that do have F.I.C.A. withheld, but when I was originally given the choice, it was a false one.  In fact, I was probably the first elected department head to exercise the proposed exemption.

This caused H.R. to do the research and find the then awkward anomaly.

Editorial: A breakthrough, or just a flash in the pan, on pensions?

California taxpayers probably should give Gov. Arnold Schwarzenegger a polite round of applause for an historic rollback, however slight, of pension benefits for state employees. But don’t rise for a standing ovation quite yet.

It’s unclear whether last week’s agreement tentatively arrived at by the governor and union leaders representing 12 percent of state workers was the beginning of major reforms needed to ward off almost certain fiscal catastrophe, or merely headline-grabbing, token concessions.

After all, by the governor’s own estimate, the agreement will save only $72 million in the coming year’s budget. That’s a pittance, considering this year the state was budgeted to pay $3.3 billion toward pensions, before CalPERS, California’s largest public pension fund, last week ordered the state to increase that contribution by another $600 million.

Even the $72 million savings isn’t all pension savings. The governor’s office was calculating how much of that amount is accounted for by two unions’ accepting one unpaid day off per month, equal to about a 5 percent pay cut.

So, as dollars go, the unions’ concession won’t do much to turn around the $19.1-billion deficit legislators face in the 2010-11 budget year, which begins July 1. And the agreements, which must be ratified by the Legislature and union members, do little to address the huge costs already in the pipeline for current employees.

Perhaps most disappointing, the agreements leave intact the defined-benefit model that guarantees pension payouts, rather than switching to a defined-contribution model, such as 401(k) plans, which specify only a contribution to employee pension accounts.

So why did pension reform-minded Orange County Supervisor John Moorlach tell us he is "pleased" with the tentative agreement? Mr. Moorlach said the agreement signals that public employee unions are willing to make changes that previously they have staunchly resisted.

Even so, reforms as dramatic as switching from fixed payments to fixed contributions aren’t likely to occur first at the state level, where union influence is so strong in the Legislature. Counties and cities are more likely venues for that kind of breakthrough, Mr. Moorlach said.

Last week’s agreements with unions representing state firefighters, California Highway Patrol officers, psychiatric technicians and health workers was the first time state unions agreed to roll back previously won benefits, the governor’s office told us.

Concessions fell largely on newly hired employees, not those already covered by pension agreements. The governor also agreed not to reduce pay to minimum wage level in a budget crisis, and to grant some step raises. In effect, current employees benefitted themselves while cutting back benefits for those yet to be hired. Moreover, the four unions represent only 23,000 of the 193,000 unionized state workers.

The concessions include increasing retirement age by five years for new hires, and requiring current workers contributing more, at least 10 percent of their salary, to their retirement, which will reduce the state’s costs by the same amount. The savings would grow to $1 billion if all unionized state workers adopted similar contracts, according to the Department of Finance.

The question is whether last week’s agreement was precedent-setting, or an anomaly. Does it begin a trend of scaling back overly generous benefits irresponsibly promised by lawmakers in the pocket of government unions? Or will the state’s other employee bargaining units continue to resist even such modest reforms?

Unfunded liability for employee pension and retirement health care is on a pace to bankrupt state government. Legislators, elected with the help of union money, are in no hurry to do much about it. Last week a Democratic-controlled Senate committee killed a pension reform bill by Sen. Dennis Hollingsworth, R-Murrieta, which would have saved taxpayers $110 billion over 30 years. In light of all that, we applaud the governor’s efforts, if only softly.

Will Shawn Nelson Take a Pension?

During this year’s rough-and-tumble primary campaign for the vacant seat on the Orange County Board of Supervisors, virtually every candidate talked about the challenge of managing public sector pensions and their costs.

None was as vocal as Fullerton City Councilman Shawn Nelson, who won in the primary and will be sworn in Tuesday morning. Nelson will finish the term of Chris Norby, who in January won a special election to the state Assembly. He will have to stand for election again in November for a full term of his own.

Nelson talked passionately about bringing down the unfunded pension liability facing the county, now estimated at more than $3.3 billion.

In reality, there is not much that a supervisor can do to shrink the unfunded liability, especially in the short term. But there is one thing Nelson can do: He can decline a pension for himself.

Under a little-known — and not publicized — state law, each county supervisor has to actually decide to opt into the county’s pension system to get the same benefit most employees do.

I tried to find out Nelson’s pension plans on Monday, but he didn’t return several of my phone calls.

If Nelson does decline a pension, he won’t be the first to do so. Pat Bates — who also faced a ton of questions about pensions in 2006 when she ran for her first term — kept her pledge to not contribute to the expansion of the county’s unfunded liability.

None of the other current supervisors have opted out, most notably John Moorlach who has made battling pensions a hallmark of his elective career.

Bates has rarely mentioned her policy in public, but she doesn’t avoid questions about her decision.

"That was my campaign pledge," Bates told me. "It was a big issue when I was running for election, and I made a pledge that I would do nothing to add to the unfunded. And putting myself in the pension, I would be one of those future funding responsibilities."

County budget staffers were not able to provide a cost breakdown for supervisors and their pensions on Monday. But a ballpark estimate — based on an average supervisor’s office payroll of about $1 million and pension payments costing about 21 percent of payroll — is that each supervisor office costs taxpayers about $200,000 in pension payments.

Bates said that she could see an argument for a supervisor getting a pension before term limits. But now that voters have limited a supervisor’s career to two terms, she said it can’t be justified.

"Prior to terms limits, when it became your primary profession, I didn’t have a problem because Social Security wasn’t provided," Bates said. "With term limits, it doesn’t seem to be an appropriate compensation."

However, other sitting county supervisors don’t see it that way.

"I have no problem that I’m going to earn a pension," said Supervisor Bill Campbell.

If you’re going to get good, qualified people to run for public office, they can’t be expected to take a cut in pay and retirement benefits, argue both Campbell and Moorlach.

"People are giving up an opportunity, so I think the compensation should be covered," Campbell said.

Currently, a county supervisor’s compensation package — not including pension benefits — is a salary of more than $150,000 annually, a defined contribution retirement account (referred to a 401(k) in the private sector), and a car allowance.

However, if Campbell, Moorlach and the other pension takers have a change of heart, they will have one last chance to save the taxpayers money.

Another not publicized option available to county supervisors allows them, within 60 days of leaving office, to simply get the money they paid into the system back and forgo a pension.




June 22


Jim Christie of Reuters covered the topic of rising housing prices in “Calif. Counties Expect Windfall from Housing Gains.”  It gave me a chance to preach the message of what would be facing us in the near future.  Here are the pertinent sentences.  Talk about staying on topic.

                Southern California’s counties are reporting especially strong tax roll gains, reflecting soaring appreciation in home prices across the region and brisk sales of homes.

                In Orange County south of Los Angeles the annual tax roll is estimated to be about $3.5 billion, up 10.4 percent from the prior year, said John Moorlach, the county’s treasurer.

                “We’ve enjoyed some amazing growth,” Moorlach said, referring to the local housing market, one of the state’s strongest.  “We’re still enjoying a pretty strong trend here.”

                But that strength could dissipate as county pension costs mount, Moorlach said.

                Like other local governments in California, Orange County will have to increase spending on its pension plans and to meet rising health care costs for county retirees, Moorlach said.

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