MOORLACH UPDATE — Wisconsin Boy — October 20, 2014

Thirty-four years ago, the wedding present that my friend Chris Mueller gave me was a book, titled “Shadow of the Almighty,” by Elisabeth Elliot. Chris now serves as the Pastor of Faith Bible Church in Murrieta. And the movie, “End of the Spear,” which was released in 2005 provides the story of Elisabeth and Jim Elliot. I pulled the book from my library yesterday morning to accurately pass along a quote from Jim Elliot that has stuck with me these past three decades. It is provided in the opening of the book’s Prologue: “When Jim was a college student in 1949 he wrote these words: ‘He is no fool who gives what he cannot keep to gain what he cannot lose.’” This is a deep spiritual principle, but I also see a financial reality in it as well.

What if you purchased a retirement annuity, that was going to pay you a monthly benefit for life as your only source of income, but the purchase price was too low and the benefits would not meet the expected results. Would you take the monthly benefits until they ran out, taking the risk that you would outlive the income stream? Would you take the monthly benefits and wait for a receiver to notify you that the payments would be decreased, in order to match your life expectancy with the remaining principal? Or would you negotiate a lower monthly benefit now, in order to eliminate the financial disruption at a time in your later years when it would be very difficult to adjust to a reduction or elimination of the annuity payment? Sometimes life gives you a situation, like this one, where it might be better to give up what you cannot keep in order to receive something where the possibility of a reduction or loss is minimized or eliminated. This will be the decision that public employee unions will be facing. And it seems that it would be much better for union members to get in front of this fiscal dilemma now, than to have to face personal financial crises later in life. I believe this is the nugget from yesterday’s Watchdog piece in the OC Register below. For a more detailed discussion on the topic, see MOORLACH UPDATE — San Diego U-T — October 13, 2013.

BONUS: The big news for the Moorlach family is that our second grandchild, a healthy boy, was born on Saturday in the state of Wisconsin. He was born at 8 pounds, 8 ounces, and 20 inches long. Mother and father are doing well and my daughter and new grandson left the hospital today (see below). Mrs. Moorlach will be flying out later in the week. And the discussion on his name has not concluded, so his name will be announced soon. Congratulations, Sarah, Joseph and Jordi!

BONUS: Many of you know that I’m a big World Series of Poker (WSOP) fan (see the final LOOK BACK at MOORLACH UPDATE — Conditions of Children — October 24, 2013). I was pleasantly surprised last night while watching Part 8 of this year’s WSOP to see Orange County’s Peter Placey in the top 50. Peter is a long-time friend and, since I didn’t catch too many of the series’ parts in sequence, I fell out of my chair when I saw him. Now I’m going to have to watch the remaining episodes (and catch up on the past ones). Good luck, Peter! The County wisely blocks Poker sites, so the conclusion is still a secret to me (although you dodged a bullet last night – fun stuff!).

Cities could save pensions in bankruptcy

Stockton’s fiscal crisis could open the door at last to reducing costs.

By TERI SFORZA

Mother said that if you don’t ask for what you want, you’ll never get it.

We mention this because, even though rising public pension costs have helped drive cities into bankruptcy, none has ever asked the court to reduce those pension costs. Not even by one single penny.

Stiff those who bought the city’s bonds! Hike taxes on Joe Citizen! But don’t think about reducing pensions, because in California the pension promises made to public workers the day they were hired are considered eternal, immutable, unalterable. Even if the city can’t afford them.

Recently, however, the stone tablets on which all that was written shattered, changing the game for every public agency and Joe Citizen in California.

“California public employee retirement law … is simply invalid in the face of the supremacy clause of the United States Constitution,” declared the federal judge handling the city of Stockton’s bankruptcy case. “I’ve concluded the pension could be adjusted.”

Wow. Was Mother wrong?

Mind you, Stockton never asked to adjust pensions (it wants to pay pension bills in full and give bondholders just pennies on the dollar). And the gargantuan California Public Employees’ Retirement System – which has long (and some say arrogantly) argued that pension obligations are sacrosanct, even in federal court – says, “The real precedent … is that even if municipalities are allowed to impair pensions in the rare situation of bankruptcy, cities like Stockton can make the smart decision to protect the pension promises for their public employees.”

They could. But that doesn’t mean a bankruptcy judge will agree.

Judge Christopher Klein declined to rule on Stockton’s we’ll-pay-pensions-in-full-and-give-bondholders-just-a-penny-on-the-dollar-thank-you-very-much recovery plan, unsure if it’s, you know, fair.

Klein said he needed to think more about it and will take up Stockton’s recovery plan again next week. Every pension reformer and defender in California is essentially holding his breath in the meantime.

The judge may approve Stockton’s plan, or he may not. But with his declaration – and a similar one in Detroit’s bankruptcy last year – one might argue that every public agency in California has been handed a big stick that can hover over bargaining tables in employee union negotiations: How about maybe let’s agree to reductions here, voluntarily, and avoid the whole messy business?

“There is no question that decisions like Stockton have a chilling effect on employees and their representatives,” said Nick Berardino, general manager of the Orange County Employees Association, which represents some 18,000 public workers at city and county governments.

“It’s like a wake-up call,” said Karol Denniston, a municipal bankruptcy expert and partner at Squire Patton Boggs in San Francisco. “Everybody should be looking at this and saying, ‘There’s a game changer under way, and we’re going to have to re-evaluate our positions.’ It would be a good time for everyone to exercise some common sense.”

So California cities apparently have this big stick. Will they use it? Will legislators find a way to stop them?

‘CREATIVE RESULTS’

Orange County Supervisor John Moorlach, dubbed “pension warrior” in this space, suspects that the real impact will be at the bargaining table. More and more groups will find it in their best interest to follow in the footsteps of the aforementioned Orange County Employees Association.

In 2006, the county had racked up $1.4 billion in unfunded liabilities for retiree medical benefits. The county negotiated with OCEA and other bargaining units, and they all embraced reductions that shrunk the liability by $1 billion, or 71 percent.

In 2009, the county and OCEA struck a groundbreaking agreement: Workers could choose to decrease their pension formulas going forward and opt into a 401(k)-type program. It would give workers more take-home pay and cost the county less. It was viewed as win-win but has been blocked by the Internal Revenue Service, which frowns upon formula changes.

The bigger picture, however, may be that such things can be negotiated, and the new hammer might help it all come to pass. “The Orange County Employees Association showed that working at the bargaining table can provide creative results,” Moorlach said.

OCEA’s Berardino is more circumspect. He’s not sure Klein’s conclusions will have much impact, “especially in light of the governor’s pension reforms last year and the recovering economy,” he told us. “I think our reformed retiree medical program will have the best chance to be accepted by other labor groups, but our defined benefit/contribution hybrid plan will find very little interest or support.”

Stockton, for its part, strongly argues that pension reductions would leave it decimated as workers flee to other agencies with better benefits. But that might not persuade the court.

“In Stockton, it sure looks like the city is going to be forced to cut the pensions, at least a little,” said David Skeel, a bankruptcy expert and corporate law professor at the University of Pennsylvania Law School. “It will be interesting to see what Stockton does, since the city clearly isn’t anxious to go down that road. But the judge has signaled that Stockton needs to, and I personally think he’s right.”

YANK THE HAMMER?

Last month, Moody’s Investors Service calculated that the 25 largest public pensions in the U.S. – including CalPERS and the California State Teachers’ Retirement System – face about $2 trillion in unfunded liabilities. They averaged “robust” returns on their investments despite the recession, but liabilities tripled in the same period.

If public agencies can give these obligations a haircut in bankruptcy court, yet another front may open up in the pension wars: State lawmakers could make it harder for cities to declare bankruptcy.

California lawmakers control this process, and they’ve already made it more cumbersome: After Vallejo, the Legislature required cities on the brink of fiscal insolvency to go through 90 days of arbitration with their creditors before filing in federal court.

Legislators could slam shut the door to bankruptcy court altogether. “I wouldn’t be very surprised to see a coalition of teachers, nurses, firefighters, law enforcement people, district attorneys – and the list goes on – all lobby to the Legislature to change the rules so that no municipality can bring a bankruptcy action,” state Treasurer Bill Lockyer said recently.

But what happens when a struggling city does not adjust pension obligations?

VALLEJO

After giddily boosting pay and benefits for workers – lifetime health coverage for employees and their families after one year of service, the 3-percent-at-50 formula allowing public safety folk to retire with potentially 90 percent of their salaries, etc. – tax revenues in the little city of Vallejo plummeted.

It filed for bankruptcy in 2008, shedding more than $30 million in debt, renegotiating worker contracts and reducing retiree health care obligations by some $100 million.

That wasn’t enough. Vallejo emerged from bankruptcy in 2011 and already is scrambling. The city failed to scale back retiree medical benefits for all bargaining units during the bankruptcy and didn’t even try to alter pension obligations.

Among the top costs, of course, are higher payments to CalPERS for retirement benefits.

Contact the writer: tsforza Twitter: @ocwatchdog

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