MOORLACH UPDATE — Pension Efforts — January 28, 2011

The Appellate Court ruling on the County’s retroactive pension benefits case is still in the news.

The OC Register, in its second editorial, encourages the Board of Supervisors to take it to the California Supreme Court.  One clarification:  It is not my understanding that the retirement enhancement was also granted to retired public safety employees.  If so, why wait until the effective date of the implementation of the new benefit to retire?

The Los Alamitos-Seal Beach Patch and the Los Angeles Daily News printed the City News Service’s coverage of the case.  One clarification:  the County has not been told that we would not succeed by three law firms that we retained.

Bloomberg News provided a thorough review of the County’s pension-related activities.  And the LOOK BACK provides additional information on the topic.

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Editorial: Continue fight against retroactive pension spike

On Wednesday, a Los Angeles-based state appeals court ruled against the Orange County Board of Supervisors in their battle to reverse an earlier board decision awarding retroactive pension benefits to sheriff’s deputies. While the ruling is a setback for the current board and for pension reform, the supervisors should continue the battle – to the California Supreme Court – to end the retroactive pension boost.

Five different supervisors voted in 2001, wrongly in our view, to include past service when boosting pension benefits for public safety workers. The retroactive benefits were conferred upon public safety officers and retired public safety employees in 2002. Basically, the decision gave workers a raise for work they had already done and, in doing so, placed a new $100 million burden on taxpayers. A subsequent group of supervisors, led by John Moorlach, sued to undo the retroactive portion of the pension increase, saying it amounted to an illegal gift of public funds.

A trial judge in Los Angeles tossed the suit nearly two years ago. The supervisors’ appeal of that ruling was rejected by the 2nd District Court of Appeals: "The county emphasizes its current difficult financial situation and the ‘ruinous fiscal irresponsibility’ of the prior board of supervisors."

"Imprudence, however, is not unconstitutional," the appellate court said.

Basically, the court held that future generations of taxpayers are on the hook for poor decisions made by past elected officials.

Attorney Harold Johnson of the Pacific Legal Foundation, which filed a brief in support of the county, said in a statement, "The state Constitution says voters should have a say before being saddled with big multiyear financial liabilities. In Orange County, voters were denied that right when new retroactive pension goodies were showered on favored public employees, and that fundamental right was diluted again, with [the appellate court’s] ruling."

The ruling is a victory for the Association of Orange County Deputy Sheriffs, the deputies union, and a loss for county taxpayers. The supervisors ought to continue the fight.

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Daily News

Appellate court throws out Orange County’s effort to roll back pension benefits

SANTA ANA – An appellate court panel today threw out Orange County’s lawsuit seeking to roll back some pension benefits for sheriff’s deputies and District Attorney’s Office investigators.

The unanimous decision of three justices could mean the county is on the hook for $100 million to $500 million more in pension benefits in the coming years, said Orange County Supervisor John Moorlach, a critic of the pension plan approved by the Board of Supervisors in December 2001.

"I hope my colleagues will vote to file an appeal with the state Supreme Court when we meet to discuss it on Feb. 8," Moorlach said.

The Association of Orange County Deputy Sheriffs, the union that represents deputies, hailed the ruling, noting it was the third time in two years the courts have rejected the county’s efforts to overturn the increased benefits.

"After three strikes, the county is out," said association president Wayne Quint.

"We hope the Orange County Board of Supervisors 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. They can’t win.

"They have been told this by three different law firms and four judges in two different courts. If they don’t realize it at this point, they are in major denial. How much more apparent can it be that they have no legal argument?"

The association claims the county has spent nearly $2.23 million on the litigation.

"I don’t know if it’s that high, but if I can invest $2.3 million and get more than $100 million in savings then that’s worth pursuing," Moorlach said. "And it might be an investment that saves a lot of money for other municipalities."

At issue is the so-called 3 percent at 50 formula, which means the law enforcement officers receive 3 percent of final compensation, multiplied by the number of service years, for employees who retire when they are 50 years old.

The Orange County supervisors upped the benefit from 2 percent at 50 in 2001. But in 2008 board comprised of a different group of supervisors changed their minds about the benefit as actuaries predicted hundreds of millions of dollars in future obligation.

The county’s lawsuit sought to overturn the 3 percent at 50 formula with a claim that only voters could approve by a two-thirds majority future debt more than $100 million. The lawsuit asserted that the board’s vote violated the state’s constitution.

However, the ruling — written by Second District Court of Appeals Associate Justice Jeffrey Johnson, with Presiding Justice Robert Mallano and Associate Justice Victoria Gerrard Chaney concurring — said the board’s vote to sweeten the pension benefits did not amount to a gift of public money.

Johnson’s opinion also said the estimates of future debt are not certain since they are based on the predictions from actuaries.

Moorlach scoffed at the opinion.

"It’s kind of an interesting argument that retroactive benefits are [a] (sic) vested right, but not a debt. I don’t know how you make that kind of argument," Moorlach said.

"If you create a new debt and it cannot be paid in that year you create it then you have to go to the voters for approval and that was not done."

The county is objecting to the retroactive raises and is not contesting the increases from the date it was approved in 2001, Moorlach said.

"At the end of the day this has to be resolved and either we all have to suck it up and pay these outrageous benefits or we clean it up and pay what’s really due," Moorlach said.

If the county cannot meet its obligation with the pensions then it could lead to layoffs and other significant budget cuts, Moorlach said.

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Orange County Considers $320 Million Pension-Note Sale to Itself

By Michael B. Marois

Orange County, California, which suffered the biggest municipal bankruptcy in U.S. history, may borrow as much as $320 million from itself to pay pension costs as its expenses for retiree benefits balloon.

The plan is to sell taxable pension-obligation notes maturing in about 16 months to the Orange County Investment Pool, Chief Financial Officer Robert Franz said. The proceeds would allow the county to make its annual pension fund payment ahead of schedule, qualifying for a discount of as much as 7.75 percent, according Board of Supervisors documents.

Orange County, which sought protection from creditors in 1994 after a wrong-way bet on interest rates, is facing a shortfall of $3.7 billion in its $10 billion pension fund after benefit increases and investment losses during the recession. Its $6 billion investment pool is managed by the county treasurer.

“When you think of the concept of borrowing from ourselves, we ask, ‘Why not?’” Supervisor John Moorlach, a former county treasurer, said yesterday in a telephone interview. “Who’s a better credit than yourself?”

Local-government investment pools are used by states, counties and cities across the U.S. to put to work cash kept on hand for agencies such as sewer districts and schools. Orange County’s pool lost $1.7 billion when then-Treasurer Robert Citron made a wrong-way bet on derivatives. Since then, the county has adopted rules forbidding the pool from investing in such risky securities.

Proceeds from the sale would pay for one year’s worth of the pension’s unfunded liability — which occurs when a its total value falls below projected long-term obligations to pay benefits — as well as the county’s annual employer contribution to the Orange County Employees Retirement System, Franz said.

Pension Discount

The pension fund offers the county a discount for paying in a lump sum at the start of the period, rather than monthly installments. That discount could save the county about $21 million before interest costs, according to county figures.

The note sale could come in March, if supervisors approve, Franz said. It would mark the county’s third short-term pension note offering. In 2006, Orange County sold itself $106 million of taxable notes with an interest rate equivalent to the London interbank offered rate plus 0.15 percentage point. In 2007, the county sold $212 million at an interest rate of 5.38 percent.

“Rates are historically low right now, although they’ve bumped up a little bit, but they are still pretty low so we think it’s a good time,” Franz said. “We don’t expect that to change dramatically between now and March.”

Interest Taxed

Interest income on municipal pension bonds is subject to federal income tax because the debt finances purchases of stocks and bonds rather than public projects such as construction of roads and schools.

A California appeals court ruled Jan. 27 that retroactive increases in retirement benefits for Orange County deputy sheriffs in 2001 didn’t violate the state’s constitution. The county board sued in 2008 to overturn the increase.

The court upheld a lower court’s 2009 decision that the retroactive part of an enhanced formula for calculating the deputies’ retirement benefits didn’t violate a California prohibition against municipalities increasing their debt or liabilities without voter approval.

The county’s board of supervisors in 2009 approved a two- tier pension system that allows new employees to choose between a traditional pension or a (401)k-like plan with county matching funds that requires more years before retiring with a lower payout.

That plan has been on hold, however, because of concerns that it jeopardize the tax-exempt status of money deducted from all county workers’ paychecks for retirement accounts. The county is waiting on word from the U.S. Internal Revenue Service before implementing the new system.

To contact the reporter on this story: Michael B. Marois in Sacramento at

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

FIVE-YEAR LOOK BACKS

January 28

2006

In an amazing twist of fate, or just a curious coincidence, The Wall Street Journal’s Stan Rosenberg covered our efforts to issue a note to prepay the pension plan in “Orange County, Calif., Is Buying Own Note to Save on Pensions.”  This was an endeavor that I pursued in January 2006 to save the County money.  We did it again for the following year, but have not done it since.  The Board approved doing it again this year, see the Bloomberg News article above.  (I had the privilege of meeting Stan Rosenberg in person last October when I spoke at The Bond Buyer Conference in San Francisco.)  When AOCDS complains about the cost of the retroactive litigation, remind them that I worked hard for a $4 million savings five years ago (and I can provide a longer list of savings, if needed).

                If you are a municipal government looking to save money on your pension costs, you might want to have a  look at Orange County, Calif., bonds.

                The county, which in 1994 filed for the largest municipal bankruptcy ever, on Friday priced a $117 million private placement of taxable notes.

                The buyer was Orange County’s treasury, which is purchasing the notes for its own investment pool.

                The deal resulted from an agreement with the Orange County Employees’ Retirement System, which offered the county a 7.5% discount for advance payment of half its fiscal 2007 annual pension contribution, county treasurer John M. W. Moorlach said.

                “Basically, it’s a prepayment opportunity,” that will save the county about $4 million, which is money ti can use to address other cost issues, he said.

                The notes will mature in 2007, on June 30, the end of the fiscal year, but will contain a feature allowing them to be sold back to the county in 13 months, Mr. Moorlach said.  In that case, the county’s liability would be about $50 million, but “it would have available reserves to honor that,” he said.

                A summary of the finance plan circulated by the county indicated it had explored other options for financing the prepayment.  It said, however, that the use of cash reserves “would reduce liquidity below comfortable levels” and that interfund borrowing would have to be repaid within the same year.

Initial thinking estimated the notes might be priced at 0.20 to 0.35 percentage point above the one-month London interbank offered rate, but they were priced Friday at 0.15 percentage point over Libor, based on a recommendation by financial adviser Kelling, Northcross & Nobriga, based in Oakland, Calif.

Friday, one-month Libor was roughly 4.57%, producing an initial rate of about 4.72%.  That rate will be reset monthly.

Because the deal is strictly an internal transaction, no underwriter was required, Mr. Moorlach said, adding that his costs are being held to a financial adviser, bond counsel and the price of ratings.

The notes will be funded Monday, and the entire amount turned over to the retirement system immediately instead of making payroll period payments every two weeks.

The notes received Moody’s highest rating for a taxable short-term security, P1.  Standard & Poor’s assigned its highest short-term rating of SP-1-plus and a commercial paper rating of A1, reflecting the Feb. 28, 2007 put feature.

           

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