MOORLACH UPDATE — Rollbacks — July 30, 2010

I ran for Supervisor to address unfunded liabilities created by former Supervisors that made promises that could not be kept.

We have successfully negotiated and implemented significant and unprecedented policy changes that others are now following.

We’ve addressed our retiree medical unfunded liability. 

We’ve put a one-way valve in place to prevent future Supervisors from increasing retirement benefits without voter assent.

We were one of the first to implement new tiers for new hires.

We started payroll withholdings for a bargaining unit that previously had the County paying the entire share of each employee’s pension contribution.

The nagging question:  Is this enough? 

Our ten-year strategic financial projections tell us it is not.

The first thing that needs to be said is a big thank you to our bargaining units.  Together we have shown remarkable leadership in this critical area.

The next thing that needs to be said is that more must be done.

I don’t see raises in salaries, either for merit or cost of living increases, for many, many years, unless more is accomplished.

The OC Register has my thoughts on this already on their website.  I anticipate that it will be in their Sunday Commentary Section.

(P.S.  For more on the 2005 “Richman initiative” check out the LOOK BACKS below.)

John Moorlach: Bell rings for pension reform

By JOHN M.W. MOORLACH

Orange County supervisor, Second District

The first hurdle one faces when dealing with a problem is agreeing that there really is one. In Pensionland, beneficiaries stick their heads in the sand. Euphemisms, like "investment earnings comprise most of the funding revenue" show their lack of perception. Assuming that tomorrow’s potential higher investment returns will solve today’s underfunding is like reading "Peter Pan." Their mantra is, "you’ve just got to believe."

No. There is a problem. Deal with it!

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Now that we understand that defined-benefit pension plans are taking municipalities to their fiscal knees, how do we prevent the enhancement of retirement formulas from increasing in the future? First, you put a one-way valve on it. Orange County did this in November 2008 with Measure J. Paraphrased, it requires voters approve negotiated retirement benefit improvements. This will address any potential hemorrhaging.

Next, we go after the unconscionable acts of the past. How can someone in their right mind agree to a 50 percent increase in retirement benefits that are retroactive to the date of hire? If a pension plan is fully funded at the time this modification is approved, it becomes one-third underfunded overnight. This is egregious. That’s why the 2007 Board of Supervisors voted to sue the Association of Orange County Deputy Sheriffs for the 50 percent increase in retirement benefits bestowed upon them by the 2001 Board of Supervisors.

The granting of this benefit created a heavy debt. Our state constitution requires debts to be approved by two-thirds of the voters. This was not done.

Even our state attorney general said as much last week by advocating a public policy to bar retroactive benefits in the future. It’s nice to see Jerry Brown advocating a public policy during his campaign for governor. It’s even nicer that he’s addressing the topic of pension reform. It’s too bad he’s on both sides of the retroactivity issue. But, if it takes public employee union money and voter angst to get him back into the governor’s nonmansion, I guess he’ll do what it takes. His is the only amicus brief against the county’s lawsuit against the retroactive pension increase, now in the appellate court.

Medical programs for retired government employees is the other unfunded liability crippling municipalities. These need to be addressed. They are, for the most part, nonvested benefits, and they need to be renegotiated, and quickly. The county of Orange did this in 2006, taking an unfunded liability of $1.4 billion down to $412 million – a 72 percent reduction. The annual required contribution went down from $130 million to $26 million. Had we not successfully negotiated this modification with our bargaining units, it would be difficult to say where our budget would be today.

Every municipality has to address its retiree medical plans in order to address its long-term financial survivability.

Addressing the pension liability is tougher. It’s vested. Therefore, we (supposedly) can only make structural changes for new hires. Orange County started on this last year. Our governor is negotiating it with the state’s bargaining units as we speak. He has already secured new pension tiers with six of 21 state bargaining units. Both gubernatorial candidates are advocating the same strategy. We showed that it can be done. I commend the governor for following our lead. Orange County has also implemented employee withholdings for a bargaining unit whose members did not previously pay in their employee share.

The evolution of pension reform is being embraced by everyone. Those elected to public office need to maintain the fiscal viability of their agencies. The unions need their government employers to succeed in order to receive their benefits. The public gets it. The $100,000 Club of pension beneficiaries posted by the California Foundation for Fiscal Responsibility has rung the bell. And the city of Bell has made national news about certain public employee compensation abuse.

The evolution must go further. Everything that Orange County has done is great. We’re leading the pack. We have broken through the union barrier. In fact, even the general manager of the largest bargaining unit has espoused and embraced the changes as if they were his own. But, more must be done.

What has the evolution process taught us? It’s that, if you’re expecting Sacramento to fix its problems, you are sadly mistaken. The unions run the place and they fund the ruling party. Don’t bring legislative fixes to them; they will die in committee.

The ballot-measure approach has been limited at best. We can nibble around the edges, but major reform will be squashed by public employee union money. In 2005 the unions convinced Gov. Schwarzenegger to drop the Richman initiative to institute defined-contribution pension plans. The other four ballot measures he supported that November failed. He then went quiet – until this year, when he started to negotiate bargaining unit agreements while demanding an annual budget that included pension reform.

The county of Orange and Gov. Schwarzenegger are pursuing pension reform where it can happen the easiest; at the bargaining table. I want to affirm the governor in his efforts and hope that he is successful in implementing new pension tiers for new hires with the remaining 15 bargaining units that he has to deal with. This is a long-term solution that will provide long-term results.

Regretfully, even if the governor is successful, his efforts will not be enough to save the state from its financial implosion. It provides minimal short-term relief. He and Jerry Brown refer to new tiers for new hires as "rollbacks" – but true rollbacks would be a reversion to the old formulas.

Before there was "3 percent at 50" there was "2 percent at 50." The former formulas were "Cadillac" plans, whereas current formulas are "Rolls-Royce" plans. We need to go back. This would provide a blended formula going forward. It would reduce our unfunded actuarially accrued liabilities and it would reduce our annual required contributions. This can also be accomplished at the bargaining table.

Short of agreeing to save themselves by saving their employers, the public employee unions will eventually face a well-financed ballot measure pursuing a defined-contribution solution or a defined-benefit "private sector" freeze model. The voters have seen public sector greed (thank you, city of Bell), and they have had enough. It’s time for leadership on pension reform, and the public-employee unions hold the key.

FIVE-YEAR LOOK BACKS

2005

July 28

Dave Brooks of the Huntington Beach Independent featured a candidate who would be challenging Supervisor Jim Silva and the current officeholder’s spouse, Diane Harman, in the upcoming race for the 67th District in 2006.  The article was titled “Marine challenges 2 to an Assembly race – Former leatherneck among three who will vie for 67th District seat to be vacated by Tom Harman.”  My name was invoked, and sense I knew Mike McGill, I was flattered.

                [Cypress Mayor Mike] McGill said his political ideology is most closely aligned with county treasurer John Moorlach.

The OC Register’s second editorial was titled “A trifecta for the ballot.”  The November special ballot would not only have all of the Governor’s initiatives, but the Orange County Firefighters union also gathered signatures for a countywide ballot measure.  The OCFA would soon be running out of money, which has now occurred as their revenues come from real property taxes.  So the firefighters union decided they could take Proposition 172 sales tax funding from the County’s Sheriff’s Department and District Attorney.  I’ll let a few paragraphs of the editorial, including its concluding paragraph, explain the rest.

                We understand and appreciate the desire of the Orange County Board of Supervisors to deflate a potentially disastrous effort by the Orange County Fire Authority union to grab a share of tax dollars now earmarked for county law enforcement.

                The board has voted to add three initiatives to the Nov. 8 ballot, which will compete with a union-backed signature-driven initiative that will also be on the ballot.  Called Measure D, it is a self-serving initiative Orange County Treasurer John Moorlach once referred to as “greed at its finest.”

“Real estate taxes have gone up 50 percent more than sales taxes,” said Mr. Moorlach.  “Firefighters got the better end of the deal.”  The problem, he notes, is that the fire authority granted the firefighters retirement benefits that allow them to retire at age 50 with as much as 100 percent of their base pay.  OCFA needs to find some way to pay for it.

“How?” asks Mr. Moorlach.  “By telling voters that Prop. 172 was supposed to go to fire because pictures of fires were used in some advertisements.  They are pulling on our heartstrings . . . But this is about paying for these egregious benefits . . . and about putting another fireman on a truck as a way to get more union members.”

We only hope the county’s strategy works, or else county residents can expect a) significant cuts in law enforcement; b) cuts in other county services; and/or c) proposed tax increases to make up for the shortfall if the politically difficult tasks of a and b are not approved.

July 31

The San Diego Union-Tribune did an amazing piece, “Roundtable on pension reform,” providing the responses of “experts interviewed July 20.”  They were Assemblyman Keith Richman, San Diego’s Pension Reform Committee Chair April Boling, California School Employees Association Legislative Representative Dave Low, California League of Cities Deputy Executive Director Dwight Stenbakken, and Former Chief Deputy State Controller Mark Battey.

I’ll provide one response by former Assemblyman Richman that will show you his understanding of the topic and his passion for the urgency for the need to provide a correction.  Remember, this panel was assembled five years ago.

                QUESTION:  Would each of you briefly give us your perspective on the issue of public employee pensions?

RICHMAN:  San Diego is only one example.  Orange County has a similar problem.  In fact, their unfunded liabilities just on their pensions are about $2.4 billion now.  They have another $1.3 billion of unfunded retiree health care costs.  Another $1 billion left over from their bankruptcy.  So according to John Moorlach, the treasurer of Orange County, their situation financially is now worse than it was when they declared bankruptcy.  Riverside County over the last six months has issued $460 million of pension obligation bonds.  Bakersfield is spending 17 percent of its general fund for pensions.  Sacramento has issued almost a billion dollars in a series of pension obligation bonds.  A number of school districts in the state including L.A. Unified School District and Fresno are at risk of going bankrupt.  The state paid $160 million in 2000-01, $2.6 billion this year, a projected $3.5 billion in a couple years.  That’s the equivalent of the entire budget for the University of California.  Pensions in California are 24 percent higher on average than the next highest state.  We have many people throughout the state of California who are getting pensions that far exceed 100 percent of their salary in their last year.  Many people are spiking their salaries in the last year.

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