MOORLACH UPDATE — Negotiations — December 13, 2013

Steve Malanga picks up on his theme from last Saturday’s editorial submission in The Wall Street Journal with his Public Sector Inc. piece below that was picked up by PublicCEO.com (see MOORLACH UPDATE — The Wall Street Journal — December 7, 2013). The piece also links to my San Diego UT editorial submission, where I predicted how Detroit Federal Bankruptcy Judge Rhodes would rule (see MOORLACH UPDATE — San Diego U-T — October 13, 2013) and an Orange County Employees Retirement System (OCERS) analysis that compares “1.62% at 65” to “2.7% at 55” (see http://www.ocers.org/pdf/member_active/benefit_comparison.pdf). The Manhattan Institute for Policy Research study on teacher compensation can be seen at http://www.manhattan-institute.org/html/cr_79.htm#.UqoJNLSelzQ. It is the first piece below.

Staying on the theme of employee negotiations, we are nearing the conclusion of our efforts with a number of bargaining units. The negotiations were supposed to have concluded last year, during my term as Chair, so you can appreciate how engaged the Board has been for the last two years on this matter. The OC Register covers the topic in the second piece below. And, yes, when it is my turn in the rotation, I have prayed for the County’s finances. Having Sacramento pick the County’s pockets for $73 million per year-plus, is definitely something worth praying about (see MOORLACH UPDATE — VLF Grab — August 12, 2013 and MOORLACH UPDATE — AB 701 — September 14, 2013).

BONUS: Just a friendly reminder that you are cordially invited to our annual Christmas Open House at my office at the Civic Center on December 17th from 2 p.m. to 4 p.m. (see MOORLACH UPDATE — Annual Christmas Open House Invitation, which was sent on November 18th). Holding the event on a Tuesday afternoon when the Board meets was a risky proposition. Next Tuesday’s Board agenda looks like a heavy one. Therefore, if you arrive early and if the Board is still in session, you are welcome to observe by sitting in the Board Chambers. Hopefully, the meeting will have concluded by 2 p.m. But, I get the sense that the Open House will not conclude at 4 p.m., but a little later than that. Please RSVP with Cammy Danciu at Cammy.Danciu.

CHEAPER PENSIONS: HOW THE MATH WORKS FOR EMPLOYEES

By Steve Malanga.

In my Wall St. Journal piece this weekend I discussed how the IRS is holding up municipalities’ efforts to move workers into new, less expensive pension systems, even when employees via their union agree they’d like to make the move. I spent most of the piece on the IRS issues, but it’s worth exploring why places like San Jose and Orange County think that some workers might voluntarily agree to take less in pension promises. Let’s look at some math.

Orange County, for instance, gained approval in 2009 from its main union to begin offering new workers and current employees already in its defined benefit pension system the option to switch to a new hybrid plan that features a smaller DB plan combined with a 401(k) style savings.

County government was hoping to persuade employees to move away from its very expensive defined benefit plan, which offers county employees 2.7 percent at age 55 (that is a pension equal to 2.7 percent of final salary times the number of years worked, starting at age 55). In other words, under the county’s current plan, if you go to work at age 25 and retire at 55 from county government, you walk away with 81 percent of your final salary as a pension. Most folks in the private sector would consider that rich, indeed.

Still, though much of the burden for paying for this system is with the taxpayer, county employees must contribute toward their own retirement, too. Under the current 2.7 percent at 55 rate, that contribution amounts to 10.51 percent of pay.

The DB component of the county’s new hybrid plan, by contrast, offers workers 1.62 percent at 65. In addition, the plan includes a defined contribution savings account into which an employee can contribute additional money (tax free right now of course), and the county will match those contributions up to 2 percent of base salary.

Why would anyone accept a plan like this? Well, for one thing, it costs a lot less. The contribution rate for the employee portion of the DB plan is 6.94 percent of pay. For an employee earning $60,000 a year, the additional take-home pay amounts to $90 every two weeks, or $2,340 per year, according to the county’s data. Not chickenfeed.

Still, more take-home pay isn’t the only incentive. County officials believe that younger employees in particular would like the option of a more portable plan (here’s where the DC portion comes in) because they don’t plan on working for the county forever. They might also relish more take home pay because they don’t particularly think the idea of working to age 65 to qualify for retirement, like the rest of us, is so bad. (Actually, Social Security retirement age is rising on a sliding scale and is 67 or 68 for most of us still working.)

This actually makes a lot of sense. One of the infrequently discussed shortcomings of many of the government DB plans in effect now is that they save very little for workers in their first 10-to-15 years employed by government, and then these plans ramp up the savings during the final years of someone’s long government employment.

If a worker leaves even after 10 years employed at such a job, he gets sometimes much less in retirement savings to take away than if he were part of a defined contribution plan where employee and employer contributions are more evenly dispersed. Far more people, moreover, leave government employment before reaching full retirement than we think.

This Manhattan Institute study, for instance, looked at figures for teachers in 10 big school systems nationwide. Only 28 percent of teachers stayed in the systems for 20 years or more. Those who left before got a raw deal when it came to retirement benefits, thanks to the current method of funding DB plans (see chart below for the way pension wealth accrues for teachers in NYC). As the study observes:

Under the traditional defined benefit (DB) pension system that currently covers 89 percent of public-school teachers nationwide, teachers accrue very little retirement wealth through the early and middle portions of their careers. Then, toward the end of their working lives, they receive steep increases in retirement wealth as they near the system’s retirement eligibility thresholds. Teachers who change systems or leave the profession before these late-career increases are left with relatively little retirement wealth. For the minority of teachers who stay in place and thus qualify for full benefits, DB pension systems offer relatively high maximum retirement earnings. But they do this by relying on significant teacher turnover, which lets these plans leverage contributions made on behalf of the majority of teachers to subsidize the retirements of a select few.

These plans have obvious benefits for governments, too, beyond the savings. As I’ve written before, more than two dozen states have restrictions against changing worker pensions, even for work not yet done. That makes it impossible to save any money by altering pensions for current workers. But when workers choose a new system themselves because they think it will benefit them, those restrictions generally don’t apply. As Orange County Supervisor Moorlach says in the piece I link above, it’s a way of getting savings without a face-off with unions and a collision in court.

And there is some growing evidence that government employees want choices like this. A poll by the Manhattan Institute’s Empire Center found that 70 percent of New York teachers said they would have considered a defined contribution plan if one had been offered at the time of their initial employment.

Steven Malanga

Steven Malanga is the senior editor of City Journal and a senior fellow at the Manhattan Institute. His latest book is Shakedown: The Continuing Conspiracy Against the American Taxpayer.

County labor negotiations nearing an end

By MIKE REICHER

Supervisor John Moorlach prays aloud, in public, for God to help the county’s finances.

In meeting invocations, and seemingly every opportunity, he and other top county officials bemoan state revenue losses.

All their despair has been building up to this point: By the end of January, county executives plan to make their final contract offers to five of seven employee unions, including the county’s largest – the 12,000-member Orange County Employees Association.

As labor talks sputtered over the past two years, Orange County’s general fund lost $73 million in ongoing annual state revenue, and officials say they now must cap employment costs, or skip construction projects and maintenance. But many of the rank-and-file employees have forgone pay raises for the past five years, and labor representatives say they’re now due.

“It’s going to come to a head,” Board Chairman Shawn Nelson said in an interview.

If a union rejects the county’s final offer, an independent panel would weigh both sides, and propose contract terms that the supervisors could ultimately impose. Attorneys and managers already completed their negotiations.

Tradeoffs

County officials have made a laundry list of deferred maintenance and construction projects jeopardized, they say, because of tight finances and climbing benefits costs.

Over the next five years, the county wants to spend $68 million to replace a central utility plant built in 1968. Officials also claim to have deferred $50 million worth of maintenance, on facilities such as the fourth floor Chow Hall at Central Men’s Jail, which is slated for a $1.9 million renovation.

Those costs are minor, of course, compared with the $1.7 billion the county spends annually on salaries and benefits.

Pay raises

Perhaps the most contentious issue is a pay raise for the general workers at OCEA.

County management has generally offered a roughly 3 percent increase in wages and benefits, Nelson said, because finance officials expect general-purpose revenue to grow by that amount annually, over the next five years.

But without any contract changes, health-care and pension costs will increase by about that same percentage, equaling about $14 million per year, leaving little or none for raises.

County leaders say some employees get regular “step” and merit pay increases, so to claim they haven’t received raises is disingenuous. General employees who qualified received an average 4.7 percent raise in fiscal year 2013, Chief Financial Officer Frank Kim said.

OCEA General Manager Nick Berardino disputes how the county wields that number. It only affects some employees, he points out. Indeed, only 12 percent of OCEA members qualified for a step increase in fiscal 2013.

The context for today’s talks stretches back much further. General employees received a 2 percent raise in 1978, Berardino said, in exchange for paying their full share of their pension costs. Nelson cites that as a bargaining chip.

But since then, Berardino says, OCEA members’ wages have been held back disproportionally, compared with other bargaining groups.

“We’ve done our part to relieve the pressure in terms of pension cost,” he said, “and the county has to do its part to make sure the employees have a living wage.”

Supervisor Pat Bates would rather give performance bonuses that an across-the-board raises.

“Hopefully we’ll find a compromise,” she said.

Pensions

While OCEA employees have been paying their full share of pension costs, some other groups until recently had the county paying much or all of their retirement fund.

Sheriff’s deputies and district attorney investigators still only pay about 10 percent of their pensions, according to the county, while the general employees pay about 40 percent – and the county picks up the remainder.

If the deputies and investigators paid their full employee share, the county could save $17 million annually, Kim said.

Association of Orange County Deputy Sheriffs President Tom Dominguez declined to comment. A representative of the American Federation of State, County and Municipal Employees didn’t respond to messages seeking comment.

“It’s not prudent for us to discuss any of the specifics,” Dominguez said. “Bargaining is done at the bargaining table.”

Executive benefits

Often, Berardino contrasts general employees’ benefits with those of executives and managers. The roughly 120 executives receive an additional retirement savings account, into which the county pays 5 percent of their salary. They also get a $765 per month car stipend, which Berardino calls a “two-Mercedes car allowance.”

Nelson counters that the car allowance isn’t just for lease or loan payments, but for maintenance and gas as well. He also says a comparison to top workers isn’t useful because of magnitude: A 1 percent raise for OCEA could mean $10.5 million annually.

“Those are real dollars,” Nelson said.

Berardino says it’s about fairness: “It’s not a matter of scale. It’s a matter of each individual employee’s compensation.”

FIVE-YEAR LOOK BACKS

December 12

2003

One of the editorials in the OC Register was titled “Public enemies.” The piece brought to light the joys of opposing money grabs by public employee union leadership. This is a good explanation of the environment that elected officials are in, the pressures they face, and vitriol that is utilized. Tragically, Mil Thornton would eventually be successful in obtaining a 2-percent-at-57 pension, retroactive to the date of his hire. It would pass on a 3-to-2 vote by the Board of Supervisors in August of the following year. Ironically, Mil Thornton would be one of the first to retire after the new benefit became effective, thus not having to make any personal investment toward the unfunded actuarial accrued liability that he created. He would also then sell his home near the top of the market and relocate. I don’t know if I would compare him to John Dillinger, but he made out like a bandit, and he left the taxpayers and his former employee union members holding the bag.

As the state struggles with budget problems, and as cities and counties complain about efforts to deprive them of needed state funds, it’s only reasonable to look at some of the main causes of California’s fiscal ills and stop approving measures that make matters worse.

Yet state public employee unions are adamant about halting discussions about the fiscal impact of retirement benefits that were dramatically expanded during the Davis administration. The former governor signed a 3-percent-at-50 retirement plan that allows public-safety officials to retire at age 50 with 90 percent of their pay with 30 years of service — even higher after unused vacation time and other incentives are thrown in.

Although this 50 percent increase in retirement pay applies only to public-safety unions, other public-employee unions have been trying to create similar benefits for themselves. So when Orange County Treasurer John Moorlach and Supervisor Chris Norby took lead roles in criticizing the cost of such benefits to Orange County taxpayers, some union officials became angry.

Although he doesn’t name names, Orange County Employees Association President Mil Thornton, writing in a union newspaper column, blasts the “anti-employee county leadership,” comparing officials to John Dillinger, who “cut a path of violence and misery across the Midwest during the 1930s. Today’s public enemies are often more subtle. They leave out the violence, but they cause more misery and human suffering than a dozen Dillingers.” He refers to vague “attacks” on unions, compensation levels and public employees.

We didn’t know that Orange County’s public union employees, who earn good salaries and receive excellent benefits, are in such a state of suffering and misery. Of course, hyperbole is part of the political game, and union leaders have every right to write what they want, even if the words are designed to spark anger and resentment.

Mr. Thornton wouldn’t tell us who he was talking about or what specific policies he was referring to in his column.

Unlike the deputy sheriffs, OCEA members aren’t eligible for 3 percent at 50. Nevertheless, Mr. Moorlach believes the union, which hopes to increase its own retirement benefits at some point, is trying to shut down debate about benefit costs.

The 3-percent-at-50 benefit, granted to Orange County deputy sheriffs, has imposed an immediate unfunded liability of $386 million on Orange County taxpayers, according to Mr. Moorlach. “The vehicle license fee is not coming our way and expenses are spiking,” said Mr. Moorlach. “Talk about an incredible squeeze play, and anyone who objects has to face a political action committee coming against them.”

A detailed Contra Costa Times article on Sunday shows a similar impact in that northern county, highlighting the dramatic increase in costs to taxpayers and an ensuing shortage of public-safety officers as they leave to take lucrative pensions. It tells the story of a 51-year-old deputy sheriff who retired and is earning more than he earned while working.

OCEA is free to call anyone names and make the most vile comparisons, but it certainly doesn’t advance this needed public debate about retirement plans and other union-related issues. “Comparing the Board of Supervisors to a murderer like John Dillinger is not helpful to the ongoing partnership we must have,” said Mr. Norby.

Who can argue?

Peter Larsen of the OC Register covered one of the first initiatives for the new Governor in “Borrowing time – The $15 billion bond issue being pushed by Gov. Arnold Schwarzenegger may take a while to percolate with voters.” An available strategy in getting one’s personal financial house in order is to refinance debt. The other alternatives are to reduce spending and/or increase revenues. A fourth strategy is to sell assets, but I’m not going to go into a major course on personal finance right now, but it is usually a combination of these techniques that are pursued. For government, the problem at the time wasn’t revenues, it was the exorbitant increases to annual spending of a one-time bump in revenues that put our state in the deep fiscal position that it is in (46th out of 50 states, according to my metrics). Regretfully, the Governator failed to blow up boxes and cut credit cards during his tenure. Arnold just could not stop the spending hemorrhaging and he knew fully well that increasing the car tax (vehicle license fees) got Gov. Davis recalled. Here is a selected segment of the piece:

As chances for the bond measure to make the March ballot heated up this week, voters started to pay closer attention. But unlike the decision it took to vote former Gov. Gray Davis out of office, this issue – a complicated fiscal measure that deals with a staggering amount of money – will likely prove a murkier one with which to come to terms.

As voters start their search for answers, those who most closely follow the state’s fiscal foibles generally offered the opinion Thursday that while using bonds to pay for debts isn’t ideal, it may be needed.

“Regretfully, I think it’s necessary,” said Orange County Treasurer John Moorlach. “It took several years for us to get into this mess, so it’s going to take several years to get out.

“But it’s something that has to be done,” he said. “If you had asked me a year and a half ago what would have to happen to get us out of this, I’d have told you we’re going to have to borrow our way out.

“The spenders don’t want to quit spending and the nontaxers don’t want to tax – so what’s left?”

2008

The Board was making the difficult cuts and layoffs in response to the downturn in the economy. It gave the OC Register the chance to weigh in with an editorial, “Shrink county government – Consider outsourcing, eliminating departments.”

It’s always hard when people lose their jobs, especially during the holiday season, but the proposed cuts in the county’s budget are long overdue and fairly modest overall. As the Register reported, budget negotiators have told the county’s Social Services Agency that its 4,218 employees will be required to take a mandatory unpaid furlough of two weeks over the next six months and that it must eliminate 210 jobs and 193 vacant positions. Nick Berardino, the union leader, had previously called for voluntary furloughs, and is now decrying the cold-hearted nature of the cuts.

The hard truth is that a voluntary furlough program will not produce anywhere near the needed savings. "The private sector has already made tons of adjustments because of [falling] revenues," Board Chairman John Moorlach told the newspaper. "Now it’s our turn." Yes, the private sector has been cutting jobs for some time now – more intensely so in recent days – and finally the economic crisis has gotten so bad that it is touching government agencies. The tax revenue just isn’t there to support current activities.

We do agree with Mr. Berardino that the cushy management salaries, perks and benefits also need to be trimmed. The board should ask itself what activities county government could stop or should stop doing, and look for entire departments to eliminate. It should consider outsourcing and privatization. It should examine where demand for services has actually fallen – planning and permitting come to mind – and contract those departments. Many public employees are paid to do tasks that are not legitimate roles of the government.

The county needs to cut $86 million or more from the budget. It can’t run a deficit, as can the federal or state governments, which is the good news. But we’re left wondering: What has the county been doing with record revenue as real estate boomed over the past decade?

December 13

2008

Bruce Rushton of The State Journal-Register, out of Springfield, Illinois, wanted to know if the arrested Governor was impacting the state’s reputation in “Arrest makes it easy to mock Illinois’ reputation.” Here is my segment of his piece (where the reporter misspells my name, while making fun of my pronunciation of the former Governor’s name):

Things could be worse, says John Moorlach, chairman of the Orange County (Cal.) Board of Supervisors and a man who knows what it’s like to live in a place loved by late-night comedians.

Moorlach owes his political career to Orange County declaring bankruptcy in 1994. As an unsuccessful candidate for county treasurer, he had predicted the financial meltdown, and he still hears about it.

“When Jefferson County in Alabama declares bankruptcy, Fox News calls us,” Moorlach said.

Even so, the public memory is short, says Murdoch, and the stain of bankruptcy is worse than the stain of auctioning a U.S. Senate seat. The governor’s last name (Moorlach pronounces it Blag-don-o-vitch) helps, he says.

“‘Ryan’ is a lot easier to remember,” Moorlach said. “This guy will be gone. Good riddance, and move on. We make cracks about Chicago—not necessarily Illinois—but Chicago’s fair game around the country.”

Brianna Bailey of the Daily Pilot addressed a favorite topic in “Annexation put back on the table – County official wonders if selling land would help fill financial gap. Some say the Newport name would help their property.” As an update, I should be receiving an analysis of the actual costs of the various unincorporated areas in the County from the Chief Financial Officer within the next few weeks. Here is a segment of the piece:

With Orange County expecting an $84-million budget gap next year, county officials may want to hand over unincorporated areas to other municipalities. This could be good news for Santa Ana Country Club and the South of Mesa Drive neighborhood, which have lobbied unsuccessfully to become part of Newport Beach for years, but Costa Mesa still has first dibs on the land.

In the wake of the budget crunch, Orange County Board of Supervisors Chairman John Moorlach has asked for an investigation into how much unincorporated areas cost the county versus how much money they bring in.

Getting unincorporated areas off the books is a priority for Orange County, but it’s not at the top of the list, Moorlach said Friday, a day after the county announced it would have to lay off about 200 social services workers. An additional 4,000 county workers were told they would have to take two weeks off without pay in the wake of an expected $20-million cut in state funding.

“Things get a little more interesting when you get short-handed,” Moorlach said Friday. “[Annexation] is a priority, but certainly with our financial situation and staff a bit stretched, it’s going to be difficult to make it a high priority at this time.”

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