MOORLACH UPDATE — City of Pasadena? — January 22, 2020

City of Pasadena

Larry Moreno, Sunday morning host on KRLA AM 870, interviewed me yesterday. He was shocked that the OC Register included the City of Pasadena in Sunday’s piece on fiscally distressed California cities (see MOORLACH UPDATE — City Rankings and State Budget — January 18, 2020).

Pasadena News Now provides an editorial submission that helps explain why Pasadena placed 462 out of 482 cities.

The Pasadena News Now piece also mentions Pasadena Unified School District. It placed 527 out of 944 school districts (see MOORLACH UPDATE — Wedding Day and Group 6 — September 27, 2019).

25th Anniversary Look Back

Pensions & Investments, the international newspaper of money management, had two pieces on Orange County’s implosion on January 23, 1995.

The first was titled “Risk Amnesia.” It’s a classic, providing sage advice in a simple manner and is well worth reading in its entirety (see MOORLACH UPDATE — LOOK BACKS — January 23, 2010).

The second piece was written by Barry B. Burr, an excellent columnist for this publication, who penned “Credit Raters Miss Many Danger Flags.”

Barry Burr retired in 2016 after more than 30 years at P&I writing the publication’s editorials. He has received, among other awards, the Northwestern University Medill School/Strong Funds award for editorial columns and the Peter Lisagor Award for editorials.

It was satisfying to see Mr. Burr hold the credit rating agencies to account in this nationally respected publication. The column is provided here, in full:

Two disturbing aspects of the Orange County financial debacle, both revolving on accepting responsibility, deserve attention.

For one, users of the credit rating services of Standard & Poor’s Corp. and Moody’s Investors Service Inc. hardly can take reassurance in knowing Orange County has given them no reason to change their policies in rating such debt.

For the other, Orange County, while filing suit against Merrill Lynch & Co. to recover $3 billion in losses from the risky leveraged strategy, has forgotten its own liability to investors in its securities who relied on its trust. Regardless of whether the county wins anything from Merrill Lynch, investors should have cause to hold the county responsible for their losses.

In terms of the rating services, both Vladimir Stadnyk, executive managing director-public finance at S&P in New York, and Barbara Flinckinger, assistant director and manager-Far West regional ratings and public finance at Moody’s in New York, said in interviews the situation in Orange County has resulted in no change in the policies the companies use to rate local governments. (Only last summer, for instance, both companies gave the county their highest short-term rating in regard to a $600 million taxable note issue.)

The two explained the situation in Orange County prior to the revelation of the unprecedented losses raised no red flags alerting them of the need for more scrutiny. No warnings? Among the warning flags the raters outrageously ignored:

The Orange County investment pool’s $8 billion in capital made it one of the largest single funds in the nation, excluding its leveraged position. But its huge leverage should have given it even more notoriety with $12 billion in borrowing boosting the pool’s size to $20 billion.

All of this was run by a sole person, Robert L. Citron, an elected treasurer and a politician with no appropriate financial credentials attesting to his knowledge of complex and risky investment strategies.

The highly leveraged investment strategy Mr. Citron used was rare among local or state governments, even unique apparently, as neither S&P nor Moody’s has yet identified another entity with such big overleveraged strategy in use.

The policies and objectives of the investment pool were unclear: Was the pool supposed to be a money-market type fund holding sacred the value of the principal, or a longer-term fund taking interest-rate risk to enhance return?

The pool’s performance was not measured against the market or appropriate benchmarks. So how could the raters judge the effectiveness of Mr. Citron’s strategy? They couldn’t.

John W.M. Moorlach, who opposed Mr. Citron in last spring’s election and made the pool’s riskiness the campaign issue, noted at the time the risk of rising interest rates and increasing calls on the pool’s collateral were harming its liquidity; and he presciently forecasted the pool’s ultimate $2 billion-plus loss.

Last year’s rising interest rates caused the worst fixed-income market in 15 years, resulting in widespread loses to investors. Yet, Mr. Citron was presumed by the raters to be immune from it or outsmarting it. The rating companies should have called on their analysts in other departments who rate publicly available money market funds, mutual funds and other investment funds. But neither took advantage of this expertise to examine the pool.

In a seemingly unconnected matter, S&P last year began with some ballyhoo attaching an “r” rating to those securities it felt were subject to particularly volatile returns because of their market sensitivity. Yet, it neglected to extend the implications of its “r” mark to one of the most sensitive funds in the country.

Without question, the credit ratings proved worthless on Orange County. Any user of them has to wonder how reliable the companies’ recent assertions that no other situation in the order of Orange County is out there lurking. The raters’ policies and processes need tougher internal scrutiny and improvement.

Guest Opinion | “Elections and Our Community’s Viability”

Voters Need Candidates Who Have Indisputable Data, Analysis, Disclosure and Accountability.

By SHERYL TURNER, CEO, and LOUIS McGRAW, California Broker ABR

Business Leaders for Better Government

On the heels of the optimistic Pasadena Mayor’s State of the City Address, Business Leaders for Better Government notes Senator John Moorlach’s (R-Costa Mesa) annual 2019 Financial Soundness Rankings for California’s 482 cities, identifying Pasadena as one of the four worst cities in the State for managing debt.

Ranking Pasadena as the ninth worst city per capita with a population over 50,000, the report (https://moorlach.cssrc.us/sites/default/files/City_CAFR_Report_for_2019_Jan._2_2020_Moorlach.pdf) identifies the unrestricted net position of purely governmental activities for each resident as negative $2,510. So, for a family of four, multiply times four, or $10,040.

Revenue Streams Identified

Our Mayor identified the four biggest sources of revenue that account for more than half of the City’s revenue: property tax, sales tax, utility users’ tax, transient occupancy tax, and then everything else, with “new development and rising property values” continuing to be the primary source driving revenue increases. These are all areas Business Leaders for Better Government monitors.

However, from 2018 to 2019, the property, sales and utility users’ taxes only increased by $520,000, (www.cityofpasadena.net) a statistically insignificant amount, further underscoring that new developments and new retail sources are sorely needed for our City revenue streams. One Councilmember seems to think increasing parcel taxes make more sense when it comes to generating revenue. As if housing were not expensive enough, he seems blind to the impacts of his random thoughts from the dais.

In the last three years, new development in the city has been obstructed by votes of the City Council, often ignoring staff recommendations but relying rather on the input from local residential or historical groups, who remain critical of the level of city fire and police services, yet who staunchly reject the development and business projects that could create the critical fiscal revenue to fund them.

The City continues to roll over the Rose Bowl Operating Company debt of $175 million which was incurred to update the facility. Yet it has not yet been able to come up with a plan that covers the annual stadium operating cost and debit service requirement in the future.

While it is a new retail revenue generator, the cannabis retail sales industry, has not performed to expectation in other cities. However, Pasadena’s controversial permitting process may finally be getting support from unopposed candidate Councilmember Tyron Hampton. Moving forward with an amended process may provide the legal structure this potential revenue-generator needs.

Our leaders have (successfully) promoted taxing residents with an additional sales tax under Measures I and J in 2018 to help balance the City coffers, a measure which Business Leaders for Better Government opposed. Yet despite the new tax revenues, the revenue is a drop-in-the-bucket strategy for fiscal relief when our annual liabilities for CalPERS continue to rise from $29.3 million in FY 2014 to $58 million for FY 2020.

The additional Measures I and J sales tax brought with it the misguided bonus of underwriting the poor management strategies of the Pasadena Unified School District (which continues to have “transparency” problems between the seemingly autonomous, out-of-control staff and the rudderless PUSD Board). All the while talk of an $850 million bond to bailout PUSD from their ever-looming insolvency continues, a staggering figure that PUSD estimates would burden the average home-owner/taxpayer with an additional $274 per year for the next 32 years until 2052. This would constitute the biggest property tax increase on all real estate property ever in the history of Pasadena.

“But it’s for the children” is staff’s argument, making questioners seem unsupportive of education when critics ask the Board to identify a single specific project for a designated site to be accomplished on a particular schedule.

The Transient Occupancy Tax, a revenue the city could directly increase by approving new developments, only slightly increased last year. Sadly, Pasadena has built only three new hotels in the past 30 years and discouraged the Kimpton Hotel project that would have generated $45 million in TOT, sales and property revenue per year. There is simply no factual basis for Councilmembers who say “we have enough hotels” when the Convention Center is perpetually short on the number of rooms it needs to book bigger events, all of which would generate even more revenues for the City.

Be on the lookout. Proposals about an increase in parcel taxes and in utility taxes paid by every homeowner and business may be next. That Pasadena already has one of the highest taxes and fees schedules in the State is of no concern to certain locals and City Council members.

What will new leaders do? Outsiders vs. Insiders in City Council Districts

Mayoral candidates for the March 3 Primary Nominating Election are long on rhetoric and short on specific solutions. One candidate opposes development (despite voting for it for 15 years) and has proposed redoing the General Plan to downzone developable properties. Ignoring that such actions are prohibited by State Laws, as far as he is concerned, the City should incur the expense of suing the State.

From their website platforms, one candidate opposes “overdevelopment” as a way to ensure quality of life, but at least seems more fiscally responsible; one candidate focuses only on the Northwest, which is good but misses the bigger picture on our City’s debts; and, one candidate’s platform includes making Pasadena more “business friendly” without explaining how. Bad actors, conflicts of interest and ‘dark money’ influence are very visible, with one candidate even suggesting a vote for him might get you a salary increase.

Independent and new District candidates carry the stigma of being ‘outsiders.’ But their original information and proposals are in the public interest. What we need is for all candidates to produce content using indisputable data, expert analysis on the issues that we care about most while improving their disclosure and accountability. To have better government, we need solutions and new revenue streams in the city; and we need to reign in the undisciplined PUSD School Board to keep Pasadena’s education and government solvency off the Moorlach report.

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MOORLACH UPDATE — City Rankings and State Budget — January 18, 2020

482 Cities

Our latest edition of the rankings for cities based on their per capita unrestricted net position (UNP) is creating a stir.  It should ruffle a few feathers.  

Disbelief is an interesting thing.  Some doubt the size of the numbers, which come right off of the audited Comprehensive Annual Financial Reports for each city.  The rankings are unbiased and objective. The only area for debate is the precise population number. But, being in the ballpark should be fine.

Others challenge the simplicity of the metric.  I could expand on the formula, but this one is rather accurate.  Let me give you an example. The Mercatus School at George Mason University has an annual ranking of states.  My analysis for the period addressed came to the same conclusion, placing California in 42nd place (see MOORLACH UPDATE — 2017 State Per Capita UNPs — April 2, 2018).  My metric may be simple, but it got me to the same place as a multi-formulaic approach did.

The OC Register did a little digging with the data and focused on four cities.  The reactions were anticipated, based on the above. One of the reactions I did not anticipate was a Mayor making a case for filing for Chapter 9 bankruptcy.  The city of Stockton did so in 2012, but by stiffing its pension obligation bond (POB) holders (see MOORLACH UPDATE — Pension Refinancing Gamble — January 2, 2020).  Eliminating debts will move a city up the rankings.  That’s a major point of why we went through this exercise. My rankings stand as a warning that some cities need to improve their finances if they want to avoid becoming at risk for the filing of bankruptcy protection or implementing a plan of disincorporation.

2020-2021 Proposed State Budget

The OC Register provides my initial reaction to the Governor’s proposed budget that was released on the traditional January 10th deadline.  I watched the Governor’s entire press conference, which started at 10 a.m., until I had to break for a 1 p.m. meeting with the Mayor of Huntington Beach.

Sacramento is enjoying budget surpluses, while the cities are making budget cuts to address pension and retiree medical contributions.  There seems to be something wrong with this picture. Especially when the state doesn’t hesitate to take funds from cities when its coffers are empty.

I also announced the release of my study on the Lanterman-Petris-Short Act and how it has failed those with severe mental illness.  

25th Anniversary Look Back

On January 19, 1995, my friend Arthur B. Laffer published a newsletter with Jeanne Sinquefield and L. W. Vitanza, through his firm, A. B. Laffer, V. A. Canto & Associates.  It was titled “A Tearful Time For The Duke — The Day John Wayne’s Orange County Went Broke.” It’s an incredible, 11-page thesis on Orange County and the bankruptcy filing, especially so soon after it occurred.  Art Laffer was kind enough to provide an electronic version and it can be viewed at my Senate website.

Much of what was written then seems eerily applicable for today.  It certainly looks like history is repeating itself. Here are a few segments from the “Introduction and Summary:”

. . . while we surely didn’t foresee what was going to happen to Orange County, we did predict that something was going to happen to someone.  The fiscal pressures in California are incredible and have been extraordinarily high for the last four and one half years. But even here in California the fiscal pressures have not been borne evenly.

The state raised tax rates in 1990 and 1991 causing a precipitous decline in the state’s economy relative to the rest of the nation.  But in spite of the economic collapse suffered by the whole state, the state government experienced a lesser revenue decline than did the municipalities because the state government’s revenue losses were partially offset by higher tax rates at the state level.  For municipal governments the offsets were few and far between. Municipalities did not have the tax rate increases.

Why these 4 Southern California cities were called out for debt management troubles

Inglewood, Pasadena, Torrance and Cathedral City are piling on debt because of pension obligations and retiree medical care costs

By TONY SAAVEDRA

https://www.ocregister.com/2020/01/17/why-these-4-southern-california-cities-were-called-out-for-debt-management-troubles/

Four Southern California cities have been identified among the worst in the state for managing debt in an annual financial report conducted by an Orange County lawmaker.

The study by state Sen. John Moorlach, R-Costa Mesa, lists Inglewood — with its soon-to-open football stadium and AA credit rating — as the fifth worst city in the state per capita with more than 50,000 population.

When it comes to reading financial tea leaves, Moorlach believes one of the best indicators of budgetary health is a city’s unrestricted net assets, defined as funds that are free of any encumbrances after bills have been paid.

Some cities, such as Inglewood, no longer have unrestricted net assets and, in fact, have dug themselves into a deep hole instead. They now have unrestricted net deficits, usually attributed to pension benefits and retiree medical care.

In June 2018, Inglewood — with a population of roughly 110,000 — had an unrestricted net deficit of $388.7 million, amounting to $3,423 in debt for every person who calls the city home.

Inglewood Mayor James T. Butts Jr. considers Moorlach’s analysis without merit.

“Using this as an indicator of financial health is like going to the doctor to get a checkup and ignoring blood pressure, cholesterol and blood chemistry and making an assessment (based) on the length of your hair,” Butts said.

But some financial experts say Moorlach’s analysis is a very real way of determining whether a city is kicking the can on its long-term debt.

“The problem I see is how are you going to undo this (debt)?” said Gary Caporicci, senior partner with the Santa Ana accounting firm The Pun Group. “The answer is you’re not going to be able to turn this around.”

Oakland topped Moorlach’s list with an unrestricted net deficit of $5,701 per person, but three other Southern California cities — Cathedral City, Pasadena and Torrance — joined Inglewood among the top 10 worst cities per capita.

Other cities, including Los Angeles, Ontario and Anaheim, showed large losses in the unrestricted net asset column in 2018, allowing their debt to grow dangerously.

“That these cities’ governments are in financial trouble signifies either disturbing mismanagement or overconfidence in their economies’ prowess,” the report said.

Inglewood

There’s little doubt that Inglewood has roped itself a sports cash cow that the mayor predicts will pump $10 billion worth of revenue into the city by 2024. SoFi Stadium, a $5 billion complex that will be home to the Los Angeles Rams and Chargers, opens this summer. Additionally, the L.A. Clippers hope to build a new arena in Inglewood by 2024. Both represent a revenue boom for Inglewood.

But the city’s handling of its unrestricted net assets tells a story less rosy.

“If your unrestricted net asset is above zero, you’re financially sound. If your assets are below zero, you gotta start working a plan,” said Moorlach, who predicted Orange County’s bankruptcy in 1994.

Butts counters that Moorlach’s analysis is overly simplistic.

“All that really matters is if you are able to pay at present your obligation,” the mayor said. Inglewood’s finances are robust, with more highways being laid, trees being trimmed, officers being hired, he said.

“Are your sources of revenue growing or diminishing?” Butts asked.

Inglewood this fiscal year has general fund revenues of $125 million.

Butts noted that the city of Stockton, which filed for bankruptcy in 2013, is now listed by Moorlach as one of the best in California for managing debt. Stockton also topped another list of well-run cities by national watchdog group “Truth in Accounting” in 2018.

“The easiest way not to owe money is to go bankrupt,” Butts quipped.

In 2017, Inglewood danced around a law restricting the use of pension obligation bonds for anything but pensions. It did that by designating two-thirds of the $53 million bond proceeds a reimbursement for general fund payments it had already made to the California Public Employee Retirement System in 2016 and 2017.

Cathedral City

Cathedral City, with a population of about 54,000, actually was the top Southern California community on Moorlach’s list, coming in at fourth worst in the statewide rankings. The desert community in Riverside County showed an unrestricted net deficit of $209.3 million in 2018, penciling out to negative $3,821 per person.

A 31-square-mile business-resort community just east of Palm Springs, Cathedral City’s sales tax has increased by more than $5.7 million from 2010. In 2018, hotel tax revenue jumped in one year by more than $650,000. As long as the cash is flowing, the city won’t have a problem, experts say.

Pasadena

Pasadena, owner of the iconic Rose Bowl, is known for its hip vibe and old money. It also stands as the ninth worst city per capita with a population over 50,000 in Moorlach’s analysis. Pasadena has an unrestricted net deficit of $362.3 million and a per capita of minus $2,510.

City Director of Finance Matthew Hawkesworth complained that Moorlach’s report “doesn’t tell you the whole picture of what’s going on in Pasadena.”

Sure, the city has a lot of debt, but Hawkesworth said its debt has been built “conscientiously and purposefully.” The city has taken steps to lower its pension and medical debt by having new employees pay a greater share of those costs.

Pasadena covers 23 square miles and had a general fund of $237 million in 2018.

Torrance

Home to one of the country’s largest malls, a municipal airport and American Honda Motor Co.’s design facility, Torrance is known for its solid manufacturing base along with its hospitals, fueling a $200 million general fund in 2018.

But the city’s past generosity with pensions dug Torrance into an unrestricted net deficit of negative $354.1 million, or minus $2,373 per capita — the 10th worst in California. Pensions to first-responders make up a large part of the city’s debt.

Explained Finance Director Eric Tsao: “The community puts a high price on public safety. … It’s something we are dealing with, we treat it almost like a mortgage.”

Cities getting worse

Moorlach also called out other cities for large losses in their unrestricted net assets in 2018.

In one year, according to his study, the city of Los Angeles’ unrestricted net deficit grew by $1.4 billion, the biggest jump of any city in California.

Employee pension and medical benefit debts account for about $1.2 billion of that slide deeper into debt, Moorlach said. While Los Angeles accounts for 10 percent of California’s population, it comprises 16 percent of the combined increase in unrestricted net deficit for all 482 cities in the state.

Pension and medical benefit debt also was to blame for Ontario’s $163.6 million drop in unrestricted net assets in 2018. The city, however, is still $16.2 million in the black.

“We don’t think the report tells the true story,” said city Executive Finance Director Armen Harkalyam.

Boasting an airport, convention center and outlet mall, Ontario has a general fund of $280 million. Harkalyam said the city is looking at pension obligation bonds and other trusts to pay its debt to city retirees.

In Moorlach’s analysis, Anaheim added $140.9 million to its unrestricted net deficit in 2018 — bringing its debt to negative $551,607. However, Anaheim officials countered that Moorlach failed to take into account updated numbers that lowered Anaheim’s deficit by $48 million.

Moorlach, however, stands by his analysis, listing Anaheim as taking the seventh largest slide into debt in 2018.

Ninth on the list of cities with the largest loss in unrestricted net assets is Beverly Hills, falling in 2018 by $129 million. The city still has unrestricted net assets of $121 million. The city’s general fund revenues in 2018 were $239 million.

Gov. Newsom’s budget proposal: the good, the bad, the questionable

By JOHN MOORLACH

https://www.ocregister.com/2020/01/17/gov-newsoms-budget-proposal-the-good-the-bad-the-questionable/

The state is flush with income tax revenues and is devouring every dollar in sight. Its subsidiaries – the cities, counties and school districts – are watching in dismay as they are on forced diets and making budget cuts just to feed their pension and retiree medical obligations. They are looking for scraps from Sacramento’s table. Let me address a few of the most egregious problems facing this gluttonous state.

In his budget proposal press conference for fiscal year 2020-21 last Friday, Gov. Gavin Newsom commendably brought up a crucial tool to deal with the state’s burgeoning homeless problem: the need to reform the Lanterman-Petris-Short (LPS) Act, which deals with how to involuntarily commit those who are mentally ill.

He mentioned he is a “civil libertarian,” but the LPS Act, passed in the year of his birth (1967), is anything but “civil” if it leads to the displacement, maltreatment, neglect and death of thousands of our severely mentally ill family members and neighbors on California’s streets.

The Legislature does not fully understand the mess the LPS Act is, so it is appropriate that the state’s “Homeless Czar” – as he now calls himself – is looking into it. My new analysis of the LPS Act is just out and on my state website. He is welcome to use it as a resource.

On another positive note, Newsom brought up helping cities with their pension deficits, but he needed to specify how to pay for it. He also proposed spending more on higher education and emergency preparedness responsiveness, both of which are overdue.

Thankfully, the governor announced a deal had been reached concerning the state’s lawsuit against Huntington Beach on its compliance with low-cost housing construction. But that’s not how Huntington Beach Mayor Lyn Semeta saw it that very day. Is it a hollow victory?

Some other areas suggest better direction for state resources, but the solutions are problematic. The biggest is education. State funding on schools will rise just $1 billion. That is because the general fund overall will rise just 2.3 percent. And the Proposition 98 formula dedicates 40 percent of that funding to K-14 schools.

The governor commendably brought attention to the need to close the achievement gap of Latino and African American students. He said the state needs to reevaluate recent efforts to close that gap, such as the Local Control Funding Formula (LCFF), which a recent state audit found had no benefit to student performance.

And he stressed the importance of attracting talented, enthusiastic young teachers. But, in a recession, it’s these newer teachers who are released first, thanks to teachers’ union protocols. So why pursue a fifth year of college? For a potential $20,000 bonus? Unfortunately, the governor did not mention ending this “last-in-first-out” system, merit pay for the best teachers, or making it easier to fire incompetent and abusive teachers.

Indeed, last year he dealt with a false threat from the traditional public schools, signing into law 15 bills that starve charter schools of innovative educational approaches. The purpose of these schools is to raise children, especially in Latino and African-American areas, to excellence. Fixing California’s public schools will take a joint effort with these parental preferred options. Let’s hope the extra funding is spread around in a balanced fashion.

The governor also supported the $15 billion school bond on the March 3 ballot, but did not mention the $900 million a year cost to the general fund it will impose for up to 30 years. Where is that money going to come from? Especially when annual surplus funds are trending downward?

Increasing the housing supply would help alleviate the high cost of living for all Californians. The governor’s method of throwing money at the problem is not as good as reducing the red tape needed to begin construction, especially reforming the California Environmental Quality Act.

The governor also wants to fund medical care for undocumented immigrants age 65 and older. But this is the age group that most uses medical care, meaning the costs could soar well above the $101 million of his estimate.

Instead of doing so much, perhaps the governor should have committed the majority of the surplus of $5.6 billion to reducing state unfunded liabilities, estimated by some to be an insatiable $1 trillion? He only committed to a reduction of $1.1 billion in the out years of 2023-24. This may be too little, too late, and eaten up by bond payments.

There is plenty more to talk about and I look forward to collaborating on the budget with the governor and my colleagues in the Legislature, especially the areas on which we can find common ground. These areas begin with helping the homeless mentally ill, giving children a good education and assisting the state’s struggling cities, counties and school districts.

John M.W. Moorlach, R-Costa Mesa, represents the 37th District in the California Senate.

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MOORLACH UPDATE — Vacaville Studying OPEBs — January 17, 2020

Addressing OPEBs

The Vacaville City Council recently established an advisory committee to review their Other Post-Employment Benefits (OPEB) situation. The Reporter provides the details.

Orange County addressed its Retiree Medical liabilities in 2006. The effort, negotiated with the majority of the bargaining units, reduced the unfunded actuarial accrued liability (UAAL) from roughly $1.4 billion to a little more than $400 million, thus reducing the annual required contribution by approximately $100 million per year. I assisted in the construction of this effort, which in retrospect, replaced the funds lost in the Citron portfolio implosion. This endeavor came just before the Great Recession, providing some relief to the County of Orange during rough years. This and other fiscally responsible efforts during my tenure helped move Orange County from 46th place out of 58 counties to a ranking in the middle of the pack.

If the state of California pursued a similar strategy as Orange County did a little more than 13 years ago, it could reduce its OPEB UAAL by some $65 billion. I commend the city of Vacaville for establishing the committee and for working with its actuary. The first step in a 12-step journey is to admit there is a problem. That’s all I’ve been trying to communicate with my rankings.

25th Anniversary Look Back

Now that I’m in the State Senate, what occurred on January 17, 1995 has an even more special impact. It was the Senate Special Committee on Local Government Investments Hearing at the State Capitol, Room 4203. I have now spent a lot of time in Room 4203 as the Senator for the 37th District.

The proposed written questions provided to the panelists were profound. The Committee published these materials, including the list of its members.

Here is the posted agenda for that historic hearing:

9:00 – 9:15

Opening Statements – Committee Chairs, Senators Lucy Killea, and William A. Craven

9:15 – 11:00

Orange County Treasurer’s Practices – Robert Citron and Matthew Raabe

11:00 – 12:00

Oversight and Disclosure – OC Supervisors Gaddi Vasquez and Roger Stanton, OC Auditor-Controller Steven E. Lewis and John R. Miller, National Director of Government Auditing, KPMG Peat Marwick (OC’s outside auditors)

12:00 – 1:30

Lunch Break

1:30 – 2:30

Affected Local Agencies – Superintendent Mac Bernd, Newport-Mesa USD; Kim Stallings, Business Manager, Placentia-Yorba Linda USD; Robert Locke, Director of Financial and Administrative Services, City of Mountain View; and Brian Mayhew, Finance Director for the City of Westminster

2:30 – 4:00

Relations With the Securities Industry – Michael Stamenson, Director, Merrill Lynch; Kevin Hennessey, Managing Director, CS First Boston Corp.; John Landers, Principal and Branch Manager, Morgan Stanley & Co.; Jeff Leifer, Principal, Leifer Capital; and James Van Horn, Ph.D., Professor, Graduate School of Business, Stanford University

4:00 – 4:30

Public Comment

OPEB background delivered at first Advisory Committee meeting

By NICK SESTANOVICH

https://www.thereporter.com/2020/01/16/opeb-background-delivered-at-first-advisory-committee-meeting/

The Other Post-Employment Benefits (OPEB) Advisory Committee held its inaugural meeting Thursday to go over Vacaville’s approach to OPEB and begin the process of making recommendations to the City Council.

On June 25, the Solano County Grand Jury issued a report which opined that the city’s OPEB package for retirees was “not sustainable” and could lead to a loss of employees and services to citizens if not addressed. Among the report’s recommendations was the formation of an OPEB oversight committee to study the OPEB package and deliver suggestions to the council.

Staff did not initially support this recommendation, but the council formally suggested that an “advisory committee” would be more appropriate.

At Thursday’s meeting, Jay Yerkes, the city’s treasurer, served as chair and Robert Denton, Sherri McBride, Jim Leland and Laura Dougherty served as committee members. The group will meet over a 120-day period to produce a report to be submitted to the City Council.

“We are doing a limited, few-month scope of work to see if there is any stone that hasn’t been overturned already and if we can magically come up with something that hasn’t been talked about in the last 10 years that the city’s already been working on this,” Yerkes said.

Other Vacaville city staff were on hand to answer questions and present reports, including City Manager Jeremy Craig, Human Resources Division Manager Jessica Bowes, Administrative Services Director Dawn Leonardini and Finance Manager Ken Matsumiya. Bowes and Matsumiya delivered a Power Point presentation on the city’s OPEB background and how the package works.

According to the presentation, the city contracts with the California Public Employees’ Retirement System (CalPERS) for pension and health benefits. The contract began in 1975, and Bowes said that the pension was dictated by the Public Employees’ Retirement Law, while health insurance was dictated by the Public Employees’ Medical & Hospital Care Act.

The city currently has three tiers for retiree medical. The first tier consists of an 85-15 contribution and a vesting schedule. The second tier consists of just a vesting schedule, which is based on an employees’ total years of service with at least their last five years being in Vacaville. The third tier consists of a substantial reduction in retiree benefits while keeping an employee’s benefit the same as other active employees.

Bowes said the first two tiers are closed plans that do not allow new entries. The third tier, however, is an open plan and has about 20 employees enrolled.

Matsumiya said valuation is performed by the city every two years, and the data is sent to an actuary. The actuary will be presenting the results of the most recent valuation at the next meeting.

In the 2019 fiscal year, $5.2 million was contributed to the OPEB trust fund, and $45 million was in the trust as of Dec. 31. The city also paid $4.8 million for health premiums.

“Retiree premiums annually end up being around $5 million,” Matsumiya said. “We’ve set aside pretty much $8 (million) to $9 million to fund retiree payments.”

In a public comment, resident Wendy Breckon said she had studied the OPEB issue since the Grand Jury report was issued. She was thankful the city established the committee because she felt Vacaville’s fiscal status was something that needed to be addressed.

Breckon cited a Transparent California report, which ranked Vacaville No. 112 out of 465 cities for health care spending, as well as a report by Sen. John Moorlach, R-Costa Mesa, which ranked the city in the bottom 10 percent for “financial soundness.”

“To fix any problem, you have to realize there’s a problem,” she said.

Breckon also felt that 120 days was a short amount of time to solve a complex issue. Yerkes said the council intended to have it done in a limited time period to see if the committee could come up with good solutions in a finite time period.

Leland noted that the next meeting fell on a Monday — Jan. 27 — and asked if it was possible for meetings to be held the same day of the week. Yerkes said it was possible to regularly hold meetings on Thursdays at 2 p.m., but Leonardini said the Monday meeting was due to the actuary being in town and scheduled to present at the City Council the day after.

“You’re just getting an opportunity to see it first,” she said.

Meetings are held in Conference Rooms A/B at Vacaville City Hall, 650 Merchant St. They are open to the public.

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MOORLACH UPDATE — Democrats Trying to Raise Taxes Again — January 16, 2020

Proposal to Raise Corporate Tax Rates

Chief Executive Magazine has consistently ranked California as the worst state in which to do business for the last fourteen years.

Yesterday, the Senate Governance and Finance Committee, on which I serve as Vice Chair, had a hearing for SB 37 (Skinner). It should help our state retain its standing as the worst state for business another year, as this bill proposes to increase the state income tax rate on certain public companies that do business in California. The proposed calculation should make the C.P.A.s who prepare multi-state corporate income tax returns very happy, as I see significantly more billable time to crunch the numbers.

It is based on a proposed compensation ratio, which compares the pay of the Chief Executive Officer (CEO), or the highest paid employee, to the median compensation of all employees of the company.

It also has a 50% rate increase if a company reduces its U.S. full-time workers by 10% or more during the previous taxable year. It assumes that the reduction is due to outsourcing to other countries.

Also, to take a swipe at the federal Tax and Jobs Act, the tax increase becomes inoperable for taxable years when the federal corporate tax rate is 35% or more, the rate before the Tax and Jobs Act dropped it to 21% in 2017

For corporations with taxable income in excess of $10 million, the rate would go up from the current 8.84% to between 10.84% and 14.84%. The higher the compensation ratio, the higher the corporation’s tax rate. If passed, the Franchise Tax Board expects additional revenues of $4.1 billion in the fiscal year 2021-22. Sacramento does not need more tax revenues.

It is a social engineering effort for large corporations to address a perceived wage gap. But, it will also create the highest corporate tax rate in the nation. Currently the top state rates are New Jersey’s 11.5% and Iowa’s.

Public employee unions are the main supporters of this bill, with the business community fully represented in opposition. As these unions control the legislature, you can guess how the votes went.

I became a legislator to decrease tax rates and save the state’s pension systems. Adding another tax burden will not help the share prices of publicly traded corporations held in the retirement systems’ portfolios.

I can think of different techniques for changing corporate behavior. I did not see Sacramento putting an onerous compensation contract on Elon Musk when Tesla enjoyed state-subsidized cars through tax credits and carpool stickers. Yet, this week he qualified for a $346 million payout in stock options. Talk about being a little hypocritical.

The state also pays certain employees very high wages. We just discussed one state program recently on this very subject (see MOORLACH UPDATE — State Compensation Insurance Fund — January 4, 2020).

The Associated Press covered the Committee meeting and The Press Democrat piece was selected.

The bill now moves to the Senate Rules Committee, where the Senate Pro Tem has to decide if it will move forward. Something tells me that she will not be amused with yet another tax increase proposal by the Democrats, especially during an election year. Hopefully, SB 37 will wake up the business community, as this is another great example of what happens when a legislature is lacking balance in membership.

California’s 482 Cities

My annual report on the financial status of California’s cities drew a columnist’s attention in the Lodi News-Sentinel.

As to why the city of Lodi has such a low standing, its city manager provided a very professional and realistic response. But, the city has also made significant staffing reductions in recent years in order to make its annually required pension plan contributions. And the next recession could prove to be a real shock to its fiscal condition.

25th Anniversary Look Back

On January 16, 1995, the Orange County Business Journal, in their Comment section provided a Reader’s Digest version of my letter to David Threshie, then-Publisher of the OC Register (see MOORLACH UPDATE — OC Register Coverage Look Back — September 16, 2019). Here was their introduction to the selected paragraphs:

As we’ve stated before on this page, the Business Journal, like the rest of the local media, share in the blame for the county’s bond debacle because we failed in our role of public watchdog. But the Orange County Register will be especially haunted by the way it dismissed criticism against Treasurer Robert Citron’s investment practices that were raised by candidate John Moorlach.

Three months after Citron’s reelection, the Register ran a story suggesting Citron had been vindicated against Moorlach and other critics: “The campaign is over, interest rates are leveling out, and to tweak a line from Mark Twain, reports of Bob Citron’s death spiral appear to have been greatly exaggerated.” In a 4-page response to Register publisher R. David Threshie, Moorlach complained of biased reporting and reasserted his points.

The excerpts printed here, like other warnings issued by Moorlach over the course of last year, proved eerily prescient. Moorlach is expected to be appointed to Citron’s vacated post. He still hasn’t heard from Threshie.

California bill targets highly paid corporate executives

ADAM BEAM
ASSOCIATED PRESS

https://www.pressdemocrat.com/news/10591459-181/california-bill-targets-highly-paid?sba=AAS

California is considering raising taxes on some of the country’s largest companies, but the size of the tax increase would depend on how much its highest-paid executive make compared to its employees.

The bigger the gap, the bigger the tax increase.

The bill by Democratic state Sen. Nancy Skinner passed out of its first committee hearing on Wednesday, keeping it alive a head of a Jan. 31 deadline to pass the Senate.

The proposal would only apply to companies that post at least $10 million of taxable income from business conducted in California. That would apply to about 2,000 companies nationwide, including the Walt Disney Co., headquartered in Burbank.

Heiress Abigail Disney, granddaughter of Roy Disney — the brother of Walt Disney and one of the company’s co-founders — supports the bill. She has no formal role at the company, but she has been advocating for higher wages for the company’s workers.

“At the happiest place on Earth, they are paid so poorly that they rely on food banks, sleep in cars or live so close to the bone that even a small problem could send them into a death spiral,” Disney told state lawmakers on Wednesday.

Abigail Disney’s comments about the company’s workers stem from a visit she made to some Disney Land employees at an offsite union office in Anaheim.

Walt Disney Co. CEO Bob Iger received more than $65 million in 2018, according to media reports, a higher-than-usual figure because of a one-time stock award connected to the company’s acquisition of 21st Century Fox. That salary was more than 1,400 times the median pay of a Disney employee, according to a study from Equilar.

In 2018, shareholders voted to reject Iger’s pay package in a non-binding vote. Last year, the company responded by cutting $13.5 million of Iger’s future potential earnings.

A spokesman for the Walt Disney Co. said the company committed to a minimum wage of $15 an hour, health insurance for a little as $6 a week, childcare subsidies and an initial investment of $150 million to fully pay for college degrees of hourly workers.

“The truth is, Disney has made significant investments to provide for the upward mobility of our employees,” according to a statement from the company.

Many of the state’s business groups oppose the law, including the California Business Roundtable, which represents large companies. President Rob Lapsley said the bill would keep companies from coming the state.

“I’m not here today to defend CEO pay. What I am here today to do is to defend jobs,” he said. “Take the CEO pay out of it. What (the bill) is sending is a broader signal that the Legislature is intending to be able to regulate every aspect of free enterprise in this state.”

California would not be the first government in the U.S. to try this, but would be the the largest. In 2016, city officials in Portland, Oregon, approved a 10% tax on publicly traded companies that pay their CEOs 100 to 250 times the average worker.

Some lawmakers signaled they want some changes before the bill comes for a vote in the Senate.

One question is whether the state should make money off the tax. Lawmakers could write the bill so it rewards companies that have smaller gaps between their CEO’s salary and the average pay of their workers.

As written, state officials estimate the legislation could bring in up to $4.1 billion. Skinner says it’s reasonable for the state to make money off the tax because the rising income inequality means more workers are relying on public assistance.“California’s taxpayers are basically paying the cost for the services that employees then turn to because they don’t have a wage that can provide their families needs,” Skinner said.

“California’s taxpayers are basically paying the cost for the services that employees then turn to because they don’t have a wage that can provide their families needs,” Skinner said.

Republican state Sen. John Moorlach questioned why the Legislature would seek to meddle with the salaries of big companies when athletic coaches at some of the state’s public universities make millions of dollars.

“Are we going to be looking at our own house,” Moorlach said.

Skinner said public employees in California “by and large … have a very decent wage,” saying most of them do not face “the types of problems our low-wage workers are facing.”

Abigail Disney told lawmakers the issue was a problem of corporate culture “50 years in the making.”

“If your entire reputation as a company relies on the idea of its clean floors, you had better be willing to pay your workers enough to do the job well and with dignity,” Disney said. “Because dignity is not a perk.”

Steve Mann: Could Romanek abductor walk free in 2020?

https://www.lodinews.com/opinion/article_8729db8a-370c-11ea-855e-a7faed0d4f70.html

BY THE NUMBERS: The rankings are in and they’re not pretty. State Sen. John Moorlach recently released his annual report on the financial health of California cities, ranking each one of them according to what he calls their financial soundness. It mainly focuses on each city’s “unrestricted net position” (UNP), basically the difference between assets and liabilities. It’s kind of like the net equity of a business. Some cities have a positive number, but most in California don’t. So how does Lodi rank? We came in 426th out of 482. Not at the bottom, but close. How can this be? All the numbers are positive until you factor in pension and other post-employment benefit (OPEB) liabilities, both huge negative numbers. Holy financial statements! Does this mean Lodi is broke? No. Does it mean the city can’t pay its bills? Nope. The city’s general fund has about a $10 million reserve. It means that if the city had to liquidate and pay off all its liabilities, including the ones from PERS, it couldn’t. It would be a little short — about $117 million short. What does the city have to say about all this?

“If all of (the city’s) liabilities were accelerated to current, yes, we could not pay all of our (PERS liabilities) and all of our operations costs,” City Manager Steve Schwabauer admits. “But of course that will not happen,” he emphasizes. “Almost all of the negative UNP is long-term liabilities we will pay over many years. They are not fully funded today and certainly should be,” he says.

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MOORLACH UPDATE — The Fur Flies In San Francisco — January 14, 2020

Unconstitutional Attack on Consumer Rights

The audacity of legislatively disallowing the fur industry in the state of California is chilling, and possibly unconstitutional.  It certainly shows what can happen when mere mortals are granted a little legislative power.

The California Globe provides pushback by the fur industry in their piece below (also see MOORLACH UPDATE — AB 44 Fur Banning — September 12, 2019 and MOORLACH UPDATE — 2019 Veto-Worthy Bills and Second 94 — September 21, 2019).

25th Anniversary Look Back

On January 16, 1995, I made it to the Business Day section of The New York Times in “New Era for Orange County Jeremiah,” by Leslie Wayne (see  https://www.nytimes.com/1995/01/16/business/new-era-for-orange-county-jeremiah.html).

Fur Industry Sues San Francisco

Lawsuit says City’s fur ban an unconstitutional attack on consumer rights

By Katy Grimes

https://californiaglobe.com/section-2/fur-industry-sues-san-francisco/

‘Memo to California politicians: You do not have the right to stop people from buying things just because you or special-interest lobbyist allies don’t like the products.’

The International Fur Federation, based in London, announced Monday it has filed a lawsuit to prevent San Francisco from implementing a city ordinance banning the sale of fur.

The ordinance, passed in 2018, gave existing department stores until Jan. 1, 2020, to sell off their remaining fur stock and prohibits the sale of newly manufactured fur coats, hats, gloves, lined parkas (such as Canada Goose jackets), and other products.

The lawsuit also argues San Francisco has no legitimate local interest to ban fur sales and that the ordinance is an unconstitutional restriction on interstate and foreign commerce.

The California Legislature also passed a statewide fur ban. Assemblywoman Laura Friedman (D-Glendale) is the author of AB 44, which would prohibit the sale and manufacture of new fur in California. Friedman called fur a “fashion statement and statement of wealth. There is no need for warmth” from fur, she said, mentioning the many faux fur products available.

Los Angeles, San Francisco, West Hollywood and Berkeley already have fur bans in place, but Assemblywoman Friedman pushed for fur to be banned throughout the state of California.

Sen. Brian Jones (R-Santee) said that after hearing from different cultural groups, what wasn’t acknowledged was the push to ban fur discriminates against Native American and African American communities whose cultures value fur products. “There’s no reason for this bill other than one class of society telling another class of society what they can and cannot wear,” Jones said in September after the bill was passed by the Legislature.

“I didn’t come to Sacramento to shut down legitimate business or industry – the free market does that,“ Sen. John Moorlach said.

“In an attempt to legislate morality, Supervisor Katy Tang, sponsor of the ban, has stated that businesses ‘need to get with the times,‘” the International Fur Federation reported.

“Yet the current times do not allow for ignoring the Constitution’s prohibition on restraining interstate commerce. Proponents of San Francisco’s fur ban, including the radical animal liberation group PETA, believe the sale of leather, wool, and other animal products should also be banned.”

Fur sales in San Francisco alone are estimated to be $40 million annually, the IFF said. Globally, the fur industry is a $23-$30 billion business.

“While fur producers worldwide are complying with the humane standards of the FurMark program, San Francisco’s fur ban is so extreme that it blocks even humanely certified products. FurMark is a certification program for animal welfare and sustainability that covers fur products in North America and Europe.”

“If this law is allowed to stand, there’s nothing stopping San Francisco from banning wool, leather, meat, or other products that a small group of activists don’t approve of,” said Mark Oaten, CEO of IFF. “Californians should have no fewer rights than residents of other states. They should be free to buy legally produced goods unless there is a public safety or health issue—which does not exist here.”

“By banning fur coats and failing to address real issues such as homelessness, San Francisco politicians are the epitome of unfashionable governance,” said Will Coggin, managing director of the Center for Consumer Freedom. “Memo to California politicians: You do not have the right to stop people from buying things just because you or special-interest lobbyist allies don’t like the products.”

“San Francisco passed a ban on adults from using e-cigarettes—considered by many to be a safer alternative to tobacco cigarettes,” the CCF said. “Recently, San Francisco banned the sale of bottled water on city property, including San Francisco International Airport, and the state has banned plastic straws. Both of these measures make San Francisco’s ban on fur all the more puzzling, since it will encourage the sale of fake fur, which is commonly made from plastic.”

The IFF explains the plastic fur issue:

Specifically, the alternative to natural fur is plastic fake fur, a fossil fuel byproduct. Research has found these synthetic fur fibers “shed” microfibers into the water when they are cleaned. A single garment could shed 100,000 microfibers in the wash. Plastic microfibers are a leading cause of ocean pollution, including the Great Pacific Garbage Patch and San Francisco Bay, and the National Science Foundation recently announced that microplastics may be 1 million times more prevalent than previously estimated.

The challenge to San Francisco’s fur ban is filed in federal court for the Northern District of California. A copy is available here. Expect to see additional legal challenges, specifically to California’s statewide ban.

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MOORLACH UPDATE — SB 640 Concluding Analysis — January 13, 2020

SB 640

The LB Report is back with a review of SB 640 and how it fared in last week’s meeting of the Senate’s Health Committee (see MOORLACH UPDATE — First Week of 2020 Session — January 9, 2020 and MOORLACH UPDATE — SB 640 and Cities 193 to 240 — November 18, 2019).

25th Anniversary Look Back

January 12, 1995, was a busy day.

In Washington, D.C., the Committee On Commerce held a Congressional Hearing on the Orange County Bankruptcy. Then-Congressman Chris Cox addressed concerns that I thought, at the time, the journalism industry would resolve. If I wasn’t getting adequate information, then newspapers should have sued the County for the information, a common practice today. And, why I’m big on disclosure.

I enjoyed lunch with former SEC Chair and Congressman Chris Cox on December 6th, 2019 with a few friends to commemorate the historic day and share recollections and war stories. Here’s a sample of what he stated in the 1995 hearing:

HON. CHRISTOPHER COX, California: I served as chairman of John Moorlach’s campaign to unseat Bob Citron. The election issue was the investment strategy pursued by Mr. Citron. In the context of that campaign John Moorlach obtained 700 pages of documents from the County Treasurer’s Office–as much as he could get his hands on. Mr. Citron apparently provided to him as much as the law required. The disclosure was wholly inadequate. Whether it was John Moorlach, whether it was participants in the county’s pool, whether it was investors in the publicly issued and traded securities of the county, no one had the kind of information they should have had. And we are speaking here of billions of dollars.

At the time of the June 1994 election, John Moorlach, who was campaigning for the job that Bob Citron held, couldn’t get the complete details of the county’s portfolio. It is difficult to imagine what national security requirement exists to maintain secrecy about the way that public funds are invested when public investors themselves are sharing in that risk.

Here in Orange County, the county filed its now-famous lawsuit against Merrill Lynch. Here is the opening paragraph of the County’s press release issued by its PR consultants:

Saying that Merrill Lynch & Co., Inc. “abused the trust and confidence” of County residents by “permitting and encouraging [County Treasurer Robert L.] Citron to invest public funds in volatile financial instruments that were not authorized by law nor suitable for the investment of taxpayers’ dollars,” Orange County today filed suit in U.S. Bankruptcy Court against one of the world’s largest providers of investment and financial services.

Of course, Merrill Lynch immediately fired back with a press release that would set the stage for where the depositions would be heading in the months following:

It is predictable, but wrong, for the County Supervisors to attempt to scapegoat Merrill Lynch for the county’s bankruptcy. While we have not yet seen a copy of the lawsuit, any allegations of improper conduct by Merrill Lynch are false, and we will contest the lawsuit vigorously.

As this matter proceeds through the legal process, overwhelming evidence will demonstrate that the County Treasurer’s Office disclosed to the Board of Supervisors its leveraged investment strategy, including the fact that “this strategy has been predicated on interest earning rates to continue to remain low.”

There is also ample evidence that the County supervisors and other public officials encouraged the County Treasurer to continue pursuing this investment strategy, and repeatedly applauded the above-average investment returns that the strategy achieved.

For the Board of Supervisors to now accuse Merrill Lynch is disingenuous at best, and an abdication of their own responsibilities in this matter. For years, they reaped high rewards. Now they want to deny the risks. In effect, they’re saying: “Heads we win, tails you lose.”

In the January 12th edition of the Daily Pilot, Hugh Hewitt had an editorial submission titled “Just Do It, Supervisors — The Nike solution to the county’s bankruptcy would be fair, quick and only objectionable to high-priced attorneys.”

Here is the piece in a few selected paragraphs:

The two critical issues facing every citizen of Orange County are remarkably simple: How should the $2 billion loss be allocated among taxpayers, and how should the loss be paid for?

The only way to assure equal impact among all taxpayers is to allocate the loss only to those agencies that include every Orange County taxpayer as a constituent. That means the county, the Transportation Agency, the Sanitation District, etc. All other agencies and special district should receive 100 cents on the dollar.

This is a purely utilitarian analysis, and it is based on simple fairness. All county taxpayers should suffer in the same proportion as a result.

Some final thoughts on accountability and culpability. Bob Citron lost the money, period. He did not disclose his investment strategy, and when John Moorlach called him on it, he successfully duped a majority of the voters. That’s it. It’s over. Recalls and outrage at elected officials are misplaced.

But the problem is now known and understood. Officials are accountable for their actions, or reactions, from Dec. 1 forward. After five weeks of paralysis and analysis, it’s time to retire the lawyers, fire the PR consultants, step up to the problem and dispose of it.

Long Beach State Senator Lena Gonzalez Votes To Kill SB 640 That Would Have Allowed Intervention To Treat Severely Mentally Ill Homeless

https://www.lbreport.com/news/jan20/sb640vot.htm

Publisher’s preface: Current CA law leaves severely mentally ill homeless persons, a number of whom may be helped with medications, untreated to wander helplessly and try to survive on the streets. LBREPORT.com has previously reported in detail (here and here) on SB 640, a Sacramento bill that proposed to change the status quo. LBREPORT.com now reports on what recently happened to SB 640.

(Jan. 12, 2020, 4:30 p.m.) — Long Beach state Senator (former LB City Councilwoman) Lena Gonzalez (D, LB-SE L.A. County) voted as a member of the state Senate Health Committee to prevent the advance of SB 640) that sought to amend current CA law permitting the involuntarily treatment of gravely disabled persons to include persons so severely mentally ill they can’t take care of themselves (details below.)

SB 640 by state Senator John Moorlach (R, Irvine/Costa Mesa) sought to amend the definition in CA’s Lanterman-Petris-Short Act of “gravely disabled” to include persons who suffer from [legislative counsel’s digest] “a condition in which a person, as a result of a mental health disorder, is incapable of making informed decisions about, or providing for, the person’s own basic personal needs for food, clothing, shelter, or medical care or shelter without significant supervision and assistance from another person and, as a result of being incapable of making these informed decisions, the person is at risk of substantial bodily harm, dangerous worsening of a concomitant serious physical illness, significant psychiatric deterioration, or mismanagement of the person’s essential needs that could result in bodily harm.”

At a Jan. 8, 2020 Health Committee hearing, five affirmative Committee votes were needed to advance SB 640 to the Senate Judiciary Committee for further discussion and possible amendments. Two Health Committee members (one Democrat and one Republican) voted “yes”; two Democrats (one of whom was Senator Gonzalez) voted “no”; four Democrats (including the Committee chair) remained silent. The resulting 2-2 vote effectively killed SB 640 for the remainder of 2020.

SB 640 had the support of [source: Health Committee legislative analysis] the California District Attorneys Association. California Police Chiefs Association, City of Fullerton, City of Santa Monica, MentalIllnessPolicy.org, NAMI [National Alliance on Mental Illness] Sacramento, Schizophrenia and Related Disorders Alliance of America, Westside Council of Chambers of Commerce and two individuals.

It was opposed by the California Hospital Association (unless amended), County Behavioral Health Directors Association of California, Disability Rights California, Mental Health America of Northern California and SEIU California. [Gonzalez received a $9,300 contribution (the maximum) in her 2019 state Senate campaign from SEIU Local 2015 State PAC.]

Senator Moorlach’s stated need for the bill (as listed in the Senate Health Committee’s legislative analysis) states:

…California is failing its seriously mentally ill. Current law states that a person is gravely disabled if, as a result of a mental health disorder, he or she cannot provide for their basic needs for food, clothing, and shelter. This law was intended to serve as a protection to individual liberties but has created a system that, instead of helping the most seriously mentally ill, relegates them to the streets, jails, and emergency rooms. Better metrics are needed to help seriously mentally ill individuals that are simply powerless to provide for their own personal well-being. This is especially important when the absence of significant supervision and assistance leaves the individual at risk of substantial bodily harm. Clarifying the definition of “gravely disabled” will be a step towards repairing a system that is failing to serve those who need it most.

The full Jan. 8, 2020 state Senate Health Committee legislative analysis of SB 640 is visible here.

SB 640 received “yes” votes from state Senator Shannon Grove, (R, southern central valley/high desert) and state Senator Melissa Hurtado (D, Fresno-Bakersfield) and needed three additional affirmative votes to advance. Committee chair Senator Richard Pan (D, Sacramento) joined by Senators Holly Mitchell (D, Los Angeles), Susan Rubio (D, Baldwin Park) and William Monning (D, Central Coast) remained silent. State Senators Lena Gonzalez (D, Long Beach-SE L.A. County) and Connie Leyva (D, Inland Empire) voted “no.”

The resulting 2-2 vote effectively killed SB 640.

Following the 2-2 vote to block SB 640’s advance, the Committee voted to grant the bill “reconsideration” but under current timelines it was a near empty gesture legislatively; SB 640 was “double-referred” to the state Senate Judiciary Committee meaning it had to pass both Committees by Jan. 24, 2020, which the Health Committee’s vote precluded.

The Health Committee’s action wasn’t a complete surprise. In April 2019 [prior to the election of Sen. Gonzalez], the same Committee held a “testimony only” hearing on SB 640 at which Committee Democrats politely thanked Senator Moorlach and his witnesses (who pleaded for Committee passage of SB 640) but raised various objections to the bill. To see/hear in detail what took place, see VIDEO:  https://youtu.be/-5Bv4zteGFE

City of Long Beach record

Although SB 640 had been pending since Feb. 2019 and LB Mayor Robert Garcia and City Councilmembers frequently cite homelessness as a major Long Beach issue, the City took no position on SB 640.

The LB City Council’s “State Legislation Committee” chaired by Councilman Al Austin didn’t discuss SB 640; it held no meetings on any matter during the 2019 state legislative session. No other Council committee or Mayor-chosen “advisory commission” discussed SB 640.

Any of LB’s nine City Councilmembers (whose votes set city policy) or Mayor Garcia (who has no policy-setting vote) could have agendized SB 640 for City Council discussion and voted to take a position on SB 640 “on any Tuesday.” None did.

In a November 2019 audio interview with LBREPORT.com (here), Senator Moorlach indicated he’d welcome support from Long Beach. On January 10, 2020, LBREPORT.com asked Senator Moorlach’s office if any officials from the City of LB had contacted them about SB 640; we were told none had done so.

What’s next

In or about April 2020, the CA State Auditor’s office is expected to release a report that may discuss how various CA counties interpret the current law’s “gravely disabled” definition that SB 640 sought to amend, how they apply its criteria; and whether funding is an issue. Those findings may spur renewed interest in addressing the issues raised by Senator Moorlach and spur renewed efforts to amend current CA law. Senator Gonzalez mentioned the upcoming State Auditor’s report in her Committee statement.

In Long Beach, Mayor Garcia recently shifted memberships on various City Council committees. He named Councilman Rex Richardson to chair the Council’s State Legislation Committee, added newly elected Councilwoman Mary Zendejas [to replace exited Councilwoman Gonzalez] and retained Councilman Austin as a State Legislation Committee member.

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MOORLACH UPDATE — First Week of 2020 Session — January 9, 2020

Homelessness and SB 640

Wednesday morning the Governor announced another homeless initiative as part of his budget proposal for fiscal 2020-21, which will be released Friday.  In the afternoon I would ask my colleagues on the Senate Health Committee to expand the definition of “gravely disabled” (see MOORLACH UPDATE — SB 640 and Cities 193 to 240 — November 18, 2019).  It did not make it out of the committee, garnering two supportive votes, two in opposition and three abstaining, thus not achieving the necessary four votes to move forward.

The Associated Press covered Governor Newsom’s new initiative and I emphasized the need to address homeless individuals who are severely mentally ill.  The San Mateo Daily Journal provides the AP piece.

SB 57 — DMV Software Improvement for Motor Voter

On Tuesday I testified on behalf of SB 57.  I co-authored this common-sense bill with Sen. Pat Bates. Unfortunately, reason did not rule the day and the bill was voted down on party lines (see MOORLACH UPDATE — CSU versus DMV — August 13, 2019, MOORLACH UPDATE — Rushing Motor Voter — January 31, 2019, MOORLACH UPDATE — Motor Voter Accountability — December 21, 2018 and MOORLACH UPDATE — Be Well Orange County — October 17, 2019).  The Orange County Breeze provides the press release from Sen. Bates.

Vaxxed

The producer of the documentary movie “Vaxxed” was at the Capitol Tuesday morning (see MOORLACH UPDATE — “Vaxxed” — December 15, 2016).  I was invited to come to their recreational vehicle and enjoyed visiting with several constituents from my District.  Channels KRON 4 and FOX 40 were present when I came by.

I fully understand the need for vaccinations. And I am happy to have the smallpox vaccination scar on my shoulder. While I was in Rotary International, I supported eliminating polio from the planet through vaccinations.

Some individuals have allergic reactions to ingredients in vaccinations (see MOORLACH UPDATE — Anaphylactic Shock — September 5, 2019).

When there are valid allergy concerns, parents and their physicians are only doing their jobs by being careful. If there are pediatricians who issue fraudulent waivers (“bad actors”), then they should be dealt with appropriately. Inserting government into a relationship between physicians and their patients is not the appropriate solution.

25th Anniversary Look Back  

On January 10, 1995, the Legislative Counsel of California, headed by Bion M. Gregory, sent a six-page correspondence to Assemblyman Curt Pringle on the subject of the Investment of Surplus Funds for School Districts.  It was signed by Diane F. Boyer-Vine, who would succeed Mr. Gregory in 2001, and has been serving as the Legislative Counsel the entire time I’ve served in the State Senate (a small world, indeed).

The opinion concluded that school districts could invest surplus funds, those not required for the immediate necessities of the district, in other code-specified investments.  The opinion came a few weeks too late. But, it confirms that Assemblyman Pringle and I were working on solutions long before the implosion occurred.

California governor seeks $1 billion to target homelessness

By DON THOMPSON

Associated Press

https://www.smdailyjournal.com/business/california-governor-seeks-billion-to-target-homelessness/article_263c8f56-c056-51cb-983a-2a7a6740c21a.html

A billion-dollar investment last year has yet to curtail California’s growing homeless crisis, and with the state awash in revenue, Gov. Gavin Newsom wants to spend a billion more on programs aimed at getting people off the streets.

He signed an executive order Wednesday creating what he intends to be a $750 million fund that providers could tap to pay rents, fund affordable housing or aid boarding and care homes. Newsom also wants to use vacant state property to house homeless people and is seeking changes to the state’s Medicaid program to increase spending on preventive health care.

In addition, the Democratic governor said the final portion of $650 million in emergency homeless aid to cities and counties approved in June was being released Wednesday after a final federal homelessness count.

The report by the U.S. Department of Housing and Urban Development found California’s homeless population increased 16% last year, to about 151,000 people. That’s more than a quarter of the national total.

President Donald Trump continued his criticism of California’s Democratic leaders this week, and especially those in Los Angeles and San Francisco, for failing to adequately address homelessness. In a tweet, he called it a local issue but said that if city and state leaders “acknowledge responsibility and politely” ask for help, then his administration “will very seriously consider getting involved.”

Newsom made no mention of Trump in his announcement but acted with an eye toward an inevitable economic downturn that wouldn’t allow the state to spend billions on the problem.

Although California is projected to have a $7 billion surplus, the state’s bipartisan legislative analyst said only $1 billion should be spent on programs that will last beyond the year.

Because Newsom’s proposal on homelessness would eat up the bulk of that $1 billion, the governor proposed to “seed” the fund with one-time state revenue and called on philanthropic and private sector groups “to step up as well.”

His order comes two days before he’ll unveil his annual budget plan, which he said includes $695 million of state and federal matching funds to increase spending on preventive health care. The money would go to things that can prevent homelessness, like helping people find housing. A portion could even go to rent assistance if it helps people not use health care services as often.

A group representing the directors of California’s county behavioral health programs praised Newsom’s proposed budget increases.

Newsom said many of his proposals were inspired by advisers, including Los Angeles County Supervisor Mark Ridley-Thomas, who said the governor is using California’s “real estate and human capital in ways never proposed before to confront this humanitarian crisis.”

David Wolfe, legislative director of the Howard Jarvis Taxpayers Association, was skeptical.

He noted that taxpayers in 2018 also approved $4 billion in bonds for existing affordable housing programs for low-income residents, veterans and farmworkers. They also allowed the state to use up to $140 million each year in existing county mental-health funds to pay for housing for homeless people with mental illness.

Lawmakers also allocated $1 billion in the budget last year for homeless and mental health services.

“You can’t just throw money at homelessness and a lack of affordable housing and expect that you’re going to achieve the result that you’re hoping to achieve,” Wolfe said.

He and Republican Assemblyman Tyler Diep, vice chairman of the chamber’s housing committee, said the state also needs to streamline its strict environmental protections to speed up housing construction.

And California must address that portion of the “homeless population that is resistant to help,” Diep said in a statement.

Lawmakers last year allowed San Francisco to test a program making it easier to have a court-appointed conservator take control of treatment for someone who’s mentally disabled. And a proposed ballot measure would send those caught violating laws against public urination, drunkenness, drug use and the like to special homeless courts intended to get them help as a condition of avoiding a criminal conviction.

Republican Sen. John Moorlach, an accountant on the Senate Housing Committee, said Newsom seems to be acting prudently but that the state needs to expand involuntary treatment.

“We’ve got to start protecting our constituents, with housewives even concerned about going to the grocery store” for fear of being accosted, Moorlach said. “If you cannot take care of yourself and you’re a danger to yourself, then we should have some kind of hold program.”

The governor also directed the state to provide 100 travel trailers and modular tent structures to cities and counties for use as temporary housing.

Newsom said a year ago that he wanted to build housing on unused state property. His new order directs his administration to identify some of those properties by month’s end that local governments or nonprofits can use for emergency homeless shelters, as long as it doesn’t delay developing of affordable housing.

That includes state property alongside highways or state roads; vacant hospitals and health care facilities; and state fairgrounds.

“Californians are demanding that all levels of government — federal, state and local — do more to get people off the streets and into services — whether that’s emergency housing, mental health services, substance abuse treatment or all of the above,” Newsom said.

Nearly $25 million more would go to test programs in three counties to put those deemed mentally incompetent to stand trial into community programs instead of state psychiatric hospitals.

Senate Committee rejects Senator Patricia Bates’ bill to restore “opt-in” voter registration at DMV

http://www.oc-breeze.com/2020/01/08/150601_senate-committee-rejects-senator-patricia-bates-bill-to-restore-opt-in-voter-registration-at-dmv/

The Senate Elections and Constitutional Amendments Committee rejected on a partisan vote Senate Bill 57 by Senator Patricia Bates (R-Laguna Niguel) that would have restored “opt-in” voter registration at the California Department of Motor Vehicles (DMV).

“Given that the Secretary of State’s office and the DMV have underplayed well-documented problems with automatic registration, today’s outcome was not a surprise,” said Senator Bates. “The decision to register to vote should be made by the individual – not the state. Those who oppose my bill fail to appreciate that an ‘opt-in’ process gives citizens more control over their own voter registrations and reduces opportunities for errors and fraud. I will continue to fight for election integrity, including working with my colleagues to make a simple fix to provide clarity to customers who visit DMV offices.”

Senate Bill 57 would have rolled back Assembly Bill 1461 (2015), which requires the DMV to automatically register Californians to vote when they obtain or renew driver’s licenses or identification cards. Numerous progressive groups opposed AB 1461 because they were concerned that undocumented immigrants would be automatically registered to vote, putting them at risk of criminal penalties and deportation.

Senator John Moorlach, a co-author of SB 57, said after today’s vote, “Our state needs to develop a better system for DMV voter registration that gives people the ability to opt-in and verify their voter information. This vote was a missed opportunity to correct the errors that the current technology has generated.”

The DMV’s difficulties in implementing automatic voter registration has been well documented by media outlets over the past two years:

  • In December 2019, the Sacramento Bee reported that “At least 600 Californians, including lifelong Republicans and Democrats, have had their voter registration unexpectedly changed, and several county elections officials are pinning much of the blame on the state’s Department of Motor Vehicles.”
  • In August 2019, the Los Angeles Times reported a state-conducted audit found that in just the first five months of the new version of Motor Voter, the DMV produced over 84,000 duplicate records and more than twice that number with political party mistakes.
  • In December 2018, the Sacramento Bee reported that the DMV director mishandled the registrations of more than 580 Californians who may have been wrongfully kept off the voter rolls in the 2018 election because of transmittal errors.
  • In October 2018, the Los Angeles Times reported that the state agency mistakenly registered another 1,500 ineligible residents, including non-citizens.
  • In October 2018, the Associated Press reported that California’s Secretary of State admitted that he was not able to confirm whether or not non-citizens voted in the June Primary.
  • In September 2018, the Sacramento Bee reported that the DMV transmitted 23,000 erroneous voter registrations.
  • In May 2018, the Los Angeles Times reported that a software error affected 77,000 voter registrations.

To learn more on why Senator Bates authored SB 57, click here to read her December 2019 op-ed in the Orange County Register.

This article was released by the Office of Senator Patricia Bates.

Anti-vaccination protesters at the Capitol

https://www.kron4.com/news/california/demonstrators-against-californias-newest-vaccine-exemption-law-protest-in-sacramento/

https://fox40.com/2020/01/07/anti-vaccination-protesters-at-the-capitol/

Several protesters against California’s new crackdown on vaccine exemptions spent Tuesday at the state Capitol.

A big bus with “vaxxed” scrawled across the side stood out front.

“It would be really nice if just one senator would come out and look at the bus or talk to the parents,” said Polly Tommey, an executive producer of the “Vaxxed” documentary. “But at the moment, they’re turning their faces away. They don’t want to get involved in this controversial subject.”

Some Republicans ended up stopping by, including Sen. John Moorlach, R-Costa Mesa.

Many of the demonstrators are from more Democratic parts of the state.

“If we have bad actors, let’s go after the bad actors,” Moorlach said. “Let’s not change the whole system and require a whole new mandate that inserts government into the middle of this critical relationship.”

The group also had a list of demands, urging lawmakers not to move forward with further restrictions and requesting Gov. Gavin Newsom come up with a commission on the topic.

“We’re making doctors irrelevant. I think that’s dangerous,” said Del Bigtree, the founder of the Informed Consent Action Network.

Bigtree, a national anti-vaccine activist, helped lead Tuesday’s protest.

Democratic Sen. Richard Pan, who helped create the new laws, took aim at Bigtree on Twitter, saying he ” is supported and enriched by a wealthy Wall Street hedge fund manager and his wife who take advantage of and endanger American families and children.”

Ashley Zavala filed this report.

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MOORLACH UPDATE — California’s 482 Cities As Of June 30, 2018 — January 6, 2020

2019 Financial Soundness Rankings for California’s 482 Cities  

Last week, I released the latest edition of my annual per capita review of the Unrestricted Net Assets of California’s 482 cities, from annual reportings as of June 30, 2018 (see https://moorlach.cssrc.us/sites/default/files/City_CAFR_Report_for_2019_Jan._2_2020_Moorlach.pdf).  The California Globe provides its take in the first piece below.

Overcorrection Series

ProPublica is back with another segment of its series on the reverberations of the AB 109 realignment mandate by then-Gov. Jerry Brown.  Releasing inmates from state prisons to county jails was a bad idea in 2011, and it’s still a bad idea (see MOORLACH UPDATE — Realignment Reverberations — December 27, 2019).  It’s the second piece below.

25th Anniversary Look Back

Orange County made it to a Congressional Hearing that lasted two days, January 5 and 6, 1995.  The topic: Derivative Financial Instruments Relating to Banks and Financial Institutions. The hearings were before the Committee on Banking, Housing, and Urban Affairs of the United States Senate of the One Hundred Fourth Congress (ISBN 0-16-047320-9).  Pages 148 to 154 provided my “Moorlach Memo” (see MOORLACH UPDATE — Concordia, Second Harvest and Bottom 50 Cities — November 27, 2019, which also provides the links to the nine previous editions).

Orange County also made it to The New York Times, front page, top-of-the-fold on January 5th.  The headline read “Orange County Can Cover Only 60% of Budget Share — Sharp Service Cuts Expected for Affluent Area,” by Leslie Wayne.  Two nice sentences to share:

Mr. Moorlach tried in July [sic] to unseat Mr. Citron, whose management of the investment portfolio led to the $2 billion loss.  Mr. Moorlach “is the only logical candidate” to replace Mr. Citron, Roger Stanton, a county superviser [sic] said today.

This theme was continued by David Evans of Bloomberg News in “Orange County Losses:  Moorlach Agrees to Become Next Treasurer.”  Here are a few selected sentences:

Three of the county’s five supervisors — Marian Bergeson, Roger Stanton and William Steiner — are prepared to support Moorlach for treasurer, staff members said.

Moorlach was widely discussed as the leading candidate for the treasurer’s job, and wasn’t sure he wanted it after receiving caveats from friends.

“People say, ‘You’re as good as gold right now, you’ll only be tarnished by going in there,'” Moorlach said.

Senator John Moorlach (Kevin Sanders for California Globe)
Senator John Moorlach (Kevin Sanders for California Globe)

Sen. John Moorlach’s 2019 Financial Soundness Rankings for California’s 482 Cities

‘There is not much positive news’

By Katy Grimes

https://californiaglobe.com/section-2/sen-john-moorlachs-2019-financial-soundness-rankings-for-californias-482-cities/

Sen. John Moorlach (R-Costa Mesa) just released his new report on the finances of the state’s 482 cities. Gird your loins for more generally bad news – only 43 percent were in positive territory for 2018, down from 46 percent for 2017.

The total combined negative unrestricted net positions* for the 482 cities got worse, going from $22.7 billion in the red in 2017 to $31.5 billion in 2018. That is a 39 percent increase in these unfunded liabilities in just one year. It is also like the 40 percent increase in one year in unfunded liabilities for the state’s 944 school districts, as detailed in my December 11, 2019 School Districts Report. Although for the schools, the total negative number was worse at $70.9 billion.

*Net assets on the balance sheet fall into several categories, including temporarily restricted, permanently restricted and unrestricted net assets. Permanently restricted net assets are funds contributed for a specific purpose. Unrestricted net assets hold no restriction regarding their usage. The agency uses these funds to pay general expenses or to fund specific purposes of the group.

For the first time, new regulations by the Governmental Accounting Standards Board (GASB) required municipal audited financial statements to include retiree medical liabilities. Balance sheets refer to this as Other Post-Employment Benefits (OPEBs).

With the OPEB addition, more cities are seeing their unrestricted net positions (UNPs) dip further into the red, the report finds. “Cities are supposed to provide their financial statements within a reasonable time after the ending of each fiscal year on June 30. For consistency, this report includes the financial statements for June 30, 2018, meaning the cities have had 18 months to complete this essential part of transparent government.”

“Despite that long-time frame, 17 cities have not yet completed their 2018 statements,” Moorlach says. “In those cases, I have extrapolated the data from past statements to produce 2018 numbers for this report. The data for those cities are shown in boldface. The 17 delinquent cities are Adelanto, Amador, Artesia, Blue Lake, California City, Coalinga, Compton, Etna, Fort Jones, Fowler, Isleton, Maywood, McFarland, Riverbank, Sonoma, Westmorland and Windsor.”

Jump to page 11 to see the UNP for each of California’s cities. My own city of Sacramento’s UNP is $6.7 million.

Los Angeles’ UNP for 2018 is $8.022 billion.

The City of Los Angeles

“How does a city with 4 million residents increase its Unrestricted Net Deficit by $1.4 billion in one year?” Moorlach asks. “The net increase in the reported liabilities for pensions and Other Post-Employment Benefits explains $1.2 billion of the 22 percent jump. Although Los Angeles enjoys 10 percent of the state’s population, its Unrestricted Net Deficit’s growth is 16 percent of the combined increase by all of California’s 482 cities.”

Moorlach says on January 10, 2020, Gov. Gavin Newsom will release his preliminary budget proposal for the 2020-21 state budget. “Hopefully, he will take account of the cities and how elected leaders in Sacramento can provide assistance in encouraging strategies to pursue for fiscal relief.”

To read Sen. Moorlach’s entire report, it is available HERE.

Katy Grimes, the Editor of the California Globe, is a long-time Investigative Journalist covering the California State Capitol, and the co-author of California’s War Against Donald Trump: Who Wins? Who Loses?

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Greg Betza, special to ProPublica

OVERCORRECTION

California’s Jails Are in a Deadly Crisis. Here’s How Experts Suggest Fixing Them.

An investigation by McClatchy and ProPublica found unchecked violence and inhumane conditions in county jails, but the state’s oversight agency has no power to stop it. Experts say that needs to change.

by Jason Pohl, The Sacramento Bee, and Ryan Gabrielson, ProPublica

https://www.propublica.org/article/californias-jails-are-in-a-deadly-crisis-heres-how-experts-suggest-fixing-them
https://www.fresnobee.com/news/local/article238944748.html
https://www.sacbee.com/news/investigations/california-prisons/article238944748.html 

Nearly a decade after California overhauled its prison and jail system, policymakers are considering reforms to the state’s landmark criminal justice transformation, calling for more oversight of county sheriffs and higher standards for inmate care.

Gov. Gavin Newsom has said he is crafting plans focused on local lockups, where homicides have surged, and exploring how to give the state more power to oversee the sheriffs who run them. More details are expected this week when the governor unveils his state budget proposal.

At the same time, state lawmakers are also calling for accountability, recommending audits of how sheriffs have spent billions of dollars in state support and requesting hearings to examine the deadly conditions in some facilities.

The moves follow a year of reporting by McClatchy and ProPublica on the radical shift of California’s prison and jail system known as “realignment.” The law approved by then-Gov. Jerry Brown in 2011 was designed to ease dangerous overcrowding in the state’s prisons by diverting thousands of newly convicted offenders to county jails.

So far, the state has allocated some $8 billion to counties to improve services inside and outside of the facilities. It awarded an additional $2 billion for the construction of new facilities. And it converted an arm of prison bureaucracy into a jail oversight agency that sets minimum standards and inspects the jails.

Those efforts, however, are faltering. The McClatchy-ProPublica investigation found:

  • Violence goes unchecked in many county jails, and homicides spiked in the years after realignment.
  • State jail inspectors are powerless to enforce their own standards and do not even scrutinize life-threatening conditions and deaths inside the facilities.
  • There are no limits on how long sheriffs can hold mentally ill inmates in extreme isolation or any rules governing how county jails care for people at risk of suicide.
  • Sheriffs and other county officials have diverted state realignment money to pay for staff and equipment unrelated to the 2011 criminal justice reform law, in some cases potentially violating the state constitution.

During the reporting, researchers, law enforcement officials, advocates and lawmakers called for changes to California’s loosely connected network of county jails. Many identified the same thing: the outsized power of sheriffs under realignment.

Robert Weisberg, a Stanford University law professor who has researched realignment for years, compared the local law enforcement officials to prison wardens with broad discretion over state money, creating “widely disparate and unpredictable” policies statewide.

In an interview, he said realignment provided short-term fixes to the state’s overcrowding problem; the statewide prison population is down 46,000 inmates since the federal court order that prompted the reforms. But it has not solved California’s broader incarceration problems, he said. In many ways, it just shifted them to the local level.

With Newsom, a Democrat, and others looking to make their mark on the criminal justice system, here are four key problems and ideas from experts on how to fix them.

Strengthen State Oversight Board

The Problem: The state created an agency to oversee realignment. But its officials do not have the authority to close dangerous jails or make county leaders change their ways — even when they find life-threatening conditions.

Ideas: Lawmakers could increase the board’s authority to compel sheriffs to fix violations and expand minimum standards to cover overall jail conditions, including measures of inmate health and use of force incidents.

When lawmakers passed the law in 2011, they created the Board of State and Community Corrections, or BSCC, and tasked it with collecting jail data, awarding grants and compiling reports about realignment’s effects.

But the board sees itself as a partner, not a regulator.

The news organizations found state inspectors generally focus on paperwork — whether county jail facilities fill out the required daily observation logs, for example — rather than on how sheriffs run their lockups. State inspections are minimal, said James Sida, a jail consultant and former state corrections official. “I wouldn’t call them highly in-depth.”

In 2018, a state inspector cited the Kern County Sheriff’s Office for 27 violations, a majority of them related to the use of extreme isolation. But he could only encourage the sheriff to make fixes. The sheriff refused, saying his office interpreted the standards differently and disagreed with the board’s conclusion.

Critics argue the BSCC needs more power. “California is flying blind without a state regulatory agency that has meaningful enforcement authority,” said Ross Mirkarimi, the former San Francisco sheriff who is now a jail consultant.

Sen. Nancy Skinner, D-Berkeley, chair of the California Senate Public Safety Committee, agreed. “We as the state definitely have to improve our oversight,” said Skinner, who voted for the 2011 realignment legislation when she was in the Assembly.

BSCC chair Linda Penner defended the board at its November meeting. “We absolutely understand that it’s not a perfect system,” she said. But, the board does exert “all of the authority that we have been given.”

Newsom has singled out the state’s jailhouse monitoring as a focus of his 2020 criminal justice plan.

Investigate Jail Deaths

The Problem: Since realignment began, inmate-on-inmate homicides have risen 46% in county jails statewide compared with the seven years before. Killings tripled and even quadrupled in several counties.

Ideas: Give the BSCC the power and staff to investigate jail deaths. The state attorney general and county authorities could also intervene.

The conditions in many jails now mirror those in the once-overcrowded prisons. For example, in the seven years before realignment, only one jail inmate was killed in Fresno County jails. But four have died in homicides in the seven years since.

Fresno County Sheriff Margaret Mims said that the county jails hold many dangerous people, and that awful events, including deaths, are almost inevitable. A few years ago, Mims said, an inmate hid a razor blade in his nasal cavity and cut his co-defendant in court.

“If you wanted absolutely no assaults on inmates, no assaults on staff, no murders, no suicides you would almost have to have a [guard] assigned to every single inmate or continually have eyes on those inmates,” she said.

Neither the county nor the state chose to conduct a comprehensive review of the deaths. Counties don’t notify the BSCC when inmates die, and the board has no authority to investigate even homicides in the jails.

The California attorney general has the power to intervene but rarely uses it.

Separately, McClatchy and ProPublica found suicide death rates have surged in several counties’ jails the past five years, and local officials have said they are unable to explain why.

Other states take a different approach. In Texas, the Commission on Jail Standards sets mandatory rules, performs inspections and tracks all inmate deaths. A law took effect in 2018 requiring an independent agency to investigate all in-custody jail deaths. The commission has the authority to close deficient and dangerous facilities.

By contrast, California lawmakers last year shelved a bill that would have allowed counties to create oversight groups with subpoena power over county sheriffs. Local law enforcement was opposed. The California State Sheriffs’ Association, which wields significant influence in public safety legislation, called the measure “unnecessary,” saying the BSCC and the state attorney general already provide oversight.

The bill’s author, Assembly Member Kevin McCarty, D-Sacramento, vowed to try again in 2020, citing the McClatchy and ProPublica investigation. “This type of lax oversight results in lawsuits and settlements where taxpayers continue to foot the bill and pay for the misconduct of our sheriff’s departments across California,” he said.

Overhaul Standards for Solitary Confinement

The Problem: Best practices say solitary confinement should only be used in extreme circumstances, but several county sheriffs in California lock people in closet-sized rooms for hours, days and even weeks on end.

Ideas: Strengthen state standards on isolation to match national guidelines.

California jail standards place no limit on how long inmates can be held in extreme isolation. In 2016, the BSCC rejected a proposed 12-hour cap on inmates’ time in safety cells, rooms with four rubberized walls and a grate in the floor for bodily fluids. Board officials argued that limit was too short. Lindsay Hayes, a national expert on correctional suicide prevention, said the state’s minimum jail standards are “pretty antiquated.”

For inmates, the consequences can be severe.

Each year, for example, the Kern County Sheriff’s Office sends hundreds of people it considers to be suicidal into “suicide watch” isolation. Inmates awaiting trial can spend months in solitary, according to state and county records. When those cells fill up, deputies lock people in safety cells. They receive no mental health treatment and, until recently, just a yoga mat to rest on. The sheriff’s office said its isolation practices save lives, removing hazards and increasing monitoring of vulnerable inmates.

Hayes maintains state corrections boards should base their jail standards on the National Commission on Correctional Health Care’s model standards, which strongly discourage prolonged solitary confinement and prioritize mental health care.

When inmates are suicide risks, jails often respond by inflicting “really heavy doses of punishment, humiliation,” said Homer Venters, former chief medical officer of New York City jails. “Then we just keep doing it for longer and longer periods of time. We drive this mental health crisis.”

Audit Counties and Curb Illegal Spending

The Problem: California law prohibits local governments from using realignment dollars to save county tax dollars that would otherwise have been spent on jail or other law enforcement programs. But the McClatchy-ProPublica investigation found that lax spending rules and limited scrutiny from state and county officials have allowed sheriffs to use money ticketed for programs and services made necessary by realignment for basic operations and side projects unrelated to California’s criminal justice overhaul.

Ideas: State and county finance officials could audit local governments and sheriff’s offices, which receive the largest share of realignment money. When abuses are found, the state controller could take back money spent illegally.

Since realignment, state taxpayers have paid more than $8 billion to counties, where officials have decided how to split it among sheriffs, probation and community programs. The state constitution promises the annual payments in perpetuity to help counties shoulder the additional people previously sent to prison. But the money isn’t always spent on realignment-related items.

In Contra Costa County, for example, the sheriff used $1.5 million to help pay for existing street patrols after other funding fell through. David Twa, the county administrator, maintains the law gives counties flexibility and allows them to use money for a “wide variety” of public safety needs.

Local oversight groups across California have raised concerns about such spending, with some saying it is potentially illegal. County boards of supervisors, who have the final say, have repeatedly denied their realignment spending has violated the law.

The state, at the direction of the governor, can audit how local governments have used the realignment cash. However, it has not done so in the eight years since the reforms began. That kind of accounting, officials say, would amount to second-guessing local leaders.

Sen. John Moorlach, R-Costa Mesa, vice chair of the state Senate’s Public Safety and Budget and Fiscal Review committees, said the state should scrutinize each county’s realignment spending.

“The state should have been asking for supportive documents every year,” Moorlach said. “That’s just a simple management program.”

Jason Pohl reports on criminal justice for The Sacramento Bee. He has reported since 2011 on public safety, mental health and disasters for newspapers in Colorado and Arizona.

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MOORLACH UPDATE — State Compensation Insurance Fund — January 4, 2020

State Compensation Insurance Fund

You’ve got to love government when it is apparently not being closely monitored. The LA Times provides an investigative piece on the State Compensation Insurance Fund that should make your eyes pop wide open.

This nonprofit workers’ compensation insurance provider was created by the state of California (see MOORLACH UPDATE — Audit Results and Cities 337 to 384 — November 25, 2019 and MOORLACH UPDATE — Reflections and Improvements — December 10, 2019).

One figure missing from the piece is the compensation that its appointed Board members receive, thus making it a “soft landing spot for former lawmakers and other political insiders.” This gig pays $58,633 a year (see https://www.statefundca.com/home/StaticIndex?id=https://content.statefundca.com//about/BoardOfDirectors.asp)!

The State Auditor has limited staffing. So does the Legislative Analyst’s Office. Consequently, last year I proposed a bill that would create the office of Chief Operating Officer. Someone has to be overseeing the state’s massive organizational chart and the propriety of every agencies’ managerial and human resources decisions (see MOORLACH UPDATE — SB 1297 – COO — April 19, 2018).

You can see why I’m opposed to municipalities forming their own banks. Or the state getting into the defined contribution pension plan business by mandating it on small employers through Secure Choice, et al (and I could give you links a mile long).

25th Anniversary Look Back

The January 4th, 1995, edition of the Montebello News, had a very amusing piece on why the city of Montebello was in the Orange County Investment Pool and how it’s financial executives complained to Robert Citron about being solicited by then-City Councilman Jeff Thomas, an investment professional and campaign supporter (see MOORLACH UPDATE — LOOK BACKS — January 4, 2010. It closed the loop on a topic raised in an article in the LA Times nine months earlier and shows how the haughty do eventually get their comeuppance (see https://www.latimes.com/archives/la-xpm-1994-04-16-mn-46471-story.html).

The LA Times would do a followup piece in December of 1994 on how the city of Montebello was now reeling from not listening to one Jeff Thomas (see https://www.latimes.com/archives/la-xpm-1994-12-30-mn-14634-story.html). One local florist still commemorates these events (see https://www.msflowers.net/flowers/citron-surprise).

Salaries skyrocket at California state insurance fund following years of scandal

By PATRICK MCGREEVY

https://www.latimes.com/california/story/2020-01-04/state-compensation-insurance-fund-salaries-hiring-practices

A California public agency that offers workers’ compensation insurance coverage to employers has recruited a high-priced team of former executives from the private sector to turn it around after years of scandal and financial problems.

But the hires are earning six-figure salaries that dwarf others in state government, drawing concerns from some in the state Capitol who question the cost as the agency rebuilds following investigations in years past that led to the removal of top managers and mass layoffs forced by loss of business.

The State Compensation Insurance Fund, known as State Fund, has also been criticized for hiring the spouses and adult children of agency managers. Its 11-member board of directors, which is appointed by the governor and legislative leaders, has become a soft landing spot for former lawmakers and other political insiders.

Bonuses and incentives awarded by State Fund’s board have boosted compensation to more than $500,000 each for its seven top managers including its CEO, whose annual pay is some $732,000 — more than three times the $210,000 salary of the governor. The salaries have prompted some lawmakers to call for an oversight hearing to determine whether the compensation is justified.

Carmen Balber, executive director of Consumer Watchdog, a group that keeps tabs on the insurance industry, said the pay “seems beyond the pale.”

“It sounds completely out of proportion for executives at any state agency to be making so much money, considering the governor makes only about $200,000 a year,” she said.

Agency officials including Board Chairman David M. Lanier say the compensation is warranted due to the unique mission of State Fund, which was created by the Legislature in 1914 to provide workers’ compensation insurance to businesses in the state, including those who can’t afford coverage from the private sector.

State Fund currently insures some 110,000 California businesses, down from 292,000 policyholders in 2002. Its market share grew significantly from the mid-’90s through 2002 as deregulation of rates and other factors led many private firms to reduce the price of their coverage, causing them to struggle financially and eventually leave California or go out of business. State Fund was left to pick up the slack.

Changes in the law have helped bring more private insurers back into California, creating more competition and reducing State Fund’s market share from 52% to 10.85%, though it remains one of the top providers of workers’ compensation insurance in the state.

The agency’s officials refer to it as a “quasi state entity” because, although its employees are state government workers, it does not receive taxpayer money from the state treasury, instead deriving its revenue from some $1 billion in premiums paid by the businesses it insures, as well as returns on funds it invests.

“The challenge we have is it’s a billion-dollar insurance company,” Lanier said. “There’s not another one of those in state government, so we need and value talent and expertise from the insurance industry.”

The agency’s biggest troubles began in 2007, when State Fund’s board fired its president and vice president after an audit found questionable financial practices involving the sale of discounted policies through outside associations linked to some board members. The scandal also resulted in the resignation of two board members whose private firms collected at least $265 million over 10 years from State Fund for administering group policy programs.

In 2011, State Fund laid off 25% of its 6,800 workers in response to its loss of market share. And its workforce has continued to drop, sitting now at 4,270 employees.

In the years after the scandal, the board of directors sought to expand its powers by persuading the Legislature to increase from one to 16 the number of executive positions exempt from civil service rules and pay scales.

In 2014, the board appointed Vernon Steiner as president and CEO of State Fund, who touted his 30 years of experience in the insurance industry. He received a base salary of $450,000 as well as various performance-linked bonuses.

Steiner appealed in 2017 for the latest expansion of civil service exemptions, telling the state Senate Insurance Committee that he and the board needed more leeway to recruit additional talent in competition with the private sector as part of his efforts to turn the agency around.

“Although I absolutely understand we are a public agency and that we serve the public, we do it in a way that is a little bit different than most other public agencies,” Steiner told lawmakers. “We compete with private carriers, and although the labor pool within civil service offers a lot of rich expertise and experience, it doesn’t generally offer insurance expertise.”

Steiner has faced pointed questions about State Fund‘s executive salaries from legislators who said they were concerned about the fat paychecks from the public agency.

“This is the state, and I look at these salaries that you are talking about paying and they are more than almost every university president at the California State University, who run an incredibly diverse campus of 40,000 students and employees,” Sen. Steve Glazer (D-Orinda) told Steiner at the 2017 hearing. “That’s troubling to me.”

The average annual salary for presidents at California State University campuses is $330,000.

Excluding the university systems — which pay some athletic coaches millions of dollars — Steiner at $732,000 is the third-highest-paid state executive after the chief investment officers for the two state retirement funds, who make more than $800,000. By comparison, University of California President Janet Napolitano’s base salary and car allowance total $578,000 to run a system with 227,000 employees and a budget of $37.2 billion.

Glazer voted for the five new executive positions after he was assured in early 2017 that the committee would get periodic reports on the compensation. Committee members including Glazer said recently that they think an oversight hearing should be held by the Legislature.

The committee last heard from Steiner at a hearing in April that focused on the insurance industry, but not executive compensation issues. He said his agency had “engaged in a large-scale transformation” that improved the financial strength and customer service and culture of the organization.

“Although we have more work ahead of us, our efforts to date have yielded positive results and provided important benefits to California businesses and injured workers,” Steiner said. “I would say we are financially as strong as we have ever been.”

In a letter to lawmakers in 2018, Steiner said State Fund’s base pay and cash payouts to managers trended in the 25th to 50th percentile within the insurance industry.

Mike Mattoch, a former chief counsel for the Assembly Insurance Committee who has also worked as an industry executive with USAA, said the not-for-profit State Fund could pay its executives half as much and still draw talent with expertise in insurance.

“It’s a very cushy gig,” said Mattoch, who now works as an attorney for Consumer Watchdog. “They don’t do much of anything and they get paid a ton.”

In November, the State Fund board approved raises in base salary, bonuses and incentive payments for 17 managers, including Steiner, whose base pay this year has been increased by $36,000, or 7%, to $544,450. By comparison, State Fund’s then-CEO was paid $273,000 in 2007.

Steiner also gets an annual “at-risk compensation differential,” which is linked to performance, according to State Fund spokeswoman Jennifer Vargen. That amount is currently $177,623.

On top of that, Steiner receives a separate performance-based incentive payment of $30,000, and $17,900 for a “Long-Term Incentive Plan.” State Fund also contributed $39,046 to Steiner’s CalPERS retirement plan.

Other executives who receive performance and incentive payments include the chief operating officer, whose annual compensation this year is $566,000, and the chief information officer, whose yearly compensation is $588,000.

Lanier said his satisfaction with the progress of State Fund reforms led him to vote at November’s meeting for the increases in salary and incentives and bonuses for the executives, including Steiner.

“He walked into a very difficult circumstance. State Fund has been on a remarkable transformation and turnaround, internally, externally,” Lanier said.

High salaries are not the only concern some state officials have with the agency. State Fund also employs the relatives of some of its executives.

Both of Steiner’s sons have worked at the agency — his son Bennett was hired by the agency last year and is an underwriter making $50,400 annually.

“All civil service rules were followed and extra steps were implemented to ensure a fair process,” said Jonathon Tudor, an agency spokesman, who said Bennett Steiner’s application received an extra round of reviews in which his name was redacted and he was determined by a human-resources panel to meet the position qualifications.

Steiner’s other son, Casey, participated in a State Fund summer internship program in 2017 and 2018, making $16 an hour while attending college, but has never been an employee, Tudor said.

The agency’s vice president for human resources, Brandee Radaikin, was hired in July 2011 and receives a base salary of $130,600. Her husband, Bruce Radaikin, received an agency job in 2017, and his pay is $44,000.

“Bruce’s relationship to Brandee was disclosed when he applied to State Fund,” Tudor said. “Brandee played no role in his hiring. All civil service rules were followed. Bruce and Brandee are in different departments and report up through different executives.”

In 2013, the agency hired Douglas Ziemer as a program manager with an annual salary of $130,000, and two years later hired his wife, Nicole Ziemer to a personnel office job, with a top salary of $81,000. The Ziemers both left the agency in July and did not play a role in each others’ hiring, Tudor said.

Balber said hiring family members of managers is a concern.

“You might see that kind of nepotism in the insurance industry, but it has no place in an agency that is selling insurance with the state imprimatur,” Balber said. “That’s a problem.”

Republican state Sen. John Moorlach of Costa Mesa, who also serves on the Senate Insurance Committee, said the state doesn’t have a central manager monitoring the hiring of family members at its many agencies, a practice he said is prevalent.

“It is rampant within the state,” he said. “I have heard plenty of stories and I don’t like what I have heard.”

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MOORLACH UPDATE — Pension Refinancing Gamble — January 2, 2020

Happy New Decade!

Pension Obligation Bonds (POBs)

Issuing Pension Obligation Bonds (POBs) was a strategy I opposed while serving at the County of Orange so I made sure they were not utilized while I was there (see MOORLACH UPDATE — State Debt — October 17, 2013 and MOORLACH UPDATE — Pension Debt — September 12, 2013).

Ironically, it was a Pension Obligation Bond issuance back in 1994 that went into default, jeopardizing the County’s credit rating and was a component of the fiscal mess at that time (see 25th Anniversary Look Back below).

A Pension Obligation Bond is a method of exchanging one debt for another.  It takes a debt owed to the multi-employer retirement system and converts it into a debt to bondholders.  It just has to be validated by a Superior Court Judge. This is supposed to authorize what may be a dubious process.

I pursued a legal case 12 years ago based on the fact that debt owed to a defined benefit pension plan was a legitimate financial obligation.  Pension Obligation Bonds are a great example of that (see MOORLACH UPDATE — POBs — February 5, 2011).  Ironically, state judges are in a similar multi-employer pension system and incorrectly decided it was not debt (see MOORLACH UPDATE — Calpensions — October 15, 2012).

The idea of using POBs is not new and has been correctly identified as a major gamble in the recent past (see MOORLACH UPDATE — Memories — May 27, 2013). 

When the city of Huntington Beach recently began to seriously consider using POBs, Orange County Treasurer-Tax Collector Shari Freidenrich and I were dismayed, so we submitted the included editorial to the Daily Pilot.  (Huntington Beach Councilman Mike Posey was the only council member to vote in opposition.)

For more on pension concerns and POBs, see a piece I joint-authored a decade ago with noted local economist and retired Chapman University President Jim Doti at MOORLACH UPDATE — Enron-By-The-Sea — November 6, 2010.

25th Anniversary Look Back

The big stories on December 28, 1994, were my bumper sticker and my May letter to Board of Supervisors Chair Tom Riley (see MOORLACH UPDATE — LOOK BACKS — December 28, 2009).  For a complete copy of my May letter to the Orange County Board of Supervisors, see MOORLACH UPDATE — Budgeting Millions of Dollars — May 31, 2019.

On December 29th, 1994, Rob Wells of the Associated Press continued his series of thorough investigations of what actually occurred in Orange County (see  MOORLACH UPDATE — HAPPY NEW YEAR! — December 31, 2009).  He is now a Journalism Assistant Professor at the University of Arkansas.

On December 31st, I made it to The Plain Dealer.  The reporters were Timothy Heider and Joel Rutchick (see MOORLACH UPDATE — Last Day of Session — September 15, 2019).  Their work was so good that I wrote a recommendation letter to the Pulitzer Prize Board.  While they didn’t get a Pulitzer, their investigative series on the Cuyahoga, Ohio, county treasurer’s questionable investment strategy of public funds won them the 1995 Gerald Loeb Award for Distinguished Business and Financial Journalism in the large-newspaper category.  It was well deserved (see MOORLACH UPDATE — OC METRO — March 1, 2010).

Their piece was titled, “Some analysts did see it coming — SAFE woes foreshadowed Orange County’s collapse.”  If you’ve been reading the LOOK BACKS since the fall, you may remember my comparing Cuyahoga County to what would occur in Orange County (see MOORLACH UPDATE — SB 359 and Cuyahoga County — October 11, 2019).

The blockbuster movie “Jurassic Park” had been released in June of 1993.  There is a scene where T-Rex starts to walk and the thud of his steps are seen as dramatic ripples in two clear plastic cups of water in one of the tour Jeeps.  I used this as an analogy, as I could hear the “thuds” all the way from Cleveland, Ohio, in the OC (see https://www.youtube.com/watch?v=EEljXeYMxRo, unless you’re too squeamish).

Here’s their piece:

When Cuyahoga County’s SAFE investment pool collapsed in October, John Moorlach felt the ground shaking half a continent away.

Th 39-year-old California accountant, an unsuccessful candidate for Orange County treasurer, had been sound warnings for months that that county’s $20 billion investment pool was likewise a house of cards.

“I said , ‘Get ready — this is the model for what’s going to happen here,'” Moorlach recalled recently.  “Thud. Thud.”

Sure enough, just six months after the election, Orange County shut down the pool, suffering losses that already exceed $2.5 billion and forcing the county into bankruptcy.  Longtime Treasurer Robert L. Citron, who had scoffed at Moorlach’s charges, resigned in humiliation.

At the core of Moorlach’s concern was that investment managers in Santa Ana, Calif., like Cleveland, had borrowed against existing holdings of bonds and other securities to buy additional securities, a risky practice known as leveraging.  Both pools got caught short when rising interest rates increased the cost of borrowing and depressed the value of their holdings.

The costs to Cuyahoga County taxpayers — $115 million so far — pales in contrast to those in Orange County.

There are differences as well in the management of the two pools:

* Orange County officials disclosed many of their high-risk strategies, including leveraging, though federal and state regulators are investigating whether other potentially fraudulent practices were kept from investors.

SAFE’s staff, by contrast, leveraged in secret, concealing relevant records from investors, county and state auditors and even from a consultant hired by county commissioners to assess the fund’s health.

*  Th Orange County treasurer invested heavily in interest rate-sensitive securities known as derivatives.  As their name suggests, these are securities whose value is tied to, or derived from underlying assets such as bonds.

SAFE’s managers steered clear of derivatives but invested heavily in 30-year bonds and other long-term securities whose prices vary wildly in changing markets.  Investment consultants hired by Cuyahoga County call such investments “out there in la-la land in terms of risk.”

Only a tiny fraction of Orange County’s portfolio was devoted to securities with terms longer than five years.

*  Cuyahoga County, in an effort to lure investors, guaranteed deposits of all SAFE investors.  When the pool collapsed, the county had to shoulder all losses itself.

Orange County, on the other hand, issued no such guarantee and even threatened to assess the full brunt of losses against any investor who pulled out in the days following the collapse earlier this month.

Yet there are similarities, too, between the two pools.

*  Both helped doom themselves by not accounting for the falling market value of their holdings.  By failing to “mark to market,” as the practice is known, they also camouflaged the dangers to investors.

Not marking to market allowed SAFE to report a $37 million gain for the first eight months of the year, when the real figure was closer to a $41 million loss, according to a Plain Dealer analysis.

“As soon as you can hide things, people are going to take advantage of that,” said Michael Peskin, who heads a New York investment consulting firm.  “It’s a dangerous situation and it exists in spades in the public arena.”

*  Both pools were founded by aging Democratic officeholders — Citron and Cuyahoga County Treasurer Francis E. Gaul — who had forged national reputations by generating high returns on investment of public funds, and sought to stifle any criticism of their operations.

For many years Citron, 69, was the lone elected Democratic official in staunchly conservative Orange County.  He held the treasurer’s office for 24 years without a serious challenge at election time.

The big returns he historically brought the 185 agencies belonging to the pool made it difficult for critics like Moorlach to make headway against him.

“He was Mr. Investor,” Moorlach said.  “He was God.”

Moorlach succeeded occasionally, however, in convincing someone of the dangers in Citron’s management — and was strongly criticized as a result.  

That’s what happened in April when one of his allies, Tustin City Councilman Jeff Thomas, persuaded his city to withdraw its $4 million from Citron’s pool.

“We were vilified,” Thomas said.  “It was such a laughable amount of money, but we were accused of starting a run.”

As concerns increased about the riskiness of the fund, Moorlach’s own community, Costa Mesa, winnowed its investment from $17 million to less than $3 million.

“There was a lot of criticism and fairly caustic comment about our position of drawing down our funds,” said City Manager Allan Roeder.

Roeder wanted to leave the pool quietly, so as not to trigger a run, but he said Citron’s staff wouldn’t let him.  If Costa Mesa got out, he was told, it was out for good.

“If you won’t stay in the pool when the [return] is down, you don’t deserve to be with us when the returns are high,” Roeder said Citron’s staff told him.

Citron himself came down hard on those he perceived as enemies.  When he got wind that a local broker solicited business from one of the cities in the pool, he fired off a scathing letter to the man’s boss, recommending he be fired.

Like Citron, Gaul, 68, steamrolled everyone who challenged him during his 19 years in county office.  He had no trouble winning his party’s nomination for Congress this year — a race he lost after SAFE fell apart.

Gaul championed SAFE aggressively and passionately, and recruited with the same vigor.  He often went over the heads of finance directors and professional treasurers who were initially reluctant to join the multiagency pool.

“He actually reached out into these communities and browbeat local officials into investing in SAFE,” said Lakewood Mayor David Harbarger.  “The argument was, if you’re not invested in SAFE you’re a bum.”

When reports of trouble within SAFE surfaced in the fall, Gaul tried to portray them as part of a politically motivated plot to derail his Congressional bid.

And when he learned that Crain’s Cleveland Business was preparing a potentially critical report about the fund last spring , a delegation from his office, joined by County Commissioners President Timothy F. Hagan, paid a visit to editors there.

Gaul argued that such an article would scare off SAFE’s investors, something he could ill afford at the time because rising interest rates were eating away at the pool’s assets, participants said.  Gaul later bragged to reporters about getting an expert quoted in the story to recant his damaging evaluation of the fund before the story was printed.

Hagan previously has said he was not trying to intimidate Crain’s into softening its story, but he did not return phone calls seeking comment for this article.

Mark Dodash, an editor at Crain’s, confirmed that the meeting took place but otherwise declined to comment.


On January 1st, 1995, Fortune Magazine provided its perspective, bringing back up the Chicken Little reference (see MOORLACH UPDATE — HAPPY NEW YEAR! — December 31, 2009).

The January edition of the California Municipal Bond Advisor, prepared under the direction of Publisher Zane B. Mann, made Orange County the entire front-page story and the next three pages.  Zane Mann was a go-to expert for other reporters (see MOORLACH UPDATE — SB 50 — April 29, 2019).  His piece was titled “The Orange County Fiasco:  Virtually All Bonds Still Safe.”

The piece was exhaustive and thorough.  It’s a shame that California Municipal Bond Advisor is no longer published, as a link to Zane Mann’s review will be an excellent resource for future researchers on the topic.  Kenneth D. Ough is even mentioned. For a little history on this personality and his negative impact on Orange County, see https://www.sec.gov/litigation/admin/33-8141.htm.

Here are a few selected paragraphs from the introduction, body and conclusion:

There will be no wave of defaults of long-term California municipal bonds as a direct result of the financial wreckage left by the bankrupt Orange County Investment pool.

That includes Orange County bonds, debt issued by municipalities within Orange County, and public bonds issued elsewhere in the state.  Bonds that were safe, secure and creditworthy before Dec. 1, 1994, are no less safe and secure on Jan. 1, 1995.

The only bondholders who will lose money are those who panicked and foolishly sold into the bond market collapse of Dec. 6, after the Orange county bankruptcy and downgrade announcement.

Selling municipal bonds to gamble on interest rates is not a proper function of the municipal bond market.  It never has been.

The actions of Citron and the Orange County supervisors were especially appalling.  They sold $600 million of taxable notes in July for the purpose of providing more collateral for the bankers who had previously lent the county some $12 billion.  (This sale occurred after the election, during which John Moorlach, a candidate for Citron’s job, had exposed the dangerous condition of the fund to both the press and county officials.)

Today, county officials are unable to explain why somebody didn’t question if maybe Moorlach was right (especially when the market value of the pool’s investments was falling so rapidly that it required a $600 million cash infusion).  Despite the obviousness of the problem, county officials continued to recruit more funds for the pool.

Given enough time, Orange County and the local municipalities will have their ratings restored.  Maybe not to double-A right away, but Orange County is too rich and too valuable to stay down for very long.  Well before your 10-year Orange County bond issues mature, this incident will become a very bad and distant memory.

Commentary: Huntington Beach’s pension bond proposal feels like déjà vu

Huntington Beach’s Brett Simpson surfs the south side of the Huntington Beach Pier, the site oThe Huntington Beach City Council’s recent approval of a resolution to consider pension bonds could put the city at risk of a fiscal wipeout, two Orange County elected officials write.
(File Photo)

By JOHN MOORLACH, SHARI FREIDENRICH

https://www.latimes.com/socal/daily-pilot/opinion/story/2019-12-31/commentary-huntington-beachs-pension-bond-proposal-feels-like-deja-vu

Surf City is risking a fiscal wipeout if it approves a proposal for pension obligation bonds.

According to the Government Finance Officers Assn., POBs are taxable bonds that state and local governments can use “as part of an overall strategy to fund the unfunded portion of their pension liabilities by creating debt.” However, POBs involve considerable investment risk.

The concept is simple. It is like paying off a flexible credit card balance with a 25-year fixed mortgage. However, there is more than the mere switching of lenders.

On Nov. 18, the Huntington Beach City Council adopted a resolution to use POBs “to refund all or a portion” of its unfunded actuarial accrued liability, or UAL, to CalPERS — the California Public Employees’ Retirement System. The resolution started a judicial validation process for the POBs.

According to the request for City Council action prepared by Dahle Bulosan, acting chief financial officer, the council’s next actions in March or April would “include approval of the preliminary official statement, identifying a not-to-exceed interest rate for the bonds, as well as the underwriting discount.”

According to the city’s analysis, Huntington Beach is choosing to use POBs because it is being charged an interest rate of 7% to service its UAL debt load.

The annual cost to the city budget due to the UAL rose from $4.58 million in fiscal year 2009 to $24.93 million in 2019. It continues to rise and the city’s analysis projects it will double to $46.02 million in 2031.

The city’s analysis warns that, to pay for these costs, Huntington Beach will need another $21.09 million a year by 2031. That could mean drastic cuts.

We sympathize. As the Daily Pilot reported in June, the city is still recovering from “recession-related cuts.”

Market interest rates are still low. The POB would replace a 7% interest rate with CalPERS, which can be flexible with its annual required contributions. Bondholders would require a maximum interest rate of 3%, requiring a fixed payment schedule. The city could save $8.5 million per year.

On the other hand, the Government Finance Officers Assn. also warns that POBs are very speculative.

In 2012, CalPERS cut its assumed rate of return from 7.75% to 7.5%. CalPERS cut it again in 2016, to 7%.

Warren Buffett recommends using a 6% assumption. Pension expert David Crane of Stanford University says 5% is a more realistic goal for public pensions. In other words, instead of supposedly “saving” 4 percentage points with POBs, Huntington Beach might “save” only 2 percentage points.

In dollar terms, that could mean “saving” $4.25 million a year, instead of $8.5 million.

In addition, making the 7% annual return, with current low inflation and low fixed income yields, means CalPERS is motivated to invest in riskier securities to offset those lower returns in its overall diversified portfolio. With this exposure, if the CalPERS fund were to take a significant market loss, the HB proceeds in the portfolio would suffer the same loss.

Interest payments on the POB debt are not reduced even if the bond proceeds paid into the CalPERS fund have lost value, making this arbitrage strategy a gamble, more so as the equity market is currently at an all-time high.

This scenario is reminiscent of the 1994 Orange County bankruptcy.

Back then, former county treasurer-tax collector Bob Citron used reverse repurchase agreements, a similar arbitrage scheme to POBs, which also “guessed” that short-term interest rates would stay low. As a candidate for office, Moorlach warned in the June 1994 election that this was a dangerous strategy that could bring disaster if short-term interest rates started rising, meaning they inverted.

That is what happened. The rest is a sad chapter in Orange County’s history.

Refinancing a debt should be a prudent strategy, but borrowing to invest brings unforeseen risks for losses. Hoping the CalPERS assumed rate of return is not reduced down to 3%, which it should do over the next 25 years, may not be a reasonable forecast to rely on.

In addition, hoping the Dow Jones market does not drop below 28,000 in the next quarter century may reflect a lack of understanding of economic cycles.

Converting a soft debt into a hard debt, with bondholders unwilling to make payment schedule adjustments, may come to haunt POB issuers in the future.

No wonder the GFOA warned that, “In recent years, local jurisdictions across the country have faced increased financial stress as a result of their reliance on POBs.”

Surf City needs to avoid a potential wipeout, as a few bad economic waves can ruin its future cash flow.

John Moorlach (R-Costa Mesa) represents the 37th district in the state Senate. Shari Freidenrich is Orange County’s treasurer-tax collector.

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