MOORLACH UPDATE — OC Register — August 22, 2010

Sunday’s OC Register Commentary section had responses on its prior week’s lead editorial; see MOORLACH UPDATE — OC Register — August 15, 2010. 

One submittal was from my Board colleagues, Chair Nguyen and Vice Chair Campbell; see http://www.ocregister.com/opinion/new-263059-plan-county.html.

The other was from Orange County Employees Association General Manager Nick Berardino, shown below.  What makes his mention of me fun is that he quoted from my August 15 Update.  It’s nice to have a large audience. 

The OC Register’s editorial staff responded to Mr. Berardino’s comments on their blog at http://orangepunch.ocregister.com/2010/08/19/its-berardino-whos-wrong-on-county-pensions/32671/.

As a clarification, I do not view the defined contribution pension plan solution as a “boondoggle.”  It is the appropriate course of action for the long-term financial wellbeing of every governmental entity at the city, county and state levels.

I enjoyed a fun weekend in San Diego, so the first LOOK BACK below is on topic.

Nick Berardino: Register wrong on county pensions

By NICK BERARDINO

General manager, Orange County Employees Association

The Register’s editorial blasting the county’s new hybrid pension option ["Appeasement, not reform, on pensions," Commentary, Aug. 15] managed to unite both sides of the political and ideological spectrum.

For once, most of us agree: The Register got it completely wrong.

Controlling the cost of public employee pensions is a complex challenge, and solving it requires more than the Register’s hyperbole and chest-pounding.

The county approached this effort with its front-line employees in the only manner that can truly succeed – through collective bargaining with its largest union, the Orange County Employees Association. OCEA represents front-line county workers, not the "$100,000 Club." Our average retiree collects an annual pension of under $29,000.

The hybrid pension developed by OCEA and county supervisors is a commonsense alternative that squarely addresses pension costs while still providing sustainable retirement options. That’s why it’s being recognized across the state and in Washington, D.C., as a truly successful reform effort, in stark contrast to the Register’s stale, unworkable mantra of "401(k)’s for all." Taxpayers rely on newspapers to help them understand complicated issues and evaluate realistic solutions. In this instance, the Register failed its readers on both counts.

The Register’s pronouncement that public employees should have only 401(k)’s – "just like the private sector" – is deliberately disingenuous because the Register knows and fails to point out that private sector employees have Social Security but most public employees do not. The Register’s approach actually would be counter-productive, persuading at least some public employees that 401(k)’s can effectively address their retirement needs, which we know from the historic investment performance of 401(k) accounts is a delusion. Public employees would actually be far worse off than their private sector counterparts, eventually creating a vast new elder underclass with little or nothing set aside for retirement.

Promoting 401(k) plans for everyone is strongly supported by one constituency – the Wall Street sharks who drove our economy off the cliff and who would stand to make hundreds of millions, if not billions, of dollars. But it would do virtually nothing to address the retirement goals of public employees or the long-term cost-saving goals of taxpayers.

Common sense, along with experts across the country, tells us that our hybrid plan will save taxpayers money. The county’s retirement contributions are reduced under the hybrid plan, giving employees a clear incentive to choose it: Their pension contribution would decrease from about 14 percent of salary to about 7 percent, increasing their take-home pay.

As Supervisor John Moorlach pointed out last week, the savings from these reforms won’t be fully realized for decades. But, unlike the 401(k) boondoggle, significant long-term savings will be realized.

Supervisor Moorlach and I have been friends for more than 16 years, and we disagree on many issues. But I wholeheartedly agree with his response to the Register’s editorial this week: "Righteous indignation, combined with complete ignorance of [California law] and the current political climate, make for a sadly ignorant and inaccurate editorial."

FIVE-YEAR LOOK BACKS

August 20

2005

Andrew Donohue of the Voice of San Diego did a lengthy piece, titled The Political Week in Review: Details of the Days,” that gave an update on the City of San Diego that balmy summer week.  It was a bleak assessment.  But, five years later, San Diego is still plodding along.  But, it’s still bleak enough for the Mayor to put a “pension plan funding” sales tax initiative on the November ballot.  Stay tuned.  If you like depressing reading, then this is what the doctor ordered.

Even in a slow vacation week in San Diego’s political world, detail and significance can easily get lost in the enormity of the city’s crisis.

But in a matter of days this week, a number of details subtly altered the stage of the city’s unfolding drama. Another in a steady stream of federal subpoenas landed at City Hall, this one from the U.S. Attorney’s Office. For the first time, investigators on the criminal end of parallel federal probes found interest in happenings outside of the pension realm and into the city of San Diego’s sewer department.

At the same time, lawsuits continued to pour in and out of City Hall.

The city attorney filed suit against two outside pension consultants he says are culpable, in part, for the creation of a pension deficit estimated to be at least $1.37 billion. It is the first in what is expected to be a number of third-party complaints seeking damages against those who provided advice in the years running up to the current financial crisis.

Orange County recouped approximately $800 million from third parties following its collapse, including $75 million from KPMG – the firm now in charge of San Diego’s long-delayed 2003 audit.

Earlier in the week, police officers filed suit seeking more than $100 million in damages from a city struggling to provide basic services to its employees. Talks broke down in a separate $100 million lawsuit settlement with a local developer; a conservative business group filed suit against the city to change its election laws.

Six former pension officials have sued the city because it won’t provide them legal representation in a lawsuit brought by City Attorney Mike Aguirre accusing them of misusing their official positions. Fuel for the officials’ case: A legal opinion from a city-paid law firm that was made public saying the City Council should, in fact, pay their legal bills.

"Every time we turn around, someone else, either internal or external is suing this city," said Ron Villa, director of the city’s financial management division, in an e-mail. "This is potentially money that could be used for other priorities such as increases to reserves, deferred maintenance, public safety or infrastructure needs."

Indeed, the city’s $6.2 million public liability fund, which goes to cover the costs of its auditors, consultants and outside attorneys, will be stressed this year. If that fund runs dry, costs will need to be further trimmed from services already curtailed during this year’s budget cycle.

When outside eyes peered upon San Diego’s chaos at the start of the year, they saw a city in need of compromise and sacrifice.

A vision appeared of a leader who would pull all interested parties into a room, honestly articulate the depths of the city’s problems and convince the labor, business and other communities of their roles in the solution.

John Moorlach, the Orange County treasurer who had warned of his county’s impending crisis, put it bluntly: The county imploded under immense financial burdens because of a lack of leadership.

A half-a-year later, the city of San Diego appears to be inching ever closer to bankruptcy. An already-splintered city has shattered into strict factions. The city’s credit rating continues to slide as questions have arisen regarding the city’s cash flow, financial statements and political stability.

Lawsuits filed by or against the city pile up daily, stretching the city’s already thin resources. Relief for a budget crisis highlighted by a billion-dollar pension deficit appears to be a distant prospect. City Attorney Mike Aguirre last month filed his long-promised legal challenge to a decade’s worth of pension benefits, but even he admits resolution could be between three and five years away.

"Man, oh man, you guys are just dead in the water there," Moorlach said this week.

Recent developments underscore a startling trend: Groups are beginning to stake out their own claims as San Diego’s crisis drags on.

Police officers have filed multiple suits against the city. The pension system, already more than $1.37 billion in the red, will bring on its own audit committee in an attempt to clear allegations of wrongdoing by pension officials.

It is a task that two city-paid law firms have already undertaken. A third group, the city’s audit committee, was commissioned in part to tackle the same duty. The group of five consultants bills the city about $800,000 a month as budget woes curtail city services.

The pension’s audit committee will perform similar tasks. And its bills, likely to be extensive, will be paid from the deficit-laden pension fund.

The Port of San Diego is crafting a bill in the state Legislature to make it easier to remove – and thereby protect – their stake in the city’s beleaguered pension in the event of a financial breaking point.

Perhaps frightened by the high drama playing out around City Hall and eager to collect on their retirements while available, city employees are choosing retirement and other retirement-related options at a much more rapid pace than in years past. This July, for example, retirements were up 81 percent over July of last year.

In short, a half-a-year later, things have gotten worse rather than better by many measurements.

"We’re skating on thin ice," said Steve Erie, political science professor at the University of California, San Diego. "We always see the glass half-full rather than half-empty. We’ve never done worse case scenario planning and it’s going to catch up with us. The question is: Will it catch up with us before we have a mayor in place?"

The prospect of a new mayor seems to be the one shining hope. San Diegans go to the polls Nov. 8 to choose between maverick City Councilwoman Donna Frye and former police Chief Jerry Sanders.

The winner inherits a city steeped in investigations by the U.S. Attorney’s Office, FBI and Securities and Exchange Commission. The city’s 2003 and 2004 financial statements remain on hold pending the release of documents long-guarded by the pension board. Without certified financial statements, the city remains without access to public financial markets and the capital to do the things cities do for their residents: repair roads, replace sewer pipes and build fire houses.

The city’s audit committee pushes ahead on a comprehensive investigation of past city practices and, in one of the tidbits of good news, believes an audit can be completed by the end of the year. But, as many admit, the city’s problem is now getting as political as it is financial.

The sudden resignation of Mayor Dick Murphy and the convictions of former Councilmen Ralph Inzunza and Michael Zucchet leave the council with only six members. Four of the 13 pension trustees have resigned, citing the city’s toxic political climate.

Both bodies need near-unanimity to take official action.

However, in the face of an adversity that has captivated a national audience, little common ground has been found between the city’s varied interests. Instead, individual factions appear to be grabbing for their piece of the ever-threatened pie.

"This is all self interest," said attorney Pat Shea. "You only get out of these things if you can turn self interest into community interest."

August 21

1995

The Letter to the Editor section of the Orange County Business Journal had a blistering commentary on my department titled “OC tax department should try using sugar, not vinegar.”  The points raised by the letter writer were accurate.  Shortly after this dressing down I reviewed the letters that the department had been issuing, for who knows how many years, and modified the content to be more business friendly.  Being cost conscious and seeing multiple boxes of envelopes with my predecessor’s name on them, I thought it would be more cost efficient to use them with a strike out of his name then to dispose of them and order all new envelopes.  Fortunately, the envelopes were used up quickly.  Thank you, belatedly, Mr. Tendler.

                I recently received a notice from the Orange County Treasurer-Tax Collector for nonpayment of $112.91 in unsecured property tax.

                The notice included a P-E-N-A-L-T-Y W-A-R-N-I-N-G and directed me to “please remit payment immediately in order to avoid” a 10% penalty and subsequent monthly penalties of 1.5%.

Why in hell, instead of sending a P-E-N-A-L-T-Y W-A-R-N-I-N-G to the taxpayers (who are paying their salaries) don’t the people in the treasurer-tax collector’s office enclose a note along the following line:  “We request that you please cooperate with this office and send your taxes in as is required by law.  We would also appreciate very much, if during these trying times, you would cooperate and help us by sending your taxes without further delay.  Thanking you in advance for your cooperation; we remain your dedicated group at the Orange County Treasurer-Tax Collector Department.”

                To top it off, the notice carried the name of Robert L. “Bob” Citron.  I beg the department, get Citron’s name off any correspondence!

                Sidney S. Tendler

                Administrator

                The Guild Insurance Group

                Newport Beach

There was a brief article in a box in the same issue of the Orange County Business Journal, titled “Taking heat,” that flowed in the post-mortem analyses of the time.  I’ll provide it in total and just remind you that I’m providing the journalistic history of the clippings that I was mentioned in that I have available.  With the benefit of hindsight, it is hard to imagine Citron reducing his leverage without incurring losses; something he would be unwilling to do.  I was receiving the monthly Treasurer’s investment inventories and he was making even bigger bets after the election.  What a story.

                The Orange County bankruptcy has left the Irvine Ranch Water District with a claim for $60 million and egg on its face.

IRWD put virtually all its funds, $400 million, in the pool.  About a third of the money came from bond proceeds and interest earned on funds earmarked for projects suspended by the recession; another third represented equipment replacement funds; and much of the rest came from connection fees paid in advance.  A tenth, $40 million, was borrowed money (reverse repurchase agreements) that the IRWD used to increase its interest earnings in the pool.

IRWD board president Peer Swan was one of former OC Treasurer-Tax Collector Robert Citron’s strongest supporters.  Swan had accused John Moorlach, Citron’s 1994 campaign opponent, and his backers of trying to cause a run on the fund by taking the portfolio to Wall Street.

But critics contend it was Swan himself who precipitated the run when he pulled out $100 million from the county pool last November and threatened to withdraw the rest, forcing the county to reveal the problem Dec. 1.  Moreover, the contend, had the county been able to hold off an announcement another two weeks, after the Dec. 13 property tax revenue deadline, the county could have met collateral calls and restructured the pool while avoiding bankruptcy.

Swan defends his role in the crisis:

“My finance manager had lunch with Citron in September and was told that the amount of leverage in the fund was being reduced,” Swan said.  “We found out a couple weeks later that the leverage was not being reduced; Citron was using reverse repurchase agreements.  When we found that out, we realized the fund was in big trouble.  We had to act.  Can you imagine what would have happened if people saw that we knew and did nothing to protect the district?”

  

2005

Dan Nguyen of the Sacramento Bee did a piece about the County’s former accounting firm, Macias, Gini & Co. LLP, in “Up for the count – Inspired by his family’s immigrant work ethic, Ken Macias has fought through obstacles to build one of the Capital’s leading accounting firms.”  Here is a snippet.  It was an interesting time back in 1997.  Ernst & Young was the County’s auditor and its contract was up for renewal.  At the time of the request for proposal, Ernst & Young was in merger discussions with KPMG, which conflicted them out from rebidding.  Arthur Andersen just took Ernst’s annual fee amount out of the County’s general ledger and presented it as their bid.  That method didn’t fly and the County avoided Arthur Andersen’s Enron-generated demise.

                The expansion helped cement the firm’s reputation for auditing large governments, and it has since won such contracts over the international firms that typically handle them.

                One such case was Orange County.  In 1997, the county was a “hot potato,” said county Treasurer-Tax Collector John Moorlach, because it was suing its former independent auditor, KPMG, for not warning the county against the bankruptcy it suffered in 1994.

                Macias’ firm and the now-defunct Arthur Andersen were the only two bidders.  Although the Sacramento firm was smaller, Moorlach said it did a better job of analyzing the costs and produced a proposal that was $200,000 per year less than the “Big Five” firm’s half-million-dollar proposal.

August 22

1995

The lead editorial in the OC Register was titled “Time for questioning.”  Here it is in total:

With the Legislature back in session and solid proposals under consideration for fixing what ails Orange County, we’re approaching – knock on wood – at least the beginning of the climactic final act of the county’s bankruptcy.  And wonder of wonders:  For those with ears to hear, one of the recurrent themes from the beginning of this melodrama is again building to a crescendo.

That theme, sounded over and over throughout the county’s time of troubles, is, as the bumper sticker says, “Question Authority.”  In this context, that maxim means don’t buy with a reflexive bend of the knee everything the bureaucrats and local elected officials tell you, merely because they control the purse strings and write the budgets and assure you they know best.

John Moorlach’s example of independent thinking is instructive.  So is Assemblyman Curt Pringle’s and state Sen. John Lewis’s.  It was Mr. Moorlach, of course, who last year stood along the tracks, waving a lantern and warning that the bridge up ahead was washed out – while the county’s financial engineers scoffed and shoveled more fuel – borrowed money, much of it – into the cauldron known as the Citron investment pool.

But independence of perspective was still called for once the bankruptcy came upon us.  When the authors of the disaster proposed a tax increase as a way out, Mr. Moorlach – and Mr. Pringle and Mr. Lewis – refused to genuflect automatically to official opinion.  They were skeptical because the plan was aimed at paying back 100 cents on the dollar – to all the public entities that had parked money with Mr. Citron.  Yet weren’t we in a bankruptcy, a collective crisis? they asked.  Why, then, should government entities insist on being made whole, to be treated as if no financial meltdown had occurred, while taxpayers would be made to shoulder the burden of these public-sector demands?

Wouldn’t it make more sense, Mr. Moorlach suggested, for each agency or city to receive from the Citron pool the value of its investment at the time bankruptcy was declared, accept its losses, and move on with life?  Wasn’t that the most mature way to confront a communal fiscal setback, rather than contributing to the trauma by issuing ultimate and triggering shakedowns and hit-ups and mass pocket-picking of taxpayers?

Mr. Lewis and Mr. Pringle came forward with their own plan, under which cities and special districts would simply forgive the amounts of money they hadn’t yet been paid by the time Measure R was unveiled.

Horrors, No!  responded much of public-sector officialdom, who insisted the sky would tumble under such scenarios.

Yet now the tune from local city and special-district politicians is changing.  We had been told that they couldn’t give up a dime of their lost investments, but now, confronted with the alternative of having property or sales taxes diverted through legislative action, a number of local political entities are intimating that, well, maybe we could make do without that last 10 cents or 12 cents or 20 cents of our Citron gambling losses.

Funny how government mandarins can find ways to economize if you block every route to the chow line.  Whatever final package of revenue-stream rearrangements the Legislature cobbles together, one operating assumption ought to be that the local governments that bet on the Citron roulette table don’t need to get all that mad money back.  Lawmakers should do what all of Orange County should have done a lot earlier:  Question Authority.

Disclaimer:  You have been added to my MOORLACH UPDATE communication e-mail tree.  In lieu of a weekly newsletter, you will receive occasional media updates, some with commentary to explain the situation, whenever I appear in the media (unless it is a duplication of a previous story). 

I have two thoughts for you to consider:  (1) my office does not usually issue press releases to get into the newspapers (only in rare cases); and (2) I do not write the articles, opinions or letters to the editor. 

This message should appear at the bottom of every e-mail you receive.  If these e-mails should stop arriving in your mail box, it will be because your address has changed and you did not provide a new one.  If you do not wish to receive these e-mails, then please e-mail back and request to unsubscribe.

Advertisements