MOORLACH UPDATE — Roll Backs — December 11, 2010

Sometimes my search engines do not find every article and I find them on my own when I read my newspapers.  That is what occurred with Thursday’s weekly Huntington Beach Independent.  It covered Wednesday’s OC LAFCO meeting.  The formalities of annexing Sunset Beach into Huntington Beach have been concluded.  All that is left is the potential litigation.  Originally it appeared that Sunset Beach would not be subject to the utility users tax (UTT) and other ancillary taxes unique to Huntington Beach.  However, the City’s Counsel opined, late in the game, which the residents of Sunset Beach would be subject to these taxes.  That’s the bad news.  The good news is that the same residents were willing to annex into Seal Beach, which has a much higher UTT, or incorporate, which would have required an even higher UTT.  This wonderful little island will now be nested with Huntington Beach.  Balboa Island is still Balboa Island, even though it is nested in Newport Beach.  Sunset Beach will always be Sunset Beach.  It is the first piece below.

Then there are times when something will appear on a media website before it is printed in one of their upcoming editions.  This is the case with the editorial submission I made to the OC Register.  The joy of being a County Supervisor is trying my best to work with my colleagues and County management to downsize in this current economy, something I’ve been pursuing since I was sworn in four years ago.  Orange County and its public employee unions have been doing an excellent job of gliding down on our annual spending.  In fact, we are a model for neighboring municipalities and our own exiting Governor pursued strategies that we initiated.  Unfortunately, after all we’ve struggled to accomplish, it is not nearly enough.  The continuing rise in the costs of defined benefit pension plans is choking us out.  I try to communicate this in the second piece below.  You’ll get to enjoy the unabridged version early.  (I’ll get to spend part of today trimming the word count down for the OC Register’s Orange Grove for Tuesday morning.)

BONUS:  The Chapman University’s Economic Forecast Conference was held on Monday, December 6th.  The handout included the joint editorial that I did five years ago with James L. Doti, Ph.D., President and Donald Bren Distinguished Chair of Business and Economics (see MOORLACH UPDATE — Enron-By-The-Sea — November 6, 2010).  Thanks to Rick Muth, who attended the conference, for letting me know about the most recent edition of the “Economic & Business Review.”  The piece, titled “The County’s Looming Pension Crisis,” had the following introduction:

                The following article appeared five years ago in the Sunday, November 6, 2005 edition of The Orange County Register.  It was also reprinted in the December 2005 volume of this Review. 

In spite of the passage of five years, this article is as relevant today as it was back then.  The sad thing is that as prescient as the authors were in identifying the dangerous underfunding of the state and counties’ pension obligations, nothing has been done.  Not only has the problem reached crisis proportions, it has become a national rather [than] simply a local issue.  We reprint this article because the proposed solutions by Dr. Doti and Mr. Moorlach are still timely.

If you would like a PDF copy of the column, please let me know.

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Commission approves annexation application

By Britney Barnes, britney.barnes@latimes.com

Huntington Beach was given the official green light Wednesday morning to absorb the small community of Sunset Beach.

The Orange County Local Agency Formation Commission, or LAFCO, unanimously approved Huntington’s annexation application of the 106-year-old community at a meeting in Santa Ana.

LAFCO’s approval came as no surprise after officials made clear they couldn’t deny the application under an island annexation, the process used for unincorporated areas smaller than 150 acres. LAFCO could only add terms or conditions, but didn’t impose any.

"The commission’s required to approve the city’s application at the end of the day," said LAFCO Atty. Scott Smith.

Some residents asked LAFCO to set down conditions protecting their right to vote or delay the decision until issues could be decided.

The community has been up in arms over the November revelation that Huntington Beach would levy the Utility Users Tax on residents post-annexation. Up until that point, both the city and LAFCO said no new taxes could be imposed on the community without a vote, which is impossible under the island annexation.

After litigation was threatened over Sunset residents gaining all the services of Huntington without paying their share, Huntington’s city attorney reviewed the laws surrounding annexation and determined all sections of the city have to pay the same taxes, officials have said.

LAFCO maintains that it can’t impose any new taxes without a vote, but said it also can’t tie the hands of future Huntington Beach City Councils, Smith said.

Huntington has the "ultimate disposition of that issue," he said.

Residents on both sides of the annexation issue asked LAFCO to protect their rights as Americans.

"We have been denied the right to vote on this annexation," said Larry Crandall, a 30 year resident. " We have been lied to regarding taxation by the very people in Huntington Beach who want to be our leaders and who have repeatedly told us to trust them that nothing will change."

Sunset Beach Community Assn. Vice President Mike Van Voorhis said there are legitimate legal issues, but asked LAFCO not to let it cloud the annexation and urged the commission to move forward.

LAFCO Commissioner Charley Wilson said the perception that Huntington Beach did a "bait-and-switch" at the 11th hour by deciding to impose the tax is "troubling."

"If I was sitting in Sunset Beach’s shoes, I’d be pretty upset too," he said.

Commission Vice Chairman John Moorlach, who is also the county supervisor for the Huntington and Sunset areas, said he is pleased that Huntington Beach has taken the imitative to annex the community.

"Things will dramatically improve for the people of Sunset Beach," he said, adding they will still be able to maintain their identity.

After the meeting, Huntington Beach City Manager Fred Wilson said the city is still planning on moving forward with levying the tax on the city.

Wilson said he thinks the residents will see a seamless transition to becoming part of Huntington and will continue operating as they have for the past 106 years.

While Huntington Beach has already approved a Sunset Beach Specific Plan that retains Sunset’s identity, for some residents, the process has already left the "community in a state of fracture," said resident Diana Dodson.

"The damage already done has shattered our community," she said.

The questions surrounding the taxation issue aren’t going away any time soon, residents said. The Citizen’s Assn. of Sunset Beach, a group of about 125 residents, will move forward with a lawsuit, said association President Jack Markovitz.

"We have the right as citizens to defend ourselves," he said. "Obviously, the government by the people for the people wasn’t working today."

The association’s lawyer, John McCarron, said the lawsuit could be filed within the week.

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John Moorlach: Pension formula for disaster

By JOHN M.W. MOORLACH

2nd District Orange County Supervisor

How do you downsize? How do you tell your employees that revenues are not enough to cover expenses? These sound like rhetorical questions, but some four years into this Great Recession many of us are still dealing with these two questions.

The Orange County Board of Supervisors on Tuesday will review its annual Strategic Financial Plan. Our county has been doing 10-year fiscal projections since our embarrassing bankruptcy protection filing in 1994. It is an excellent management tool. However, this year it tells us that the County of Orange is going to hit a wall. Why? Because our defined benefit pension plan is demanding ever higher annual contributions.

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County Supervisor John Moorlach is shown during earlier budget hearings.

Register file photo

The plight of facing higher pension plan contributions is occurring at the state, county and city levels. Over these past four years the same municipalities have been exhausting their reserves. California’s municipalities are now in a slow race to see who will be in bankruptcy court second, following the city of Vallejo.

A brief history finds that in the late 1990s the California Public Employees Retirement System found itself in great fiscal shape as a result of the "dot-com" boom effect on its equity portfolio. The board of directors of CalPERS should have had a discussion on how much of their equity portfolio they were going to sell off in order to capture profits.

Most people believe that yesterday will be tomorrow. If stocks are rising in value today, then they will also rise tomorrow. Sophisticated investors believe in cycles. If stocks are trading at multiples of earnings per share that are higher than their average, then that’s a sell sign. You need to get out before values decline, and your appreciation is lost.

The board of CalPERS entered into a different discussion. They reasoned that, since their performance had been so good, and it would continue tomorrow, the best thing to do would be to raise benefits. They encouraged Senate Bill 400, which started dramatic 50 percent increases of pension formulas and gave municipalities the option to make them retroactive to the date of hire.

Former O.C. boards of supervisors bought into the myth, and the county’s retirement system is, as a result, now two-thirds funded (which results from a 50 percent increase in liabilities). The Orange County Employees Retirement System has been in the top percentiles of investment performance. Accordingly, the truth facing municipal managers is that it is the formulas, not the investments, that are causing the ever-increasing contribution requirements.

What do we do? In the private sector, unsustainable traditional defined-benefit pension plans (employer guarantees benefits) have been frozen and converted to defined-contribution pension plans (the employee contributes and reaps the compounding benefits). Municipalities in California may not have this management tool at their disposal and cannot impose changes to existing pension plans.

California municipalities need to negotiate benefit changes. Orange County has been very successful in this regard the past four years. The Board of Supervisors has negotiated a reduction to the county’s retiree medical unfunded liability by 72 percent. New tiers for new hires were negotiated last year. We negotiated a concession with our deputy sheriffs requiring them to pay part of their employee portion through employee withholdings. No wage increases have been approved for the next three years.

Orange County has been a leader in this regard and established a model for Gov. Arnold Schwarzenegger to follow at the state level these past few months. These modifications are mandatory in this current economic climate and our negotiating partners are to be congratulated and thanked. However, with current national fiscal trends, it is not nearly enough.

We are still back to our original question: How do you downsize? We have two options. The best one is to negotiate with all of the county’s unions and ask them to revert back to their old pension formulas. The choice for union members is simple. Do you wish to cling to your Rolls-Royce pension benefit, not receive a pay raise for the next five to 10 years and risk layoffs of personnel? Or are you willing to adopt a true rollback, and receive a blended benefit, thus reducing the unfunded actuarially accrued liability and, consequently, reducing pension plan contributions, which will free funding up for cost of living pay increases?

The ball is in the unions’ court. Giving something up that you have is a very difficult thing to do. People feel entitled. They will scream that they negotiated it fair and square. A deal is a deal. A promise made is a promise kept. All great euphemisms, but economic realities have to be dealt with. Do we keep the current pension formulas? And these formulas are very high by any private industry standard. Or do we lay off a significant portion of our workforce?

When we have guests over for dinner at our home, my wife and I like to break out a table game called "Hare and Tortoise." A key strategy in this game is that of going backward in order to obtain enough resources to move forward. Sometimes in life you have to go backward to move forward. This is a mindset that has to be adopted by the public employee unions in this state. Not doing so will only lead to the inevitable: massive layoffs, pay cuts and possible bankruptcy work out plans.

It is time to negotiate sustainable defined-benefit pension benefits for all employees, not just the new hires. This requires trust, teamwork and leadership by union boards. The sooner this action is pursued the less long-term damage will occur.

If the public employee unions do not see the efficacy of this option, then the voters need to give municipalities a constitutional tool to implement a true rollback of pension formulas as a temporary but an emergency fiscal tool until the plans achieve a satisfactory funding level. This can be done through a statewide ballot measure effecting a constitutional amendment. The legal challenges will be time-consuming. But, with this race to insolvency, California and its municipalities need some relief.

It’s time for the public employee unions to see the fiscal cliff we are heading towards and continue their leadership at the negotiating table for the benefit of their members and the taxpayers of California.

FIVE-YEAR LOOK BACKS

December 11

2000

Danette Goulet of the Daily Pilot announced membership of the NMUSD Oversight Committee in “New faces dominate school board committee – Newport-Mesa district is moving closer to having oversight panel in place for spending of $163 million.”  The Orange County Treasurer’s office had an appointment, so I selected Costa Mesa resident Tony Choi.  Tony Choi was a manager in my former firm, Balser, Horowitz, Frank & Wakeling (now Ronald Blue & Co.).  Tony is now a partner in his own C.P.A. firm.

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