MOORLACH UPDATE — OC Register — October 16, 2013

The OC Register has two interesting pieces. The first one below deals with an important potential ballot measure for the November 2014 General election. It provides for a public employee defined benefit pension plan solution that can be negotiated at the bargaining table. It is somewhat of a compromise compared to the strategy I discussed in Sunday’s San Diego U-T editorial (see MOORLACH UPDATE — San Diego U-T — October 13, 2013). I want to thank San Jose Mayor Chuck Reed for his leadership in pursuing a solution and wish him all the best in his signature gathering efforts. Some form of relief needs to be available, and this is a reasonable one. However, it does not resolve existing unfunded actuarial accrued liabilities, as my strategy seeks to do, so the pig still has to go through the python. But, it is still a viable solution for the voters to consider. I believe that if it makes it to the ballot, it will pass. Consequently, the public employee unions are already trying to get in front of it with the results of a poll that they commissioned. I guess for now we can say that the game is on.

The second piece is today’s lead editorial on the Board’s recent James L. Musick Jail decision (see MOORLACH UPDATE — Twitter Musick — October 9, 2013). It’s a little weak, but deserves a few observations. The James L. Musick facility was built in the 1960s, when there was nothing in the way of serious development surrounding it. So it begs the question: Which came first? This jail or the Great Park? During my tenure here at the County I have flown into Sacramento Airport numerous times. It was built a great distance from downtown Sacramento in farm fields. Over the past two decades, housing tracts have been creeping ever closer to the airport. The joy of land is that there is only so much of it. So with encroachment, the original occupier in the vicinity must be restricted?

AB 109, the bill that initiated prison realignment, has resulted in some 2,500 state inmates already transferred back to Orange County. Today’s OC Register includes a story on the topic, “State Loses on Prison Crowding.” The opening paragraph states: “California appears to be out of options in its fight to overturn court orders requiring the prison system to rid itself of nearly 10,000 more inmates.” If Orange County is 8 percent of the state’s population, then it would not be an overstatement to assume that an additional 800 of these inmates will also be transferred down from the state’s 33 prisons. Where do we house them? It’s easy to say “not at Musick.” But, if we do not house these additional inmates, they will be released into our communities, and that will impact public safety throughout the County. Our priority needs to be public safety, and providing inmates with the tools to change their behavior before they are released is a proven method of addressing repeat offenders. Working to a warm and fuzzy “amicable solution,” as the editorial suggests, misses the primary overall focus of one of the critical responsibilities of our elected officials, the public safety of constituents.

We have a community of 3.1 million residents and we have three jail facilities. And they barely provide the necessary number of required beds. Seeking a fourth facility has not borne fruit. Doing nothing is unacceptable. The OC Register has to realize that the state of California is doing unpleasant things to the residents of Orange County. It has pickpocketed 7.5 percent of the County’s annual real property tax revenues ($73 million!!). It is unilaterally absconding with the County’s carpool lanes and attempting to convert them to toll, or managed, lanes. It is taking perceived Affordable Care Act cost savings from the Health Care Agency. It terminated redevelopment agencies and stole their reserves. And it is giving the County state prisoners. Fighting internally within the County is counterproductive, even though it may sound good for candidates in the upcoming city council races. The OC Register could have provided a hint of leadership opportunities for ensuring public safety that should be pursued, and not the weak “can’t we all just get along” lament.

Voters could enter war over pensions

A ballot initiative would allow cities to alter payout parameters.

By Teri Sforza

Out come the big guns for the Hugest! Pension! Battle! Ever!

On Tuesday, a coalition of California mayors – including Santa Ana’s Miguel Pulido and Anaheim’s Tom Tait – filed a proposed constitutional amendment with the state attorney general that would do the unthinkable: allow California governments to lower pension formulas going forward for public workers.

It would not – we repeat, would not – take away benefits public workers have already earned. And it would let each little city and county work out the devilish details for itself – no dictates from on high.

It’s the sort of forward-fix that Democratic Mayor Chuck Reed (of the bankrupt city of San Jose) and the nonpartisan Little Hoover Commission have argued is essential if core public services for Joe Citizen , and pensions themselves for public workers, are to survive.

“Many of California’s public employee retirement plans are simply unsustainable and it’s in everyone’s interest to provide the tools to fix the problem now,” Reed said in a prepared statement. “(W)e believe employees would much rather adjust their future expectations than risk seeing their accrued benefits slashed in bankruptcy. We’ve already seen that tragic situation play out in cities like Stockton and Central Falls, R.I. Our teachers, police officers, firefighters and other dedicated public servants deserve to know that the pensions they’ve earned will be there when they need it – not just the day they retire, but also when they’re 85 or 90.”

But defenders of the current system are having none of that.

“This extreme proposal, advanced by a career politician and funded by a former Texas-based Enron trader, breaks the promise of a secure retirement made to millions of Californians, many of whom are ineligible for Social Security and have an average pension of $26,000 per year,” said Dave Low, chairman of Californians for Retirement Security, which represents more than 1.5 million current and retired public workers. “It will allow public employers to unilaterally cut the retirement benefits promised to current teachers, firefighters, police officers and school bus drivers – a promise upheld by the Supreme Court.”

The initiative’s backers now need to raise about $2 million to gather enough signatures to get the constitutional amendment onto the ballot next year.

Joe Citizen, prepare for acute verbal whiplash.

THE PROBLEM

In brief: Officials assumed that the booming market of the early 2000s would never end. They gave big hikes in pension benefits to public workers – especially to public safety workers – swallowing promises that it wouldn’t cost an extra dime. They quit contributing to pension funds entirely for a while, assuming things would always be rosy.

Then the recession hit, and they rudely awoke from their stupor.

Back in 2005, 1,841 retirees pulled down more than $100,000 a year in pension checks from the giant California Public Employees’ Retirement System. By the end of 2012, membership in the $100K club had skyrocketed 700 percent, to 14,763, according to data from CalPERS.

And here we are in 2013 with agencies scrambling after reforms for new hires. But the immediate picture is grim: CalPERS – which serves the overwhelming majority of local governments – is officially $80 billion underfunded. A plan just approved to fully fund the system within 30 years will require even more money up front from all the cities, counties and special districts using its services.

Some agencies are now spending one of every five general fund dollars on pension costs, the mayors said.

A MATTER OF SURVIVAL

Taxpayer contributions into California’s public pension systems totaled $17.4 billion in 2011 – five times higher than a decade earlier, according to the State Controller’s Office.

“Today, many government employees can retire as early as age 50 and collect a guaranteed pension – which can equal up to 90 percent of their highest annual salary – for the rest of their lives,” Reed and Pulido wrote in an op-ed for UT San Diego. “We believe that California’s constitution should be amended to grant state and local governments clear authority to modify pension formulas for an existing employee’s future years of service.

“This would settle the ongoing dispute over the ‘vested rights’ doctrine, which has been used to block any effort to prospectively change the rate at which existing employees accrue benefits in the future. Private-sector pension plans have the flexibility to change benefits going forward, and we believe government leaders should have that option as well.”

CalPERS disputed that Tuesday.

“The courts have clearly established that California public employees have a vested right to the level of benefits promised to them when they are first employed. This prevents not only a reduction in the benefits that have already been earned, but it also prevents a reduction in the benefits that an employee has been promised for their future service.”

But at least 18 other states can do that, as can private-sector retirement plans. Mayor Reed argues that the California court decisions denying reductions in future pensions are an “extreme interpretation” of the law.

And one might argue that the public is on the mayors’ side: Last year, big pension reform packages passed overwhelmingly in two Democratic-heavy cities, San Jose (with 69.6 percent of the vote) and San Diego (with 66.2 percent of the vote).

Those initiatives are now tied up in court, as this one would surely be.

‘THE PLOT’

The Institute for America’s Future, a lefty think tank in Washington, D.C., released a report last week outlining a sinister rightwing plot to manufacture “the perception of a public pension crisis in order to both slash modest retiree benefits and preserve expensive corporate subsidies and tax breaks.”

The worst offenders: The Pew Charitable Trusts’ Public Sector Retirement Systems Project, and the Laura and John Arnold Foundation (rich Texans who have spent millions bankrolling pension reform efforts in California and elsewhere), it said.

The report is titled “The Plot Against Pensions: The Pew-Arnold campaign to undermine America’s retirement security – and leave taxpayers with the bill.” Public pensions face a 30-year shortfall of $1.38 trillion, or $46 billion a year, but officials “rarely ever mention that, as The New York Times reports, ‘states, counties and cities are giving up more than $80 billion each year to companies’ in the form of subsidies and tax expenditures.”

A poll released a few days ago by Californians for Retirement Security – that’s the public workers – found that 63 percent of people oppose “Allowing Public Employers to Unilaterally Cut Retirement Benefits for Current Employees.”

Voters polled said they’d prefer to see changes occur at the local level, rather than at the state level, and through negotiations between employers and employees, rather than through the ballot box. If that poll seems to directly contradict what voters just did in San Jose and San Diego, the Californians for Retirement Security aren’t mentioning it.

“It’s the underlying premise of the Reed initiative: breaking the promise to teachers, firefighters, police and other employees who made their career choice and changing the rules in the middle of the game,” Steven Maviglio, spokesman for the coalition, said by email.

GOING FORWARD

Earlier efforts at pension reform initiatives faltered after the state issued official titles and summaries – which, supporters charged, were highly damaging. San Jose’s Reed said the mayors tried to take those lessons into account.

“We’ve talked to a lot of mayors – liberal, conservative, Democrats, Republicans – and I believe have correctly identified a solution: modifying the state constitution to make sure that cities have clear authority to make modifications to future years while protecting benefits already earned,” Reed said. “We are not specifying an outcome. We are empowering local and state governments going forward to sit down with their unions to work this out.”

Reed is “guardedly optimistic” about the initiative’s chances, as are other pension warriors.

“I would state that the trend is moving in Mayor Reed’s direction,” Supervisor John Moorlach said.

We’ll be watching.

CONTACT THE WRITER: tsforza

Bigger jail a bad fit close to Great Park

An expanded Musick facility should not be built next to thousands of homes.

The 384 new “rehabilitation beds” at the proposed expansion of the James L. Musick jail, for which the Orange County Board of Supervisors voted unanimously to request $80 million in state funding, is likely not the bedside community that Irvine envisioned amongst the families, children and schools of the growing Great Park neighborhoods.

Irvine Mayor Steven Choi at least didn’t think so when he voiced his concerns at the board meeting last week, questioning Musick’s soon-to-be residential location and also argued that expansion would require an additional environmental study, because the most-recent EIR was completed in 1998, a year before MCAS El Toro closed its gates. EIR aside, it seems unlikely that anyone in 1998 predicted the site’s odyssey from air base to proposed airport to a Great Park surrounded by a developing neighborhood of 9,500 homes and a planned fifth Irvine high school – all within 2,100 feet of the Musick facility.

Perhaps the expansion project did not change significantly since the last report, or maybe anything less than the originally proposed 7,500-bed maximum-security facility of 1996 isn’t considered significant, but the fact remains that the character of the area around the 100-acre property has changed, and significantly.

“Just because things transform outside the walls doesn’t change what happens inside,” Supervisor John Moorlach told us.

But while the Register Editorial Board has long supported a move to a more rehabilitory form of incarceration, in real estate, even jail real estate, location is everything, and the coming suburban population boom to the area, and those already living in near proximity to the site in Lake Forest, make us wonder if the area is really suitable for this expansion.

The Musick facility has 1,322 beds, but coupled with another expansion approved last year, there would be 2,218 beds following completion. While the supervisors were quick to note the plan will not turn the minimum-security facility into a maximum-security one, and Supervisor Todd Spitzer amended the proposal in an effort to make that clear, some medium-security inmates at least would be transferred from other county jails.

Those inmates, according to a recent Register article, would be selected by officials for “anger-management, decision-making and other mental health problems.” With two publicized escapes from the 50-year-old jail in the past 12 months, the most recent in September with an inmate charged with six felonies, including drug possession and first-degree burglary, makes the decision at the aging facility even more disconcerting.

“I’m less concerned with the numbers as with the changing character of the facility,” Irvine Councilman Jeff Lalloway told us.

Finding an alternative site in a sprawling county a little more than twice the size of New York City, especially with the added constraints of the state’s prison realignment, may be a tall order, but worth the effort. Mr. Moorlach told us that a number of studies over the years found no suitable alternative location.

Still, it seems in the best interest of the community to work toward an amicable solution. The Board of Supervisors should halt the expansion of the jail until an agreement can be reached.

FIVE-YEAR LOOK BACKS

October 16

2008

Speaking of pension reform ballot measures, the Long Beach Press-Telegram provided a supportive editorial in “Enviable Measure J – Orange County’s voters can give themselves power over public pension increases.”

Orange County voters have an enviable opportunity on the ballots Nov. 4 called Measure J. At only 24 words, it is the briefest of the many propositions, and there are no ballot argument against it.

How could there be? This proposition simply says that future increases in retirement benefits for county employees and county officials will have to be approved by voters. Who would possibly disagree?

We know who, of course, but they aren’t about to come out against Measure J publicly. That’s because the only reason to oppose it is because it’s a whole lot easier to buy off elected officials in exchange for pension spiffs than to persuade voters.

That’s how public-employee pensions in Orange County, as elsewhere, got pumped up to as high as 90 percent of salary after only 30 years of service. Can you imagine voters ever approving a plan like that?

It’s a pity that Measure J comes along after the lavish taxpayer-financed pensions already are in place, and by law can’t be undone. But it establishes a principle, and at the very least there won’t be any more pension spiffs in Orange County unless voters want them.

It’s a pity also that voters in L.A. County and elsewhere don’t have a similar opportunity. Taxpayers gradually are becoming more aware that public-employee pensions and retiree health benefits are a huge financial liability.

Orange County Board of Supervisors Chairman John Moorlach co-authored the ballot argument in favor of Measure J and for all practical purposes is the author of the measure itself. He points out that Orange County’s pension and retiree health liabilities are $3 billion, and the county’s pension plan is only 73 percent funded. As he says, this is a debt owed by all county taxpayers.

The same burden weighs on other cities and counties and the state as well. A few places, like Long Beach, are better funded than Orange County, but there is only one real exception, which is San Francisco. And that is because in San Francisco, voters have the right to approve or reject all pension increases.

It is late in coming, but Orange County voters deserve to have that right, too. On Nov. 4, they can give it to themselves by approving Measure J.

Voters everywhere should be so lucky.

The issue of Orange County Employees Retirement System (OCERS) Board appointments by the Board of Supervisors provided some attention in the OC Register, with Norberto Santana, Jr.’s piece, titled “County retirement board appointment draws fire – Labor groups protest appointment of maverick investment manager.” Tom Flanigan has served with distinction on the OCERS Board and is currently serving as the OCERS Board Chair.

A private pitch meeting between investment fund brokers, County Supervisors’ Chairman John Moorlach and local retirement officials is raising questions about whether his bid to appoint an investment manager to the board of Orange County’s public retirement system is skirting state law.

County supervisors next week are scheduled to consider appointing Thomas Flanigan, whose controversial theories over pension fund accounting has drawn heated opposition from public employee labor groups. Flanigan’s work style also has triggered friction during his stints at several public retirement systems across the country. In 2005, he was forced to resign as Chief Investment Officer for the Orange County Retirement System.

Supervisors delayed Flanigan’s appointment earlier this month after questions were raised about his connection to Ryan Labs, Inc. – which also advocates the unique accounting approach to public pension systems known as Market Valuation of Liabilities (MVL). Using that accounting approach would likely cause Orange County’s unfunded pension liability to skyrocket, forcing public agencies to hike their annual contributions and create a choking effect on public budgets. Supporters say the accounting approach – used in the private sector – would reveal the true costs of pension benefits and prevent those costs from being pushed on to future generations.

Under a newly-adopted state law, pension board members are prohibited from having any connection to firms that are attempting to market their products to pension systems.

A coalition of public sector labor groups wrote the board of supervisors on Wednesday calling on them to halt the Flanigan appointment arguing that his connection to Ryan Labs would violate state law.

"It should be readily apparent that if the board of supervisors were to appoint Mr. Flanigan, with knowledge that his business interests place his appointment squarely in violation of the law, the board members who vote to make such an appointment expose themselves to allegations of conspiring to violate the law," concluded the letter signed by the general managers of six different labor groups.

Indeed, Flanigan’s connection to Ryan Labs, Inc. remains unclear.

Flanigan and Ryan Labs President Sean McShea both said he has no formal connection or contract with the firm. Moorlach backs Flanigan. However, employees answering the phone at Ryan Labs do indicate that he is affiliated with the company. McShea said Flanigan’s connection is loose, noting he does do "extra credit" work from time to time.

Also, a pension conference brochure refers to Flanigan as a "senior adviser" to Ryan Labs although Moorlach said the brochure reference was a "misprint."

However, despite the denials of a connection between Flanigan and Ryan Labs, the Orange County Register has confirmed that on August 14, Flanigan and McShea met with senior members of the Orange County Employees Retirement System in Moorlach’s office where a thorough debate on the merits of the MVL accounting system was conducted.

Moorlach said the meeting wasn’t a "sales call" but a reunion "so OCERS can get a sense of an idea that’s out there."

"I don’t recall saying you guys need to hire these guys as a fixed income manager," Moorlach said.

Yet in the world of finance, these types of informational debates are often seen as sales pitches.

"It was an informational debate with Ryan Labs advocating their position and OCERS’ actuary debating the points," said Julie Wyne, Assistant CEO of and general counsel to the Orange County employees’ retirement system. However, Wyne noted that "the intent of Ryan Labs was more than likely to raise the profile of their liability driven product."

Wyne, who was in the meeting, said she didn’t see anything wrong or illegal about the meeting because at that time, "Flanigan was not being considered as a board member," she said.

But Nick Berardino – who heads the Orange County Employees Association – said the Flanigan appointment should be stopped because it gets so close to the line.

"The circumstances of this appointment are symptomatic of the back door dealing that infects today’s financial industry," he said. "The maverick schemes proposed by Mr. Flanigan serve only to destabilize retirement systems and further jeopardize the economic security of working families."

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