MOORLACH UPDATE — SKY FELL — July 15, 2016

The concerns about the future impact of utilizing a defined benefit pension plan to provide a retirement benefit for public employees is sinking in, to steal a phrase (see MOORLACH CAMPAIGN UPDATE — Sinking Further — July 13, 2016 july 13, 2016 john moorlach).

Bob Citron, former Orange County Treasurer-Tax Treasurer, relied on returns that the market could provide. Well, the market doesn’t always cooperate, as he sadly found out. But, the participants in the Orange County Investment Pool, and their advisers, assured everyone that everything was fine. They arrogantly stated that they knew what they were doing, that they had done it for years, and that adequate reserves were in place. Unfortunately, the media bought into these lines.

Six months after the conclusion of my failed campaign, Orange County was in Federal Bankruptcy Court with a Chapter 9 filing. But, just a few short months before this occurred, a reporter with the OC Register once again went after me with the "Chicken Little" theme (see 9/11 Lookbacks september 12, 2009 john moorlach).

The headline was front-page, the top-of-the-fold, of the Business section, and it read "O.C.’s SKY DIDN’T FALL — Government: Critics of the tactics of Treasurer Robert L. Citron had predicted financial doom." It was another piece of evidence how reporters can be misled by individuals who are directly benefiting from a particular investment structure.

I really tried to prevent the train wreck that Orange County endured. I’m trying to do the same with pension plans. So, you can see that when I found that "SKY FELL" was an available license plate, I grabbed it.

The OC Register and its sister publications, in the piece below, provide an editorial that shows that the OC Register now "gets it." Thank goodness. Now the participants of CalPERS and its plan sponsors need to appreciate the predicament they are in and start discussing solutions. The time for arrogant platitudes has to stop.

SYMPATHIES: Allow me to share my sincere condolences on the loss of my colleague, Senator Sharon Runner. She passed away yesterday after fighting serious health issues. It was a deep honor to serve with her and wish her families comfort at this time. For news stories, see http://www.businessinsider.com/ap-california-republican-sen-sharon-runner-of-lancaster-dies-2016-7 and http://www.courthousenews.com/2016/07/14/california-senator-sharon-runner-dies-at-62.htm.

LA Daily News

EDITORIALS

Is sky falling on state’s pension finances?

The beleaguered California Public Employees’ Retirement System has been plagued by exceedingly generous retirement benefits for government employees, overly optimistic actuarial assumptions and some years of poor investment performance — exacerbated by excessively risky, politically driven and otherwise bad investment decisions, including the questionable use of private equity firms with large fees.

It now has only about 73 percent of the assets needed to cover its liabilities.

Unfortunately, the news is not getting any better, as the pension fund lost 2 percent of its market value during the just-ended fiscal year. That is significantly below the pension system’s 7.5 percent assumed annual investment return and discount rate. If the pension fund underperforms, or other actuarial assumptions turn out to be overly optimistic, taxpayers have to make up the difference.

And it looks to be much more than the case of just a bad year or two. In fact, the next three to five years are expected to be “a challenging market environment, not just for CalPERS, but for all investors,” CalPERS chief investment officer Ted Eliopoulos said during a committee meeting. “It’s going to test us.”

State Sen. John Moorlach, R-Costa Mesa, knows a thing or two about failed government investments, having gained fame — and public office — after predicting Orange County’s bankruptcy in 1994. “What has me baffled is that this is causing me great anxiety, but it does not seem to have the same impact on my colleagues in Sacramento,”Mr. Moorlach told the Orange County Register. “The governor has just signed the largest budget in state history, but he is not making any effort to prepay CalPERS, a 7.5 percent interest-rate charging debt.”

“CalPERS, like virtually all of its peers, is in deep denial about its fix,” writes Yves Smith on the nakedcapitalism.comblog. “While CalPERS is effectively accountable to no one, by virtue of having a protected status in the state constitution and an exceptionally weak and cronyistic board, if it continues with its delusional posture that it can earn its way out of its underfunded position, pushback is inevitable.”

More realistic assumptions would be welcome, but real reform will necessitate reining in government pay and benefits to private-sector levels and replacing the current pension system with 401(k)-style defined-contribution retirement plans for employees.

Some defenders of the status quo, particularly public employees unions, pooh-pooh the dire pension fiscal warnings. Those beating the drum for public pension reform are merely “crying like Chicken Little about how the sky is falling,” Dave Low, chairman of Californians for Retirement Security, a coalition of unions representing 1.6 million active and retired public employees, insisted to the Register.

But the tales of financial ruin have proven all too true for many governments. For examples of the results without reform, just look at Vallejo, or San Bernardino, or Detroit. Or just ask Sen. Moorlach, who heard the derisive Chicken Little claims more than a few times before Orange County went bankrupt. His license plate, as he related in his recent e-newsletter, says it all: “SKY FELL.”

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