MOORLACH UPDATE — New Geography — September 4, 2013

The California Political Review has reprinted an editorial piece that was originally published in early 2010. It did not come up in my searches back then, so I’m providing it today as a great review of recent history in the life of our blue state.

Golden State No More

By Robert J. Cristiano

Editor’s Note: California Political Review has been following this situation for a few years now, and we are re-releasing past articles detailing the state’s challenges.)

The Golden State is not so golden anymore. California is broke. With a $20 billion dollar deficit and tax revenues down 27% from last year, Governor Schwarzenegger looks to Washington D.C. for a bail-out to rescue the state from financial ruin. Like the executive passing a beggar on a street corner, Washington looks the other way. Unemployment is statistically 12.3%, but functionally, it runs closer to 20% of the work force. Nowhere is unemployment more tragic than in the Central Valley, the fruit and vegetable producer of the world. The unemployment rate in arguably the most fertile land on the planet is near 30% as residents line up in bread lines to feed their families. How did this happen? What happened to the Golden State?

California is a victim of its own success.

For decades following WWII, people flooded into the golden state in search of weather, opportunity and the good life. California delivered. Under Governor Pat Brown in the 1960s, California had wonderful weather, plentiful water, new highways, and the best public school systems in America. Every student had access to a strong community college system and top students were guaranteed admission to the University of California. Agriculture, Hollywood, aerospace and construction provided more jobs than workers.

The 1970s brought harbingers of California’s future. The environmental movement muzzled a robust real estate industry with alphabet agencies like AQMD, CEQA, EIR and CCC. Building moratoriums raised home prices along the coast. Aggressive land use controls pushed development inland creating urban sprawl and long commutes as residents sought affordable housing inland. Governor Jerry Brown quipped, “If we do not build it, they will not come” and shut down highway construction, public school construction and added layers of new regulations. The people came anyway.

The collapse of the Soviet Union in 1989 dealt California a cruel blow. The peace dividend meant the end for many high paying aerospace jobs and defense contracts. The recession that followed was felt far deeper than in the rest of the country. California climbed out of its recession led by wave after wave of new millionaire software developers during the dot com revolution.

In 2001, the dot come bubble burst. The politicians in Sacramento, emboldened by an endless supply of money from the dotcommers to state coffers, spent over $100 billion while revenues fell to just $70 billion. They ran up a $38.2 billion deficit in 2002 under Governor Gray Davis – more than the other 49 states combined. The people recalled Davis in 2003 and replaced him with the Terminator, Arnold Schwarzenegger.

The politicians learned nothing.

California survived the bursting dot com bubble with yet another round of real estate escalation (the housing bubble) that lifted home prices by 20% per year. Spending escalated in line with home prices. More regulations were added to burden industry. Taxes were raised. Tuition increased. California added “The Global Warming Solutions Act of 2006” as if California alone could stem global warming. In response to 9-11, politicians passed SB 400, a feel good law that allowed cops and fireman to retire at 50. It was budgeted to cost “just $400 million” per year. Last year it cost $3 billion. Then, they passed SB183 the next year, applying the same benefits to non-safety state employees like billboard inspectors. When the housing bubble burst in 2007, California found itself with a $20 billion deficit – again.

This time, California will not climb out so easily. Federal regulators, implementing the Endangered Species Act that was invented in California, diverted water from the farms of the Imperial Valley to the ocean to protect the engendered Delta Smelt. This tiny fish, with no commercial value, threatens the well being of tens of thousands of agricultural workers and contributes to unemployment figures worse than the Great Depression. California’s schools now rank 49th in the nation. They no longer generate the brilliant minds that fueled past economies. California’s 11.6% income tax has forced many high income earners to no income tax states like Florida or Nevada. The housing industry that created 212,960 units in 2006 was only able to build 36,000 units in 2009.

Former state librarian and California historian Kevin Starr talks about the potential of California being the nation’s first failed state. John Moorlach, Orange County Supervisor says, “We better start talking about this. What are we going to do when the entity (state government) above us crumbles? I think we are already technically bankrupt.” He should know: Orange County went bankrupt in 1994. The City of Vallejo, population 120,000, was forced into bankruptcy in 2008 by commitments by its politicians to pay its City Manager $400,000 per year and its fireman an average of $175,000 annually.

The biggest obstacle facing California’s recovery is a dysfunctional pension system created by politicians indebted to the public employee unions. The pension obligation is now $17 billion per year. California has 260,000 state employees and 38,000 are paid more than $100,000 per year. The University of California employs another 250,000 and 19,000 are paid over 100,000 annually. These generous salaries have been converted into lifetime annuities. The Legislative Analyst’s Office estimates the unfunded pension obligations of California to total $237 billion. In an era of retiring baby-boomers, this trajectory is clearly unsustainable. With tax receipts down, huge pension obligations and a state budget deficit of $20 billion, the vast majority of municipalities in California are suffering deficits and facing the prospect of Chapter 9 municipal bankruptcy.

A train wreck is coming.

Schwarzenegger, once the Terminator but now a Termed-Out lame duck, told the Sacramento Press Club, “No single issue threatens the fiscal health of this state more than our exploding pension obligations. Over the last 10 years, our pension costs have gone up by 2,000 percent from $150 million per year to $3 billion a year (for state government workers). That means hundreds of billions in unfunded liabilities and it means the $3 billion we are spending now will go up to $10 or $12 billion.”

In October, state Treasurer Bill Locker told lawmakers they needed to reform the pension system or “it will bankrupt the state.” The California Public Employees’ Pension System chief actuary has described the current pension system as “unsustainable.” Adam B. Summers, a policy analyst at the Reason Foundation and author of “California Spending By The Numbers: A Historic Look At State Spending From Gov. Pete Wilson to Gov. Arnold Schwarzenegger” warns, “I think we are starting to approach a tipping point.”

Do the politicians in Sacramento want to do something about the train wreck that is coming? The answer as of now is clearly no. There is no evidence that they are willing to curtail spending and reform the pension laws that cover 500,000 state employees. They know the State of California cannot go bankrupt under existing laws. However, if they will not act, the people may act for them. Just as they did in 2003 with the recall of Gray Davis, the people are taking the initiative. They are sponsoring the Citizens Power Initiative to curtail the ability of unions to use payroll deductions for campaign purposes. Another initiative would make California’s full-time legislature part-time. In the meantime, the California economy continues to grind to a halt. Will the people of California shock the nation like the people of Massachusetts did with the election of Scott Brown? Or will the unions buy another election and drive the Golden State over the edge, making it the First Failed State?

(Robert J. Cristiano PhD is a successful real estate developer and the Real Estate Professional in Residence at Chapman University in Orange, CA. Originally published on New Geography, 03/06/2010.)

FIVE-YEAR LOOK BACKS

September 1

1998

The OC Register’s Business section, on the “Markets” page, had “Voices” on the stock market drama of the previous day (see MOORLACH UPDATE — H.R. 205 — August 28, 2013). There were five individuals quoted, William Gross of Pacific Investment Management Co. (PIMCO) in Newport Beach; Robert Rubin, the Treasury Secretary of the U.S.; Farouki Majeed, the Chief Investment Officer of the Orange County Employees’ Retirement System; Doug Fabian, the market timing advisor and financial investment newsletter editor; and myself. Later that month, the Federal Open Market Committee discount rate was eased 25 basis points, dropping another 25 basis points two weeks later, and a third 25 basis point reduction a month after that. The rates would then stay level for seven months. For perspective, the current discount rate has not changed in three and one-half years.

“We’re sensing we’re going to see an easing in the overnight federal funds rate, sooner than anticipated . . . I think our country is strong enough to handle the situation but it’s still going to have an impact.”

John Moorlach, O.C. Treasurer

2003

Rick Reiff’s “OC Insider” column for the Orange County Business Journal was titled “Jilted Supes Ignore Moorlach; Ueberroth Pals Back Arnold.” Here’s how the column started:

When Larry Parrish left as Orange County chief administrator in 1989 for a higher-paying job with Dennis Carpenter’s lobbying firm, there were many well-wishes, just a little grousing about unresolved issues and an expressed desire by the supervisors to find a replacement who was more take-charge. In hindsight, Parrish’s exit was a relative celebration: Successors Ernie Schneider, Bill Popejoy, Jan Mittermeier and Michael Schumacher all left in storms of controversy. Parrish, meanwhile, found happiness in Riverside County, where he’s been chief executive for 11 years – and counting. Parrish recently flirted with returning to his old OC job – still controversial, but boasting enhanced powers, a loftier title (CEO) and more than twice his salary of 1989. But Parrish declined, citing pension benefits he’d be giving up, and promptly got a $24,000-a-year pay raise from Riverside (to $220,000). That leaves the OC supervisors scrambling for candidates but curiously failing to grant an interview to an interested John Moorlach – the Insider detects resistance to the sometimes caustic county treasurer from certain county employee groups and thin-skinned supes.

2008

The Orange County Business Journal’s Dan Beighley addressed “Legal Probe Over, Treasurer Touts Budget Cuts, Changes – GOVERNMENT: Street points to office as model; critics skeptical.” After former Orange County Treasurer-Tax Collector Chriss Street concluded his term, he left a $3 million headache for his successor, as smoke and mirrors were brought to reality by the County’s Internal Auditor. Regretfully, the skeptics were right. The former Treasurer had overcharged his local government investment pool investors, thus giving the illusion of lower overall net costs. The purported budget cuts were a sham. The Board of Supervisors approved a $3 million budget augmentation last year to pay the investors back. Just as predicted, we were told some information, but not everything. Here are the concluding paragraphs of the piece:

As for savings in the treasurer’s budget, county supervisor and former treasurer John Moorlach said he hasn’t looked into Street’s figures enough to know how legitimate his savings have been.

“Chriss has a way of telling you some information, but not everything,” he said.

Moorlach has been critical of Street and has called for his resignation.

In 1995, Moorlach took over the treasurer’s office from Robert Citron, who bankrupted the county.

Moorlach said he questions Street’s claims of bringing the budget down so dramatically after having done the job himself for more than a decade.

A longtime friend of Street’s, Moorlach said he thinks he would be better off with a job outside of public service.

“I’m not here to criticize Chriss,” he said. “I still like him. He has an incredible career and talents.”

As for running for re-election, Street declined to answer but hinted of his interest.

“I love this job,” he said. “If you’ve learned anything from me in the last year and a half, I’m very tenacious.”

September 2

2003

The OC Register had a positive story in its “Briefly” column with “Tax collection at record high in O.C.” The real estate boom was evident in the County’s hard data.

Orange County residents are paying their property taxes. The tax collector reports that for fiscal year 2002-03 the county collected $2.847 billion, or 98.7 percent of the bills outstanding. Both the dollars taken in, up 9 percent in a year, and the collection rate, vs. 98.5 percent a year ago, are record highs.

2008

The Long Beach Press-Telegram weighed in on the Rossmoor incorporation with an editorial. “A model small city.”

If you were living in unincorporated Rossmoor, would you vote to turn your community into a city, knowing it would mean you’d have to start paying a utility tax? You probably should.

Proponents of incorporation have removed what they say is the last major obstacle to voting "yes." If the measure passes, seniors with financial problems would be excused from paying the tax, which would average $16 to $21 a month.

Opponents still aren’t happy, though. They say the tax waiver could be erased by a city council anytime.

That’s true. But tax-sensitive residents should remember that Orange County no longer wants the responsibility of providing what ought to be city services.

County officials say the cost of those services exceeds tax revenue from Rossmoor by $590,000. So what’s to stop the county from finding a way to extract more revenue, or otherwise make life a little more difficult until 52-year-old Rossmoor grows up and becomes a city?

Orange County Supervisor John Moorlach, whose district includes Rossmoor, says the county should be concentrating on regional issues rather than governing unincorporated "islands" like Rossmoor. Also true.

Opponents are right about another thing. A new city could mean more bureaucracy and more expenses. But that just implies that voters have to be smart enough to put people on the council who will be not only responsive but responsible.

If you look around, you’ll see that smaller cities like Seal Beach, Los Alamitos, Lakewood and many others manage well, and their constituents appreciate it. The bigger cities, L.A. above all, don’t manage so well, partly because they attract career politicians rather than people who simply want to serve their communities.

Rossmoor residents get to decide Nov. 4 whether or not they want cityhood, and if so the amount of their utility tax (7 percent or 9 percent), who should become council members and whether they should represent their little city (population 10,000) by districts or at large.

Rossmoor, whose tree-lined streets and tidily-kept homes look like the very model of an upper-middle-class community, will end up fine either way. Still, its neighbors and the county would be glad to see it become the very model of a well-governed little city.

We know how we’d vote.

September 3

2003

Dennis Foley of the OC Register provided another update in “Supervisors still have no takers for CEO job – Officials blame the economy, budget woes for candidates’ lack of interest.” My hope for the next person to serve as the CEO, in the paragraph below, would be achieved.

Supervisor Chris Norby, for example, persuaded Treasurer-Tax Collector John Moorlach to apply. Moorlach, however, was notified by the board’s search firm shortly after his name surfaced publicly that supervisors had decided he would not be considered for the position. “I’m content with the job I have. The CEO job is a big job, and the most important thing is to try to have someone keep the job for more than two, three or five years and build some stability,” Moorlach said.

2008

Attorney General Jerry Brown issued a press release announcing his opposition to the County’s litigation questioning the retroactive granting of massive pension plan enhancements. In my UPDATE I made two observations. “Don’t confuse me with the facts while I’m running for governor and pandering to those who will finance my campaign.” This turned out to be true. “But, if he is Governor again, he will have to deal with these pensions.” Which was also true, and included (ironically) a prohibition against the granting of retroactive benefits. The first piece is by Christian Berthelsen of the LA Times, titled “California attorney general takes Orange County deputies’ side in pension fight – Jerry Brown speaks of filing a brief opposing the county’s effort to slash the benefits. The county’s lawsuit seeks to repeal a retroactive increase, saying it was unconstitutional,” and the closing paragraphs are provided.

Board of Supervisors Chairman John Moorlach estimates that the deal allows deputies, on average, to retire with a pension of $70,000 a year, and that the retroactive portion will cost the county $187 million over the next 30 years.

Brown’s announcement did not articulate the legal grounds on which he intends to challenge the county’s lawsuit. A spokeswoman for the attorney general said the legal arguments were still being developed and were not ready to be unveiled.

Separately, the California Public Employees’ Retirement System, the $230-billion public pension fund that administers benefits for government workers, said Brown would be representing its interests in the court case. CalPERS contends that the benefits are constitutional.

Mario Mainero, the chief of staff to Moorlach, who led the county to file the suit, criticized Brown’s decision to get involved as political and said his initial comments indicate that he doesn’t understand the basis of the lawsuit.

"It’s pretty clear here that Atty. Gen. Brown, who apparently wants to be governor again, is going to try to gain the support of people who can raise a lot of money for him," Mainero said.

The second piece, “Brown joins fight over Orange County deputies’ pensions,” is by Scott Sabatini of the Legal News Line. Here are my arguments:

The Board of Supervisors brought the lawsuit in the hopes of invalidating the agreement on the basis that the programmed increases violates the state constitution because it includes a retroactive benefit, according to Supervisor John Moorlach, who issued a written report on the lawsuit in July 2007.

"As an example," Moorlach’s report states, "a 50-year-old sheriff, who on June 2, 2002, had worked for 25 years, had earned 50 percent of his or her final year’s compensation as an annual pension. On June 28, 2002, that same deputy was given an additional 1 percent per year for the past 25 years, and now had a 75 percent of the final year’s compensation as an annual pension, one-third of which was given to them without working for it or paying for it."

According to Moorlach, the change in compensation could lead between $100 and $300 million unfunded in the pension.

"Retroactive benefits," Moorlach argued, "are not earned by working-they were ‘given’ to the employees-and thus they were never vested. If they are not vested, they are not constitutionally guaranteed."

Cathy Franklin of City News Service provided the third piece in “Attorney general may enter pension fray.” The entire piece is provided.

State Attorney General Jerry Brown said Tuesday he will try to enter the legal fray raging over a pension boost given to Orange County sheriff’s deputies in 2001, saying the county is wrongly working to block a clause that made the increase retroactive.

The labor pact was agreed upon by the Board of Supervisors in 2001, but new board members, led by Chairman John Moorlach, voted in January to file a lawsuit over a provision making the increase retroactive, contending it violates the state Constitution because it rewards employees for work already done.

They also contend the provision would constitute a gift of public funds if the pension increase is paid from government coffers and not by the employees.

The lawsuit is pending before Los Angeles Superior Court Judge Helen Bendix. The case was moved to Los Angeles in the spring because the case involves disputes between public agencies in Orange County. There is no trial date as yet, but the case could go to trial in January.

Brown, who opposes any change in benefits, said he will seek the court’s permission to file a legal brief on behalf of the California Public Employees Retirement System to protect the plan as it was approved about seven years ago.

Brown said virtually every public safety department in the state has the "3 percent at 50" plan that allows law enforcement officers to retire at age 50 with annual pension payments totally 3 percent of their highest year’s pay, multiplied by their years of service.

In a statement, Brown said the state routinely authorizes retroactive retirement plans in which employees obtain benefits from prior years of service.

"The deputy sheriffs put their lives on the line for us, and they deserve fair compensation for their hard work serving and protecting the people of Orange County," Brown said. "County supervisors are not entitled to suddenly change their minds and decide to take away important pension benefits that the deputies bargained for in good faith. The hard-working men and women of the Orange County Deputy Sheriffs’ Department deserve far better treatment from the Board of Supervisors. Their families are counting on it."

Wayne Quint Jr., president of the Orange County Association of Deputy Sheriffs, said he is "very pleased the attorney general is interceding in this. We believe this truly reflects the magnitude of the issue."

Moorlach said the board only opposes the retroactive nature of the pension plan because it is not self-funded, but would come out of the county’s general fund.

Not every "3 percent at 50" plan awarded in the state has the retroactive provision, but most do, according to Moorlach’s office.

Brown said the county’s lawsuit poses a "significant threat to all public employees in California, including local police and other law enforcement officers."

If successful, he said, "it will discourage young men and women from choosing a career in law enforcement and will hurt the families who relied on the promises …"

Moorlach said he had heard that Brown was considering entering the case.

"He’s been pretty much pro-union, and he has ambitions to run for governor," Moorlach said.

"Too bad he didn’t do an analysis of the issues," Moorlach said. "I think he’ll find he’s wrong."

The pension plan, Moorlach said, "created a debt without a vote of the taxpayers."

Moorlach also took exception to Brown’s use of the word "routine" when describing the state’s authorization of similar plans.

"It begs the question, when do you stop doing it?" Moorlach said. "Where does routine get into non-routine?"

He also dismissed Brown’s contention that young men and women would be discouraged from choosing a law enforcement, since the retroactivity only affects employees prior to 2001.

Quint denied that the retroactive provision will cause budget problems and service cuts in the county.

"Ours doesn’t have a large unfunded liability," he said. What has caused that perception, Quint said, is a change in actuarial assumptions.

He said the board in 2001 was eager to grant the pension change rather than grant a 4-5 percent pay boost. In that year, he said, the pension was 101 percent funded.

Robert Gasaway, a Washington, D.C., attorney who represents the county, declined to comment on the attorney general’s plans to enter the suit, saying he had not seen Brown’s statement.

September 4

2008

Michael Christopher Carroll wrote a piece for ORANGE COAST magazine, titled “Defender of the Down – Village of Hope is a whole new kind of homeless shelter. It’s as remarkable as the man who built it.” It was a very nice piece on Jim Palmer, CEO of the Orange County Rescue Mission.

“He’s someone who’s willing to think outside of the box,” says John M. W. Moorlach, chairman of the Orange County Board of Supervisors who has known Palmer for almost two decades. “[He] is always ‘first cabin’ about the business of the rescue mission.”

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