MOORLACH UPDATE — Enron-By-The-Sea — November 6, 2010

The San Diego Union Tribune is analyzing San Diego City’s Proposition D’s loss at the polls.  Its article dealt with the similarities to Orange County’s Measure R.  What the reporter did not include is that when government does not carefully manage its resources, the voters are in no mood to pay more in taxes.  The voters are not enablers to poor governmental stewards.  For the city of San Diego, it has always been its pension plan (see the LOOK BACK below).  Consequently, a half-cent sales tax increase to underwrite pension contributions was going to be a bust.  This is the first piece below.

The second piece was from the OC Register and MSNBC and provides an update on the coyote topic in Rossmoor.  Last evening I brought my cousin, who is visiting from Kentucky, to the Peter and Mary Muth Interpretive Center in the Upper Newport Bay around 9:30 p.m.  We had the privilege of hearing a few coyotes in a chorus celebrating a kill.  I’ve only heard this sound in the wild while camping in the San Gorgonio Mountains.  To hear it in the middle of suburbia was thrilling and chilling at the same time.  Orange County has coyotes and they serve a purpose in the food chain.

A November 1st memo from the District Manager of the Orange County Vector Control District noted that the vegetation removal work along the Garden Grove (22) Freeway, between Valley View Street and Seal Beach Boulevard, was stopped by Caltrans’ crews.  They observed rats scurrying from the disturbed vegetation and the District responded by placing 60 rat bait stations along the three quarters of a mile stretch.  The tamper-resistant bait stations will remain in place for two weeks before more vegetation is removed.

O.C. sales tax was rejected by same margin

Although there are differences, Measure R and Proposition D have more in common than election results

Politicians pitch a half-cent sales tax hike and urge people to support it or risk municipal services being slashed. Sixty-two percent of voters say no anyway.

Sound familiar?

It happened in San Diego this month — but also in Orange County 15 years ago.

Orange County’s effort to escape from bankruptcy using the Measure R sales tax differs in important ways from San Diego’s current plight, but those involved say the situation offers some lessons after the defeat of Proposition D here.

“They went the half-cent sales tax route for exactly the same reasons we did here,” former San Diego City Attorney Michael Aguirre said. “No one wanted to actually have to address the debt so what they tried to do was sidestep it by getting in more revenue…. We are now having to come to terms with the reality of the debt itself.”

San Diego’s financial woes stem from benefit boosts and intentional pension underfunding that spawned multibillion dollar retirement and retiree health care obligations to city workers and retirees.

By contrast, Orange County’s crisis was fueled by deep losses from risky investments in financial derivatives. To help the county make up for $1.7 billion in losses, Orange County’s board of supervisors placed a 10-year sales tax increase on a June 1995 ballot. Proponents called it the only way out of fiscal crisis.

It wasn’t.

Rebuffed on the sales tax increase, the county, which had declared the country’s largest municipal bankruptcy just six months earlier, went on to issue $880 million in bonds to pay off creditors in short order.

That prompt action staved off a collapse of greater proportions but residents felt some pain in the form of higher fees for services.

Orange County emerged from bankruptcy in June 1996, a year after voters derailed Measure R, and about 18 months after it entered bankruptcy and became synonymous with mismanagement.

“We were internationally famous overnight,” said Orange County Supervisor John Moorlach. “It was like the scarlet letter or whatever you want to call it. The whole world was watching us.

“But a lot of the world is watching San Diego city too,” he added. “The New York Times wouldn’t call you Enron by the sea — and that was years ago — if they weren’t watching. Now the focus is on you so you’ve got to perform.”

Moorlach, a supervisor since 2006, served as Orange County’s treasurer-tax collector for nearly 12 years. It was his predecessor, Robert Citron, whose bad investments led to the county’s bankruptcy. Moorlach had raised concerns about Citron’s investments before they collapsed.

Moorlach said San Diego, having explored a revenue increase as a way out of its fiscal crisis, needs to consider solutions such as cutting expenses, restructuring its debt and selling assets such as land.

“Now it’s ‘We’re in this box. What can we do differently?’” he said. “It’s all a matter of leadership.”

Such an effort began Friday when Councilman Carl DeMaio, a lead critic of the city’s sales-tax proposal, made public a plan he developed that he said could save San Diego $737 million over five years.

It would cut or freeze city worker pay, eliminate taxpayer-funded retiree health care for current employees, sell city assets and seek to outsource city services, among other things. It got a mixed reception.

Attorney Pat Shea, who represented scores of municipal agencies who wanted their money back from the failed Orange County investment pool and ran for mayor of San Diego in 2005 on a bankruptcy platform, still believes the legal maneuver would help San Diego right its ship most efficiently. But Shea acknowledges the rest of the community doesn’t agree.

“What happened in Orange County was you had this crisis and everyone could see that the consequences of this were going to be bad for a long time or a short time,” he said. “And they decided it was going to be bad for a short time.”

Shea noted another similarity between the sales tax proposals in Orange County and San Diego, calling both steps forward in fiscal crisis.

“You have to try to do these things,” he said. “If they’re successful, then that’s an option that works. But even if it’s not successful, you’ve moved the flag by now knowing that’s not an option.”

matthew.hall@uniontrib.com • (619) 293-1335 • Twitter @SDuncovered

Grates meant to bar coyotes are going in today

BY ROXANA KOPETMAN

ROSSMOOR – Orange County workers are scheduled to install grates on four channels west of the 605 freeway Friday to help prevent coyotes from entering the community.

The installation of the grates means it will be more difficult for coyotes to enter Rossmoor via the water channels from El Dorado Park, but it will not necessarily stop coyotes coming from other areas, said Rick Francis, chief of staff for Orange County Supervisor John M.W. Moorlach.

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Rossmoor officials say coyotes are one of their top reasons to seek more local control. Coyotes have killed 28 pets in the past six months, officials say.

BRUCE CHAMBERS, THE ORANGE COUNTY REGISTER

"The hard part is we really don’t know how many coyotes are out there," Francis said Friday. "We suspect they are using the water channels to navigate, but the fact of the matter is they can also find other ways to move. They are highly adaptable to different scenarios."

In October, residents reported eight coyote sightings, nine pet killings and one attack, according to the Rossmoor Predator Management Team, a group of residents who monitor the coyotes’ movements. Since May, coyotes have killed 29 pets and attacked 12 others in Rossmoor, the group reported this week.

Two other related issues may have an impact on the coyotes’ movement. Caltrans will soon begin work on a project to link carpool lanes on the San Diego, Garden Grove and San Gabriel River freeways — construction that may alter the animals’ habits. Meanwhile, the Rossmoor Homeowners Association is paying for trappers to capture the animals.

"Since we have no way of knowing how many coyotes reside in the Caltrans right of way, we do not know the level of disruption that may occur when construction starts," Francis said. "If the traps are in place at that time, which it looks like they will be, there may be greater opportunities for successful traps."

Contact the writer: fromroxana@gmail.com or 562-301-6685

FIVE-YEAR LOOK BACKS

November 6

2005

Steven Greenhut’s weekly column in the Sunday Commentary section of the OC Register was titled “The tunnel vision of the NIMBYs.”  Here are the opening four paragraphs and my quote about two-thirds into the piece (which may have influenced the column’s title).

I’m now looking at one of the most scare-mongering election mailers I’ve seen in a long time.  Nope, it’s not one of those union-sponsored advertisements unfairly trashing the governor and his four initiatives for Tuesday’s election.  It’s an ad for an Orange County primary race for supervisor that’s not even scheduled until June ’06!

Sent out by Laguna Niguel Councilwoman Cathryn DeYoung, it features a photograph of bumper-to-bumper traffic.  The piece urges voters to “Stop north county and Riverside politicians from tripling our traffic!”

DeYoung is a Republican who claims to be conservative, but she sounds like one of those Chicken Little enviro-liberals in this mailer.  She urges citizens to organize to stop two proposed projects that could ease the region’s traffic burden.

The first is what she calls the “terrible tunnel,” a proposed tunnel, largely privately financed, that would link Interstate 15 in Riverside County with the Laguna (133) Toll Road by burrowing under the Cleveland National Forest.  The second is what she calls the “Ortega Nightmare,” meaning the widening of the now-dangerous Ortega Highway, which connects Lake Elsinore with San Juan Capistrano.

“Cassie has made a significant error in leadership,” Orange County Treasurer/Tax Collector John Moorlach says.  “She’s making the tunnel an emotional topic.  She’s now saying she’s not visionary.  She is now saying she is a NIMBY-ite.”

Also in that Sunday’s OC Register Commentary section was a joint-submission by the President of Chapman University and noted economist James Doti and myself.  It was titled “The county’s looming pension crisis—Government union members’ retirements could force higher taxes, service cuts, even bankruptcy.”  As the expression goes, “Don’t say we didn’t tell you so.”  This piece was also printed in the Economics & Business Review, December 2005, Volume 24, Number 1, by Chapman University.  It is provided in full.  (You can see how it provided an impetus for many of the accomplishments my office has been able to achieve during our first term.)

Orange County is in serious fiscal trouble – strong words to be sure, but hopefully, wake-up words.

Up to now, most of the talk regarding under-funded pension liabilities at the state and local levels seems far removed from Orange County.  In a recent Business Week cover story, it was estimated that under-funded pension liabilities at the state and local levels stood at $278 billion – roughly 20 percent of total annual state and local revenues.  Other recent studies indicate that this is a conservative estimate.  Calculations based on more traditionally accepted accounting standards in the private sector push the $278 billion to an even more frightening $700 billion.

The problem is not confined to the public sector.  In the private sector, many automobile and airline corporations are sinking under the weight of their defined benefit pension liabilities.  Several once venerable companies, like United and Delta airlines, have already sunk, having declared bankruptcy to get these liabilities off their books.

As serious as this problem is in the private sector, it pales in comparison to the enormity of the public sector dilemma.  Having recognized the inherent funding challenges posed by defined benefit pension plans, most private companies moved away from these plans and replaced them with self-funding defined contribution plans like 401(k)s.  As a result, only a quarter of all private companies have defined pension plans versus 90 percent for all state and local governments.

California is in particularly dire straits.  California’s Legislative Analyst Office, for example, reports that a public sector worker in the state receives $17,000 more in annual pension benefits at the age of 65 than similar workers in Florida and Illinois.

In an example from a recent report by economist Phillip Romero, a 55-year-old state worker earning $60,000 and retiring after 21 years of service receives 43.3 percent of that salary in annual pension benefits in California as compared to 29.2 percent in New York and 20.8 percent in Florida.

Closer to home, the City of San Diego’s recent pension fund travails earned national notoriety.  Earning the moniker of “Enron-By-The-Sea.” Yet, inspite of San Diego’s national notoriety, Orange County’s unfunded pension liabilities are roughly equal.

In 2004, San Diego had pension fund assets of $2.6 billion and liabilities of $4.0 billion, leaving a deficit of $1.4 billion.  That put San Diego’s asset-to-liability ratio at 66 percent.  Orange County’s pension fund assets are $5.2 billion and it’s liabilities $7.5 billion, putting its asset-to-liability ratio at 69 percent.

Put another way, Orange County’s pension fund liabilities exceed assets by 31 percent, roughly comparable to San Diego’s 34 percent shortfall.

In dollar terms, Orange County’s pension fund deficit is $2.3 billion ($5.2 billion less $7.5 billion).  This staggering amount is roughly equivalent to the county’s annual General Fund and Four times greater than its General Purpose revenue.

Several caveats are in order here.  Pension fund deficits also depend on the expected rate of return in the various funds’ investment pools.  So a fund with an actuarial assumption of 7.5 percent, like Orange County’s, is slightly more conservative than one at a higher rate, like San Diego’s, at 8.0 percent.  But the risk-return profiles of each of the pools also may differ.  In the end, comparing funding deficits, as we have done here, is the best barometer available.

It should also be noted that the Orange County pension-fund deficit doesn’t include the deficits that are likely to exist in the cities within the county.  Nor does it include underfunded retirement health benefits in the county and cities—a problem that is potentially larger than the underfunded pension problem, especially given the rapidly increasing costs of health care.

It could have been even worse for Orange County.  Like many other state and local governments, Orange County has used pension obligation bonds (POBs) to fund its future obligations.  In an Enron-like off-balance sheet shell game, governments are allowed to add the proceeds of the POBs to their pension fund assets but not to its liabilities.  Orange County recently paid off $320 million in POBs through funds received from bankruptcy-related lawsuits against the county’s former financial advisors.

So if you’re wondering where those funds were spent, they didn’t go to streets and schools but to the pension fund.  Excluding this $320 million lawsuit payoff, the county’s pension-fund liabilities would have exceeded its assets by 34 percent, the same as San Diego.

How did we get into this fix?  Basically, elected officials across the nation, but particularly in California, succumbed to political pressure by public-employee unions to increase pension benefits substantially.  Many of these increased benefits were even made retroactive with no fiscal mechanism in place to fund them.

In addition, governments had contribution holidays, where they reduced their contributions to pension funds when investment earnings were high, as they were during the dot-com craze.  Now that investment earnings have plummeted, governmental contributions have had to increase sharply to make up the difference.  These increased pension contributions constitute a sharply higher relative share of public spending, squeezing out other types of social spending. 

What to do?  Here are some possible solutions that relate not only to Orange County but to all state and local governments:

·         Require full funding of any new retroactive benefits the day they become effective.  The state of Georgia does this.  Not surprisingly, Georgia’s pension plan is fully funded.

·         Put an end to contribution holidays by escrowing state contributions during good years to offset lean investment years.

·         General obligation bonds require voter approval.  Retroactive pension-benefit increases should, too.  San Francisco, which is both a city and a county, requires it, and its plans are fully funded.  Evidently, “conservative” Orange County can learn from “liberal” San Francisco.

·         If benefits creep up due to generous cost of living adjustments, then a cap can be placed on these COLAs.

·         The retirement age when benefits kick in can be increased.  This is an approach being considered in Britain by Prime Minister Tony Blair.

·         Perhaps the best and most logical solution is to do what private firms increasingly are doing, namely replacing defined benefit plans with defined contribution plans, like 401-k’s, for new hires.  This wouldn’t solve the mismatch between liabilities and assets for current public workers, but it would slowly make costs more predictable over the long term.  That’s why Governor Schwarzenegger advocated such reform.  He derailed it because his initial plan unintentionally cut survivor benefits for police and firefighters.  A revised version of it may be back as soon as next June’s primary election.

But we don’t have to wait until then.  Something can also be done Tuesday by voting yes on Proposition 75.  Public-employee unions have become too politically powerful because they have union dues at their disposal to throw at lawmakers who vote their way.  Not all union members support pension plans that ultimately are fiscally unsound. 

Let’s give union members some relief by requiring their approval before union dues are spent on political causes.

The pension problems facing almost all state and local governments can no longer safely be ignored. 

Short-and long-run strategies must be pursued immediately to resolve a funding crisis that, left unchecked, will inevitably lead to higher taxes, fewer government services and even worse – municipal bankruptcies.

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