MOORLACH UPDATE — Newport Beach Independent — September 16, 2011

Tony Saavedra and Jon Cassidy of the OC Register did an incredible amount of research concerning the current financial status of every city in the County (see http://www.ocregister.com/news/million-312708-cities-city.html).  Every municipality has to prepare a Comprehensive Annual Financial Report (CAFR).  You should be able to find the June 30, 2010, CAFR on your city’s website.  In order to keep your research simple, refer to the Basic Financial Statements.  Then, proceed to on or around Footnote 10 in the Disclosures to find the unfunded balances for the city’s pension (most commonly with the California Public Employees’ Retirement System – CalPERS) and retiree medical.  The data for CalPERS is a year old, using data from June 30, 2009.  Cities usually do not retain an actuary to determine the unfunded retiree medical liability on an annual basis, so the data presented may actually be a year or two old.  However, the data should be there in some form or available from the city’s Finance Director.  Tony and Jon even obtained more recent numbers from CalPERS, which reflects the unfunded actuarial accrued liability (UAAL) at market value.  CalPERS uses smoothing techniques that provide for UAALs that may be lower than what is reflected by the actual fair market values of the plan’s assets (if the asset market values are lower, then the UAAL is higher).  In order to provide a more accurate reflection of true liabilities at a moment in time, defaulting to the OC Register’s methodology is probably the most appropriate approach.  Combining the UAAL for both the pension (at market value) and the retiree medical gives you what the OC Register refers to as the “Total pension liability” in their graph below.  What does this number mean in relation to other cities?  One understandable measurement would be to divide the total UAAL by the official census population count of a city to determine a per capita cost.  The graphic below from the OC Register provides this data by city in alphabetical order.

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Jack Wu, a guest editorial writer for the NB Independent reviewed the numbers in sequential order, with the highest per capita liability going to the city of Newport Beach.  Using that approach, here’s how the 34 cities in the OC are ranked:

1     Newport Beach

                              $3,551

2     Brea

                              $2,963

3     Laguna Beach

                              $2,468

4     Costa Mesa

                              $2,383

5     Anaheim

                              $2,308

6     Huntington Beach

                              $2,005

7     Santa Ana

                              $1,927

8     Fountain Valley

                              $1,835

9     Orange

                              $1,730

10   Fullerton

                              $1,644

11   Westminster

                              $1,437

12   Garden Grove

                              $1,335

13   Los Alamitos

                              $1,216

14   Placentia

                              $1,072

15   La Palma

                                  $988

16   Tustin

                                  $955

17   Buena Park

                                  $943

18   La Habra

                                  $892

19   Cypress

                                  $847

20   Seal Beach

                                  $826

21   Irvine

                                  $746

22   San Juan Capistrano

                                  $500

23   Yorba Linda

                                  $476

24   San Clemente

                                  $262

25   Stanton

                                  $256

26   Mission Viejo

                                  $226

27   Dana Point

                                  $212

28   Villa Park

                                  $165

29   Laguna Hills

                                  $118

30   Laguna Niguel

                                 
$107

31   Lake Forest

                                  $104

32   Rancho Santa Margarita

                                    $77

33   Laguna Woods

                                    $60

34   Aliso Viejo

                                    $34

As you can see, the newer cities have lower combined UAALs.  Cities that contract with the Orange County Sheriff’s Department (OCSD) and/or the Orange County Fire Authority (OCFA) do not have their representative UAAL on their books; this debt is carried by the County of Orange and/or the OCFA.  Consequently, full service cities (those with their own police and fire departments) are higher up on the list than contracting cities.  The older the city, the more likely that it will have more retirees and be closer to the top of the list.  Newport Beach celebrated its centennial in 2006 and Huntington Beach did in 2009.  By comparison, Laguna Woods incorporated in 1999.  The overall UAAL city-weighted average per capita is $1,408.

This is data that is available to the public.  Unfortunately, the Government Accounting Standards Board only requires that it be mentioned in a footnote disclosure and not the balance sheet!  Hopefully, this accounting faux pas will be corrected soon.  It is similar to the man who marries a woman and after the wedding she informs him that she has $100,000 in credit card debt.  When he asks why she didn’t mention it while they were dating, she responds with “well, you knew I had credit cards in my wallet.”  The moral of the story is that cities have massive debts that are not being carried in the liability section of their balance sheets and the media is figuring out this major oversight and lack of transparency.

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We’re No. 1!

Jack Wu

In the spirit of all the kids going back to school, I would like to share a couple of things I remember from Grade School:

  1. It’s pretty cool to be No. 1.
  2. Don’t worry about what others think of you. Just be yourself.

So how does that apply to Newport Beach? Well…in an Orange County Register study based on of the 2010 CalPERS Annual Financial Report, Newport Beach is No. 1 in the Per Capita Ranking for Unfunded Pension Liability!

Yeah!

Right!?

Newport Beach has 85,376 residents. Newport Beach has $303,170,402 (as of June 30, 2009, for the pension numbers and 2010 for retiree health insurance pensions) in unfunded pension liability. This means that Newport Beach has a per capita unfunded pension liability of $3,551.

In comparison, neighboring Costa Mesa has 110,146 residents with $262,531,311 in unfunded pension liability, which gives each resident a $2,383 share.

In FUTHER comparison, Democrat-led Irvine (Costa Mesa and Newport Beach have had Republican majorities on their City Councils since the beginning of time) has 219,156 residents and $163,579,542 in unfunded pension liability, which gives each of its residents a $746 unfunded pension liability tab.

Now to be fair, Irvine doesn’t have a beach, nor do they have their own Fire Department, so any full-time lifeguards that Irvine may have for their City pools won’t receive lifetime pensions of over $100K a year for the rest of their lives, after being able to retire at age 50 …

So do those numbers above give you pause? It surely did County Supervisor John Moorlach, who in a recent opinion column used Newport Beach as an example to demonstrate how the County of Orange will probably go bankrupt again.

Moorlach essentially pointed out that Newport Beach barely has the money to cover just its Pension Liability debts, if they were all due today (which they aren’t). What Moorlach didn’t mention (which wouldn’t have made a difference to his editorial) was that our Taj Mahal/Civic Center will add almost $150 million to our balance sheet, essentially meaning that if all Newport Beach’s debts came due today, the debtors would just be looking at our empty pockets…kinda like the US of A, right?

Long story short, while others have been trying to convince me that Newport Beach is in great financial shape…with the City in Hundreds of Millions of dollars in unfunded pension debt and with City Employees soon to be filling up a new Taj Mahal leaving the City in another $150 million in debt…I don’t feel soo good anymore…

So…what has Newport Beach done to reverse the trend? Well, they’ve started to re-negotiate some of those lucrative pension deals that the full-time Lifeguards get. They’ve started the process of getting rid of City Employees and replacing them with contractors (parking meters for example).

That’s a start, right?

But how well will that trend work after the Taj Mahal (City Hall/Civic Center) opens with all kinds of empty offices? When a new Police Station is built? Won’t that natural temptation to fill those offices with some more civil servants be too great?

But I suppose time will tell. Most of the current City Councilmembers (a majority of whom will have been on for over a decade each) will be terming out of office within the next four years, so they won’t have to deal with all that debt when the bells toll.

All the while, the rest of the County will continue to point at Newport Beach as the shining example of grand self-indulgent decadence with our new shiny Civic Center and will continue to use Newport Beach as the cautionary tale in regards to our overwhelming Unfunded Pension Liabilities, unless something REAL is done to correct the ship.

But at least our Councilmembers vehemently, and blindly, defend their positions by not worrying about what others think of us, so at least they paid attention to those lessons during grade school.

I, on the other hand, believe in what I can touch and what I can see. And all I see is red…but at least we are No. 1 at something, right?

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