MOORLACH UPDATE — Filling a Hole — September 10, 2013

The OC Register provides a review of a recent pension report on the Orange County Employees Retirement System in the first piece below. The focus is on the investment return rate that a defined benefit pension system uses to calculate the annual contributions to be made by the employer and employees. This is a debate that will never end. Warren Buffett wants it in the 6 percent range. Unions want it as high as is feasibly possible. This is explained in the piece. To be concise, lowering the rate does not result in over-charging taxpayers. In fact, the opposite has been true for the past decade. By not making appropriate contributions, thanks to an artificially high investment rate assumption, the unfunded actuarial accrued liability (UAAL) grows. It’s like making the minimum payment, or less, on your credit card balance. So paying more later is really a way to over-charge taxpayers, as there is more that has to be paid. The problem is, with the recent great recession, it is difficult to lower the rate as municipalities do not have the resources to make the higher payment. Now the question gets more interesting. Do you pay off your debts or do you keep the money for operating expenses? One thing should be clear, at this time in the economic cycle, you don’t ask for raises, either. This will only exasperate the operating expense costs and the debt. There are no easy answers. But, if you have no real answers, then I guess you resort to calling people names, which seems to be the rebut in this piece.

The second piece is from the Orange County Breeze and is an analysis of yesterday’s UPDATE (see MOORLACH UPDATE — Family Time — September 9, 2013). One small clarification: my daughter’s name is Sarah.

Report: O.C. public pension on shaky legs

Nonprofit group’s analysis says it’s woefully underfunded.

TERI SFORZA

REGISTER COLUMNIST

Before we get into the nitty-gritty of this particular analysis – which concludes that Orange County is dangerously underfunding its public pension system – let’s remember that the communists planned their economies only five years out.

The nature of America’s public pension systems is to peer 20 to 30 years into the future – and the crystal ball can get a bit murky.

So the California Public Policy Center (a nonprofit featuring hardcore pension-reformers on its board) ran numbers from the Orange County Employees Retirement System, and it wasn’t pretty.

The undisputed facts, assuming a 7.25 percent return on investments:

  • OCERS owes $15.1 billion to its current and future retirees in county and other local government work.
  • It has $9.5 billion socked away to pay them.
  • Which means it has a hole of $5.7 billion, which it must somehow fill.

Now, to fill said hole, the county and its workers kicked in $218 million last year. But they would need to kick in more than twice that much every year – $546 million – to fill that hole in 20 years’ time, the analysis said.

“The inescapable conclusion of this study is that OCERS relied on optimistic long-term earnings projections and adopted very aggressive unfunded liability repayment schedules in order to pay the absolute minimum into their pension fund in 2012,” the CPPC analysis said. “As a result, their unfunded liability increased during 2012 by over $100 million.”

Now, if OCERS earns less than its officially expected 7.25 percent return on investments, things get uglier.

Drop the return rate to 6.2 percent – the one favored by private pension plans and Warren-Buffett types – and OCERS’ unfunded liability leaps to $7.74 billion, which would require catch-up payments of $685 million per year (more than three times higher than last year’s).

Drop the return rate even further, to 4.8 percent, and the unfunded liability skyrockets to $10.9 billion, which would require catch-up payments of $865 million per year (about four times higher than last year’s).

“Unless extremely favorable market conditions occur for the next several years without interruption, in order for OCERS to remain even marginally solvent, they need to either cut retirement benefits across the board, or increase their annual contributions by 50% or more per year,” the analysis said.

“That’s a traumatic amount of money to try to come up with,” said the CPPC’s Ed Ring. “It has to come out of other spending or higher revenue, and both are just really, really hard to do right now.”

OCERS provides retirement benefits to 14,000 county and local government retirees, and invests for another 26,000 public workers who haven’t retired. Its fiscal health matters to all of them – and to everyone else – as taxpayers are ultimately on the hook for making good on public pension promises.

REACTION

Steve Delaney, CEO of OCERS, noted that investment return assumptions have been a growing source of attention in recent years. And while the CPPC report seemed to suggest lowering the return rate to 6.2 percent, or even 4.8 percent, that’s not necessarily the best course of action.

“OCERS follows guidelines set forth by the Governmental Accounting Standards Board (GASB) for establishing a discount rate based on our long-term expected rate of return,” Delaney said in a prepared statement. “Following GASB industry standards is the fairest way to allocate pension costs over multiple generations. Our experience shows the average OCERS member has 22 years of service at retirement, so we routinely look at our actual returns over a period of 20 years and compare it to our assumed rate of return. As of December 31, 2012, OCERS’ 20-year trailing return was 8.22%, well above our current 7.25% investment rate.

“To date, the OCERS Board of Retirement continues to use nationally-recognized standards established through due process by GASB in terms of determining its investment rate assumption. But the issue of an appropriate discount rate is a legitimate question being discussed at the national level and continues to be monitored by OCERS’ Board.”

Orange County Supervisor John Moorlach, often referred to in this space as “pension warrior,” has served on OCERS’ board and has made reforming public pensions a pet project.

“It isn’t too far off,” Moorlach said of the CPPC analysis. “The numbers hurt, even using OCERS’ own assumptions.”

The Orange County Employees Association did not agree, calling the CPPC “a radical right wing think tank, hardly an objective source for analyzing pension issues,” in an email to us at the Watchdog.

“Just as the overseer of Detroit, Kevin Orr lied to the public about Detroit’s unfunded pension liability, these extremists are likewise lying to the taxpayers of Orange County, and they’re following Kevin Orr’s playbook,” said OCEA’s Jennifer Muir. “There has been a lot going on at the OCERS Board in recent weeks, and this ‘study’ can only be viewed as a calculated political attack in that context.”

POLITICS

Now, on this politics thing. OCERS is expected to entertain the idea of raising its assumed rate of return this fall, which one might say is swimming a bit upstream. Many public pension systems – including OCERS – have reduced their assumed rates of return in recent years, in an effort to get a more realistic handle on their fiscal health.

OCERS has dropped its assumed rate of return from 7.75 percent to 7.25 percent. The much larger California Public Employees Retirement System dropped its assumed rate of return from 7.75 percent to 7.5 percent.

Dropping the assumed return rate means you must pump more cash into the system now. Increasing the assumed rate means you have to pump less cash into the system now.

The union for county workers wants to see that assumed rate go back up.

“Appointed members of the OCERS Board of Directors voted to unnecessarily and artificially increase the unfunded liability to the number cited below by reducing the assumption rate by a full half a percent to 7.25 – an extraordinarily aggressive and unnecessary policy decision,” said OCEA’s Muir. “They did this despite being told by their actuary that they could prudently lower the assumption rate to 7.5%, which remains well above the 30 year rate of return for the system and in line with other well-run pension plans. The effect of that decision ultimately resulted in over-charging taxpayers and employees who contribute into the system, taking away funds that could otherwise be used to pay for services for our community.”

Stay tuned for more on this fight. Could be a doozie.

UNDERFUNDED?

By its official count, OCERS is only 62.5 percent funded (meaning that’s how much of the money it has right now, to pay what it owes right now). That’s down from 67 percent in 2011.

Some say that a retirement system needs to be 80 percent funded to be healthy – but OCERS’ own investment officer, Girard Miller, has rejected that threshhold.

“No reputable and objective expert that I can find has ever been quoted as saying this,” Miller wrote in a classic piece on pension puffery in Governing magazine last year. “80 percent funding is not a sufficient, sound or healthy funding level for a pension fund … Pensions funded at 80 percent are no different than a $400,000 house in a distressed neighborhood with a $500,000 mortgage – you can keep living there if you keep making the payments, but it’s underwater and your balance sheet is now upside down no matter how much you try to double-talk it. The only difference is that state and local governments can’t mail in the keys to the bank.”

Contact the writer: tsforza

Links to the full CPPC report are at ocregister.com/watchdogblog.

County Supervisor Moorlach gets his priorities right

By Shelley Henderson

Transparency demands that I state up front that I hold a favorable view of John Moorlach, currently Supervisor for District 2 of the County of Orange.

He has always answered questions in a straight forward fashion, and he’s the only person that I know that can make you laugh while explaining why your city, or county, or state, is headed down the tubes on greased skids because of fiscal mismanagement.

He is also gracious about bending just about in half in order to get low enough to speak to me face to face.

When I spoke with him at last month’s legislative mixer, I pressed him on his plans for after he is termed out as an Orange County supervisor. (He tried to get the limit extended, but failed.)

At that time, he hadn’t made an official announcement so I held off on publishing anything.

But his email update yesterday included a piece by Martin Wisckol in the Orange County Register, so I feel that I can at least confirm Wisckol’s account.

Wisckol counts up and briefly describes the announced candidates to replace John Campbell in the 45th Congressional District: Pat Maciariello; Mimi Walters; and Greg Raths. His candidate count rises to three-and-a-half after he includes Moorlach despite no official announcement.

At last month’s mixer, Moorlach told me that he was looking at running against Mimi Walters but wouldn’t start up until after his daughter’s family moves to Wisconsin. He wanted to squeeze in just as much time as possible with them — and especially with his first grandchild, Sarah — before they leave.

I personally applaud Supervisor Moorlach for putting family first.

He will have plenty of time after they leave at the end of this month to launch a campaign. After all, Moorlach does stand out in a crowd, and in more ways than mere height.

As the 45th District does not include any piece of the coverage area for Orange County Breeze, we will reluctantly bid him good luck. (Our coverage area falls in the 47th and 48th Districts.)

Los Angeles metro area Congressional Districts, courtesy of U.S. Geological Survey.

County Supervisor John Moorlach speaking at a prior legislative mixer. File photo by C.E.H. Wiedel.

FIVE-YEAR LOOK BACKS

September 11

1993

The Managing Editor of the Daily Pilot, Steve Marble, decided to jump into the debate with his weekly column in “What threatens schools? Gangs, violence and the Voucher Initiative” (see MOORLACH UPDATE — Poised for Laura’s Law — September 8, 2013). Steve felt that the “public school system works.” Here are the closing paragraphs of his piece:

In a recent column advocating support of the Voucher Initiative, John Moorlach – a past president of the Costa Mesa Republican Assembly – suggested that the initiative would put some “pizzazz” back in the school system and concluded with this bit of scholarly advice: “Come on, be flexible.”

Well, John, “pizzazz” is great if you’re designing fall fashions or trying to improve laundry detergent and “come on, be flexible” is something you say when you and your friends can’t decide what movie to go see. But this is our educational system we’re talking about here, not some goofy little lab experiment.

And, all in all, I’m unwilling to gamble my kids’ future because somebody’s got it in their head that they want a little more pizzazz.

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