MOORLACH UPDATE — Appellate Court Decision — January 27, 2011

Yesterday, the Court of Appeal of the State of California, Second Appellate District, Division One, came to the conclusion that “the past service portion of the enhanced retirement formula does not violate the Constitution.”

In what I would call an opinion with a strong predisposition, the Court stated that the calculation to determine the unfunded actuarially accrued liability (UAAL) is not “a legally binding debt or liability;” its use is only to determine the contributions necessary to fund the pension system.  It even concludes that the “UAAL is not created at the time of the award of enhanced benefits, but occurs over years.”  Consequently, the debt-limitati on in the Constitution does not apply.  I’m an accountant, but I’m not so creative of an accountant that I can make a debt disappear.  For the CPAs that may be reading this, it gets better.  One footnote in the opinion reads “The Accounting Professionals also state that they agree with invited comments which support changing the GASB rules to require reporting the ‘unfunded accrued benefit obligation . . . on the face of the financial statements to measure the annual cost of pension benefits earned and the demands on future cash flows.’  This is simply a suggested change to future accounting standards, however, and does not support a conclusion that the board’s action in 2001 created a liability under the then-existing standards.”

The debt-limitation is one of two areas the County addressed in its filing.  If one of the two areas is unconstitutional, then the granting of retroactive benefits is unc onstitutional.   Trying to make a debt go away, but require that the obligation still be paid, is hard to reconcile.  I can only hope that the State Supreme Court accepts the case and state constitutional experts give it a hard look.

For many years, I have been praising the State of Georgia and its defined benefit (DB) pension plan.  DB plans can serve as a useful retirement planning tool if they are not abused.  Georgia avoided DB abuse with a simple tactic:  If you improve the benefits, then the UAAL that the improved benefit creates must be paid, in full, on the date that the improvement becomes effective.  Paying cash up front is a difficult proposition in most instances.  Consequently, Georgia did not implement too many improvements, mid-course, to its DB plan.  Accordingly, the Georgia DB plan has a long history of being fully funded or close to it.&nbsp ; Now I have a Court that is telling me that new benefits don’t create an immediate UAAL.  It’s a good thing some bright minds didn’t come to that conclusion in Georgia.   

Now we have a $3.8 billion UAAL and we’re paying more than $300 million a year to feed it.  The 1994 Board of Supervisors is to be held accountable for the county’s bankruptcy.  Supervisors Riley, Wieder, Steiner, Stanton and Vasquez will have to carry the burden of giving the residents of Orange County a $1 billion debt that we’ve been paying some $90 million a year on since 1995.  The 2001 Board of Supervisors, Smith, Wilson, Silva, Coad and Spitzer, have left us with a similar obligation.  A debt where we have nothing to show for and, in this case, no compelling argument that our residents are safer for having unanimously voted for a 50 percent benefit en hancement in a simple bargaining unit reopener.

In 1997 deputy sheriffs from Ventura County won a major increase in a “compensation earnable” case in the California Supreme Court.  It’s known today as the Ventura County decision.  Prior to the Supreme Court ruling, it lost initial battles in Superior Court and in the Court of Appeals.  I can only hope that Orange County’s case has a similar conclusion.

The topic is covered below by the Voice of OC, Bloomberg and the OC Register.

I also have a bonus article from Harold Johnson of the Pacific Legal Foundation.  Harold is a former editorial writer for the OC Register and is now a successful attorney for the Pacific Legal Foundation.  Harold has been watching our efforts closely and has an interesting a nalysis.

Image001

Appellate Court Rejects Orange County’s Retroactive Pension Case

The 2nd Di strict Court of Appeal Wednesday rejected Orange County’s argument th at the 2001 granting of a retroactive pension benefit to sheriff’s deputies both violated the California constitution and amounted to an illegal gift of public funds.

The 3-0 ruling of the appellate judges came just one week after arguments were heard in a Los Angeles courtroom. It is now up to the county Board of Supervisors to decide whether to take the case to the state Supreme Court.

"We hope the Orange County Board of Super visors now come to their senses and realize what we, and their attorneys, told them four years ago — they are wrong on the facts and wrong on the law on this one, said Wayne Quint, President of the Association of Orange County Deputy Sheriffs in a news release.

The court also awarded the deputies union their costs for the appeal. All told, the suit, which was first filed in 2008, has cost county taxpayers $2.3 million, according to the union.

Supervisor John Moorlach, the driving force behind the case, took the defeat in stride, saying that it has been assumed all along that the case would go to the Supreme Court.

"I think we will get better scholarship at the Supreme Court level," said Moorlach early Wednesday afternoon. Moorlach, when reached, said he had not had a chance to read the appellate ruling.

The county contends that the 3 percent-at-50 pension enhancement given to deputies violated constitutional provisions on how much debt a county can take on and was essentially and illegal gift to deputies.

The enhancement gives deputies who retire at age 50 or later 3 percent of their final year’s pay times the number of years they worked. Previously it was 2 percent.

The county has estimated that a victory in the case would save taxpayers $187 million in pension payouts.

— DAVID WASHBURN

Image002

Orange County, California, Retroactive Pensions Allowed by Court

A 2001 retroactive increase in retirement benefits for deputy sheriffs in Orange County, California, didn’t violate the state’s constitution, a state appeals court ruled in dismissing a challenge by the county.

The California appeals court in Los Angeles, in a unanimous decision yesterday, upheld the 2009 finding by a judge that the retroactive part of an enhanced formula for calculating the deputy sheriffs�����續蜥纃緕�矼鈬肅��蜆�ぢ’t violate a California prohibition against municipalities increasing their debt or liabilities without voter approval.

Orange County sued the board of the county’s retirement plan in 2008, saying the retroactive part of the 2001 increase, approved by the county’s board of supervisors then in office, was unconstitutional. Under the changed formula, the deputy sheriffs are entitled to 3 percent, instead of 2 percent, of their final compensation for each year they worked when they retire at the age of 50.

The enhanced formula also applies to years they worked before 2001. The county claims its former board of supervisors created a $100 million liability with the past-service part of the enhanced retirement benefits that has since grown to about $187 million.

“The county emphasize s its current difficult financial situation and the ‘ruinous fiscal irresponsibility’ of the prior board of supervisors,” the appellate panel said. “Imprudence, however, is not unconstitutional.”

The 50 percent retroactive pension-benefit increase turned a fully funded pension fund into one that is only two-thirds funded and created an enormous amount of debt for the county, John Moorlach, vice chairman of Orange County’s board of supervisors, said yesterday in a telephone interview.

“We always assumed that this may go to the Supreme Court level and we hope that is a venue that might be available to us,” Moorlach said. “This has to be resolved.”

The case is County of Orange v. Associa tion of Orange County Deputy Sheriffs, B218660, California Court of Appeal, Second Appellate District (Los Angeles.)

–Editors: Peter Blumberg, Mary Romano

To contact the reporter on this story: Edvard Pettersson in Los Angeles at epettersson@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

Image003

Tony Saavedra, Reg ister investigative reporter

The state Supreme Court may be the next battleground for the county of Orange, after an appeals court refused Wednesday to overturn the county’s generous “3 percent at 50″ pension plan for sheriff’s deputies.

Justices for the Second Appellate District in Los Angeles sided with the sheriff’s union, agreeing that the pension plan’s benefits did not violate the state constitution. The decision leaves the county on the hook for millions of dollars in long-term retirement debt.

“The County emphasizes its current difficult financial situation and the ‘ruinous fiscal irresponsibility’ of the prior board of supervisors,” said the 29-page appellate opinion.

“Imprudence, however, is not unconstitutional.”

The county has been suing to roll back a pension plan that officials say guarantees deputies who retire after 30 years nearly 90 percent of their salary at age 50.

Supervisor John Moorlach has spearheaded the fight to undo the pension liberalization approved by a previous board. He said Wednesday that the fight could be headed to the state Supreme Court.

“My thought was that it would always go to the Supreme Court,” Moorlach said. “A debt was incurred without the vote of the people. The fat lady hasn’t sung.”

The county’s lawsuit was thrown out in February 2009 by a Los Angeles Superior Court judge. The county appealed.

The county has spent $2.26 million as of July 2010 pursuing the lawsuit, according to documents provided in response to a California Public Records Act request.  But winning the lawsuit could save the county as much as $500 million, Moorlach has said.

The Board of Supervisors says that granting retroactive benefits violated state law, because retired public safety employees were paid extra compensation for work they had already performed. The county also argues it was illegal, because it spent money without voter approval.

Three different outside law firms hired by the county warned it could not win such a case.  The county sued anyway.

BONUS

Image004

Giant pensions and giant slaloms

Author: Harold Johnson

Well, that was quick.  Only a week after oral argument, yesterday the Calif. Second District Court of Appeal ruled in the Orange County "retroactive" pension case.  The three-judge panel unanimously rejected the county supervisors’ challenge to the whopping retirement benefit increases that their predecessors, in 2001, had showered on public safety employees, for work already performed under a previously agreed-to pension package.

PLF and the Fullerton Association of Concerned Taxpayers weighed in against the constitutionality of the benefit bonanza, and while our arguments may have been rejected they were not refuted.

Indeed, you have to run a slalom course around the case law to exclude these pension hikes from the requirement for voter approval of local-government debt.  The cou rt stressed that past cases applying the right-to-vote-on-debt r ule have dealt with different facts.  Well, yes, but the underlying dynamic is the same: taxpayers are faced with a long-term financial liability.  That’s what counts, that’s why taxpayers deserved to say yes or no to the increases — and the state Constitution (article XVI, Section 18) guarantees them that right.

By boosting pension benefits for employees’ work in the past, the county created an immediate multi-year debt for taxpayers – – just as in the case of bonds or a purchase agreement for a building or a park.  The legal precedents also say, explicitly, that you don’t have to be able to precisely measure the amount of the liability in order for the voter-approval requirement to kick in.

The state Constitution gives voters a say before they can be saddled with this kind of long-term obligation.  In Orange County, voters were denied that right when retroactive pension goodies were&n bsp;larded out to favored public employees, and that fundamental right was diluted again with yesterday’s ruling.

 

With governments up and down California submerged in red ink, in large part because of reckless pension promises like those in Orange County, this would be an appropriate case for review by the state Supreme Court.  The constitutional and financial implications are that profound.

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). 

&nbsp ;

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