Orange County agreed this week to pay the city of Orange up to $340,000 a year to stave off a potential lawsuit regarding the housing of federal immigration detainees at a county jail within the city limits.
The Sheriff’s Department reached an agreement with U.S. Immigration and Customs Enforcement this summer to house up to 838 detainees at the Theo Lacy Facility in Orange and the James A. Musick Facility near Irvine, which would bring in an estimated $35 million to the department and help close its budget gap.
But the central Orange County community of Orange raised early objections, saying the move would violate a 1995 agreement it has with the county concerning the Theo Lacy Facility, which is across the street from the bustling Block at Orange shopping center.
Orange City Manager John Sibley had said the city was considering a lawsuit. In addition to the annual payout — which amounts to 1.5% of what the county will get per detainee per day -– the city will pay only about $5,000 a year to use the Sheriff’s Department shooting range. It currently pays three times that.
In return, the city has agreed not to sue. The agreement was approved on a 4-1 vote Tuesday, with Supervisor John Moorlach casting the lone negative vote.
Moorlach said he felt shaken down and "violated" by the payout.
— Raja Abdulrahim
FIVE-YEAR LOOK BACKS
Troy Anderson of the Los Angeles Daily News has been at the reporting forefront of the pension crisis. He was and is one of those avant garde reporters who saw the impending fiscal impacts long before it became the topic du jour. His article, “A pension ‘time bomb’ – Officials wake up to pension debt,” was picked up by UPI and went around the country. He referred to me in his piece, but not by name. The UPI story would add the following opening paragraph: “The treasurer of California’s Orange County, John Moorlach, says public sector pensions for bureaucrats and politicians are a ‘ticking time bomb.” But, it is fun to see the reference to “time bomb,” as one day we’ll have to look back and see who actually used this description first in printed articles. To show Troy Anderson’s prescience, here is the article in total. I am also mentioned in George Passantino’s “The Gathering Pension Storm” published by the Reason Foundation. The good news? The County of Orange has already implemented or attempted to address many of Passantino’s recommendations.
After years of paying little attention to the tabs they were racking up by granting some of the nation’s most extravagant public-employee pensions and benefits, California officials have awakened to the sobering reality of the massive long-term debt they created.
The largest government agencies in Los Angeles and across the state face setting aside at least $110 billion in coming years to pay for promised retiree pensions, health care and workers’ compensation benefits, according to a Daily News review of unfunded liabilities.
Pensions have become so generous that some employees can retire at age 50 with more than 100 percent of their final year’s salary, and thousands of employees statewide earn annual pensions exceeding $100,000. Among Los Angeles County government retirees, the 10 highest pensions range from $210,000 to $316,000 a year.
But fixing the problem faces daunting challenges that will take years to overcome and involves tough choices by elected officials to invest more taxpayer funds into the plans and scale back the fattened benefits workers have long enjoyed.
And experts say time is running out to defuse what Orange County’s treasurer called a "ticking time bomb."
"Many states have fallen into the trap California has of putting off the pain into the future and eventually it’s going to get to the point where it’s going to be extremely difficult to dig out of it," said national pension expert Stephen D’Arcy, a professor of finance at the University of Illinois.
"At some point, taxes will have to go up to pay these benefits. Many states have provisions that once a benefit is granted, it cannot be taken away except by extraordinary steps – perhaps a super-majority vote in the Legislature or a constitutional amendment."
Pension experts agree the tidal wave of costs that eventually will hit agencies statewide will require taxpayer bailouts or service cuts and could bankrupt some agencies.
But they say elected officials have little incentive to deal with the mounting debt because the fiscal crises in most jurisdictions won’t become critical until most of the current politicians have left office.
In his recent study, "The Gathering Pension Storm," Reason Foundation senior fellow George Passantino concluded that traditional government retirement plans encourage irresponsible decision-making and chronic underfunding – allowing politicians to curry favor with unions by doling out excessive benefit increases at taxpayer expense.
"The biggest challenge, in my opinion, is that while the alarm bells are going off all around, there is a relative state of inaction," said Passantino, who served as director of Gov. Arnold Schwarzenegger’s California Performance Review.
“Since lawmakers and union officials will not bear the costs of the benefit increases they preside over, there is no incentive for them to show restraint or to be fiscally responsible.”
Concerned about the debt, the governor has asked state Controller Steve Westly to calculate total liabilities.
“In terms of the steps we are taking, we are just starting down that road,” state Department of Finance spokesman H.D. Palmer said. “Up until this point, it’s just been a guesstimate with a lot of zeros behind it.”
Palmer said the $110 billion figure calculated by the Daily News could grow by an estimated $25 billion to $75 billion as government agencies and school districts – as required under new federal accounting rules – calculate the costs of providing lifetime health benefits to tens of thousands of retirees.
To help reduce pension debts, the governor is backing a pension-reform measure that would switch new state and local government employees into 401(k)-style plans.
The measure, which is expected to appear on the state ballot in June, comes after the governor postponed a similar plan earlier this year amid attacks by public-employee unions, which charged it would eliminate death and disability benefits for police and firefighters.
Perhaps one of the most scandalous examples of the pension problem facing the state is in San Diego, where the City Council’s decisions to boost benefits while underfunding the system resulted in a $1.4 billion deficit.
The FBI, U.S. Attorney’s Office and Securities and Exchange Commission are investigating public corruption and potential securities violations.
In comparison, the pension deficit for Los Angeles County is $5.6 billion and Los Angeles city government is $1.1 billion. If the unfunded liabilities for retiree health and workers’ compensation benefits are added in, the county’s debt soars to $17.6 billion. The city’s debt, excluding the Department of Water and Power, rises to $3.2 billion.
The county is dealing with its long-term pension debt by accelerating the annual taxpayer contributions to the plan in the past three years by 64 percent, to $1.2 billion.
Now the plan – expected to be 85 percent funded this year – is doing far better than some across the nation. For example, a pension plan for teachers in West Virginia is only 22 percent funded.
Los Angeles County Chief Administrative Officer David Janssen said he is concerned about the grand jury’s $9.4 billion estimate of the county’s retiree health deficit and has asked for an evaluation to determine the liability.
The county is joined by a growing number of cities and counties throughout the state struggling just to pay annual benefit costs. Already, the largest agencies in the state are spending $14 billion a year in taxpayer funds to make the annual contributions for retiree benefits.
“The money that we’re spending on pension and other retiree costs is money that is not going to education, health care, public safety or infrastructure,” said Assemblyman Keith Richman, R-Granada Hills, a 2006 candidate for state treasurer.
On Sept. 8, Richman introduced Assembly Constitutional Amendment 23, which would require government employees hired after July 1, 2007, to enroll in a hybrid pension-401(k)-style plan or a 401(k) one, lowering new unfunded liabilities. The proposal would not eliminate any death or disability benefits and excludes overtime and the hundreds of bonuses public employees receive from pension calculations.
In his recent report, Passantino urged government agencies to pass charter reforms requiring voter approval of any future benefit increases – a requirement enacted in the 1870s in San Francisco, one of the few jurisdictions in the state with a pension fund surplus.
The city currently has a pension surplus of $924 million, joining the Los Angeles Department of Fire and Police Pensions and the University of California Retirement System among the few pension systems in the state in the black.
“Before approving any benefit increases, voters do it knowing expressly what the change is and how much it’s going to cost,” said Clare Murphy, executive director of the city’s retirement system.
Daniel J.B. Mitchell, a management and public policy professor at UCLA’s Anderson School of Management, said the UC Retirement System has been overfunded for years because any benefit improvement has to be pre-funded.
“You have to collect the money upfront,” Mitchell said. “If you are running a school district, city, county or mosquito-abatement district, if you don’t put money in at the time the liabilities are being incurred, you can get away with it for quite a while – but eventually the problem will come back to haunt you. It’s a question of taking a long-term perspective, which not every political leader necessarily does.”
Passantino’s study also urged governments to re-evaluate employee retirement ages, use long-term averaging to minimize volatile swings in the market, limit vacation time sell-back programs and avoid pension obligation bonds.
If bonds are issued, he urges imposing additional assessments on government employees to speed bond repayment.
Steven B. Frates, a senior fellow at the Rose Institute of State and Local Government at Claremont McKenna College, urged governments to stop paying their employees’ share of the pension contributions, a practice widespread throughout the state.
Frates also suggested that officials reduce lavish cost-of-living adjustments built into pension plans, which often allow pensions to rise higher than the rate of inflation.
In Illinois, which faces a $35 billion unfunded pension liability, D’Arcy – the university finance professor – said officials have moved to make pension enhancements temporary, giving officials time to see how the increases will affect funding ratios.
Former Los Angeles Mayor Richard Riordan said most politicians are holding their breath, hoping some miracle – perhaps in the stock market – is going to solve the problem.
“What politician has the guts to take 5 percent of their budget for the next 30 years to add to their unfunded liabilities, taking it away from pay increases for their employees?” Riordan asked. “When you add to this the high-paying jobs that are leaving the state, other states that have lower taxes and less rules and regulations that interfere with business, the future does not look good.”
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