Today’s article by Troy Anderson on the pension crisis facing California reads like one of my speeches. It’s a great piece. It’s too bad that it’s accurate.
Pensions push state to insolvency
By TROY ANDERSON
As the $17 billion annual taxpayer tab for government employees’ pensions and retiree health care increases at a rate of “several billion dollars” a year, Orange County Supervisor John Moorlach says California is heading for an “economic meltdown.”
Elected treasurer in the wake of Orange County’s 1994 bankruptcy, Moorlach predicts a confluence of events – an explosion in the cost of public pensions, retiree health care and salaries, plummeting tax revenues and stock market losses – will result in a growing number of municipal bankruptcies and an unprecedented financial nightmare for the state and local governments.
“Former state librarian (and California historian) Kevin Starr is talking about the potential of California being the nation’s first failed state,” Moorlach says. “We better start talking about this. What are we going to do when the entity (state government) above us crumbles? How do we avoid getting hammered by all the debris? I think we are already technically bankrupt.”
Moorlach’s warning come as cities and counties throughout the state are experiencing significant deficits and many are considering layoffs and cuts in salaries and benefits and public services. In recent years, the state has been able to avoid large budget cuts through borrowing, tax increases and accounting gimmicks, but it now faces a $20 billion shortfall and is running out of tricks.
Amid the worst downturn since the Great Depression, Moorlach and other officials say the geometrically-increasing tab for public pensions and retiree health is pushing the state to the breaking point. Government agencies now face massive unfunded liabilities for public pensions and retiree health care.
These obligations, including the state’s bond debts, are conservatively estimated at $237 billion – and perhaps double that amount, according to a recent policy brief by the Stanford Institute for Economic Policy Research entitled “California’s Mounting Budget Mess.”
Joe Nation, author of the brief and director of the graduate student practicum in public policy at Stanford, says the institute is planning to release an analysis on March 10 estimating how large the promises really are to California’s government workers — public servants who receive the highest salaries and most generous pensions in the nation.
“The initial run suggested there is potentially an enormous, and I think, insurmountable shortfall for the system over the next 30 years,” Nation says. “They have come up with some really startling numbers that suggest the hole we’re in is far deeper than we thought.”
Although officials at many public pension systems expect the stock market to rescue them, Nation says that won’t fix the problem because elected officials approved costly pension enhancements and overestimated earnings while underfunding the systems by $12 billion to $13 billion annually for years.
“Most of the money that pays for pensions comes from investment earnings, but if those earnings are overestimated, as our pension funds have done for decades, then you are left with a huge deficit,” says David Crane, special advisor to Gov. Arnold Schwarzenegger for jobs and economic growth.
The annual taxpayer contribution for the state government’s pensions and retiree health care alone is expected to increase from $5.5 billion this year to $15 billion within a decade, Crane says.
“But even the ($15 billion) estimate is still assuming CalPERS earns very high investment yields over that time,” Crane says. “That figure depends on the stock market doubling every 10 years, and if it doesn’t, those figures are even higher.”
If the annual bill in all government agencies in the state is tabulated, the amount contributed totals now $13 billion a year for pension benefits, according to a recent report by the Legislative Analyst’s Office. These government agencies also pay $4 billion per year for retiree health benefits. The combined total is expected to increase by “several billion dollars” each year, the LAO estimates.
Nationwide, there was a $1 trillion gap in 2007-08 between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises, according to the “Trillion Dollar Gap” report released last week by the Pew Center on the States. This does not include the unfunded liabilities incurred by city and county pension systems.
And the Pew’s numbers likely underestimate the bill coming due because the most recent data available does not take into account the stock market and real estate losses incurred since the Great Recession began.
“While the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of states’ inability to save for the future and manage the costs of their public sector retirement benefits,” says Susan Urahn, managing director of the Pew center. “The growing bill coming due to states could have significant consequences for taxpayers – higher taxes, less money for public services and lower state bond ratings. States need to start exploring reforms.”
The genesis of the problems in California began in 1999 when its pension systems were well funded. Under pressure from public employee unions, state lawmakers passed Senate Bill 400 – allowing massive, retroactive and ongoing pension boosts to state employees. The bill led to the infamous “3 percent at 50” provision for California Highway Patrol officers. At age 50, they are eligible to receive 3 percent of their final year’s pay times the number of years worked. As a result, a public safety employee who began working at age 20 could retire at age 50 with 90 percent of their final salary. In 2002, lawmakers passed SB 183, expanding the “3 percent at 50” calculation to non-safety workers, including billboard and milk inspectors. The bills sparked a wave of public employee pension increases in cities, counties and other government agencies throughout the state.
“No single issue threatens the fiscal health of this state more than our exploding pension obligations,” Schwarzenegger told the Sacramento Press Club last month. “Over the last 10 years, our pension costs have gone up by 2,000 percent from $150 million per year to $3 billion a year (for state government workers). That means hundreds of billions in unfunded liabilities and it means the $3 billion we are spending now will go up to $10 or $12 billion.”
The “exploding pension obligations” are the result of a long pattern of “runaway spending” in state government, says Adam B. Summers, a policy analyst at the Reason Foundation and author of “California Spending By The Numbers: A Historic Look At State Spending From Gov. Pete Wilson to Gov. Arnold Schwarzenegger.”
This increase in spending was driven largely by an increase in the number of local and state government employees and pay increases of 50 percent to 70 percent in the last decade. The average wage for state and local government workers is now $26.24 an hour, compared to $19.45 for private-sector workers, according to the U.S. Bureau of Labor Statistics.
Since 1999-00, the number of state employees has grown from 296,076 to 356,435. During the same period, total state government spending, including federal funds, nearly doubled from $122 billion to $222 billion. Meanwhile, the number of public employees in California collecting $100,000-plus pensions has skyrocketed from about 2,500 in 2004 to 15,000 now.
Summers says the “extravagant spending” really began with the passage of SB 400 – a bill that encouraged local governments to approve similar pension and benefit increases now threatening the financial stability of cities throughout the city. Vallejo filed for bankruptcy in 2008, dozens of other cities are facing severe budget deficits and a growing number of officials throughout the state are discussing the possibility of more bankruptcies. In October, state Treasurer Bill Locker told lawmakers they needed to reform the pension system or “it will bankrupt the state.” The California Public Employees Pension System chief actuary has described the current pension system as “unsustainable.”
“I think we are starting to approach a tipping point,” Summers said. “There is talk of bankruptcy in San Diego. That is the largest city in danger of bankruptcy, but there are probably a number of smaller cities and county governments that are going to be in danger too.”
By law, the state can’t declare bankruptcy.
“The state has the power to tax and the ability to cut back on programs,” Crane says. “But I think these local governments are going to face incredibly draconian choices – shutting down parks and not hiring policemen.”
In response to the crisis, the California Foundation for Fiscal Responsibility is gathering signatures for two pension and retiree health care initiatives that would save state and local government agencies more than $500 billion over 30 years. The initiatives would require non-public safety employees to work until their Social Security retirement age for full benefits and end pension abuses.
“CalPERS’ chief actuary, the state treasurer and the governor are all saying, ‘Mayday, mayday – We have to make changes or the pension system will not be sustained,’” says Marcia Fritz, president of the foundation. “When you’ve got the top three officials saying we can’t sustain our pension benefits then you’ve got to do something.”
FIVE-YEAR LOOK BACKS
The weekly inside the OC Register for Costa Mesa residents in 1995 was called the “Costa Mesa Breeze.” It’s lead reporter was Jonathan Volzke and he put me on the front page with a photo and the following headline: “What Drives This CPA? – Moorlach looks ahead, maybe to statewide office.” This was followed by an interview starting on page 10, titled “What’s John Moorlach’s Next Move?” The interview is a fun read. I don’t think I would say anything differently 15 years later. Here are both pieces in their entirety.
John M. W. Moorlach zips around Costa Mesa’s streets in a faded orange Bricklin SV-1 coupe that rolled off a Canadian assembly line 21 years ago. The license plate on the low-slung sportster warns: “DULL CPA.” A bumper sticker on the hatch proclaims “Don’t Blame Me! I voted for Moorlach.”
The truth of the bumper sticker has erased any truth the license plate might have held. Since Moorlach predicted the county’s financial debacle in an election race against former Treasurer Robert Citron, his life has been anything but dull.
He lost the election, but he’s gained national recognition. He rates his own chances of being appointed by the Board of Supervisors to fill Citron’s seat at 50-50 but admits political doors have opened for him – maybe statewide.
He figures the unpaid time he already has spent on the county bankruptcy has cost him more than $155,000 in billable hours, but Moorlach recently took off from his tax and financial planning business to talk with The Breeze about his future – and what drives him.
WHAT’S JOHN MOORLACH‘S NEXT MOVE?
THE BREEZE: Two months after the declaration of bankruptcy, is there any satisfaction to say "I’m John Moorlach, I was right"?
MOORLACH: I’ve been vindicated, but it’s very bittersweet. In fact, I grieve more than I rejoice. We saw what was going to happen, we were ready to deal with it. So my lament is that I was never called, my lament is that we filed bankruptcy and we probably could have avoided that. Even as late as October, I wrote my team: Here’s the most recent portfolio, this thing is going to blow anytime now. Get ready for me to call. I even had a letter ready to go to Supervisor Thomas Riley saying thank you for appointing me to replace our recently retired treasurer. I was ready to rock and roll. But I never got called.
THE BREEZE: With all this, why did you lose the election?
MOORLACH: Bob Citron was actually pretty savvy as a campaigner. We wanted to let the public know I was a Republican and he was a Democrat. But it was Citron who let everyone know. That he was the victim of a Republican plot. So he played the politics where I played the issues. And he played a good game of distraction. He said "these guys are going to hurt the county’s credit rating. These guys are going to cause a run on the county pool, these guys are dangerous and irresponsible" and no one ever stepped back and said "how could someone asking questions cause these kinds of problems?"
But for a lot of people, face it, incumbents win over 90 percent of the time, and I knew that going in. I was frustrated that I lost because I’m a competitive person. I would wake up every day consumed by this. Why did I lose. Why didn’t the people figure it out. Why didn’t the press get it?
THE BREEZE: Why were you able to come and see everything and so accurately predict everything?
MOORLACH: I looked at the portfolio. Everyone that criticized me did not look at the portfolio. They went off half-cocked. And they’ll admit that now. The consultants I used, my team, said this is probably the worst municipal portfolio they have ever seen. And almost to a man – they were all male, and that was not my choice, just by a coincidence – almost every one said you don’t want to win. I would have been the most hated guy in Orange County. I would have incurred large losses. It would have taken people in retrospect, a few months perhaps a year or two to realize how much I had saved them overall. But that would have been very awkward, very difficult thing to do, but that is what being a businessman is all about. You detect and you correct and that’s the way life is. You have a tooth that is too far gone, you pull it out and that involves pain. I’m sorry.
Why everybody else didn’t get it I can only speculate.
Why didn’t Merrill Lynch say "You know, Mr. Citron, we’re just not going to deal with you anymore"? But no. They acted like drug dealers. They knew the end result would be negative under certain circumstances, but you know, gosh darn it, "if we don’t sell the product, someone else will, so it might as well be us." That logic is really flawed to me."
THE BREEZE: You convinced the city to pull out a great deal of the money. What do you think of the performance of the city and the school district?
MOORLACH: In Costa Mesa, we have four entities we elect officers to and trustees to. Mesa Consolidated Water District did not go into the pool. I would say our hero in Costa Mesa is Margaret Rutledge, the finance director for the water district. She did her homework.
Our sanitation district and our City Council have the same finance director, Susan Temple. Susan Temple never had a discomfort with Mr. Citron’s pool. She could not understand my concerns and she couldn’t locate a replacement investment that would give her those yields. And I would say "No duh, you don’t get these yields without taking astronomical risks." Susan Temple literally had to be forced to pull money out. On behest of Joe Erickson and Sandy Genis, who did their due diligence, they acted like public servants as opposed to politicians. If Temple would have listened sooner, yea, she would be a hero. But I don’t think any praise is deserving if I were to be real strong about it.
At Newport Mesa Unified School District, which we also vote for, Mr. Mac Bernd and Mike Fine had a successful bond deal with the county that made them an additional million dollars by borrowing to invest. It’s sort of like going to Vegas; you win the first time, you think you’ll win your next trip, too. Mr. Fine is just not an experienced finance director and he relied solely on Mr. Matt Raabe. He was warned by Chris Street of Corona del Mar, who was very intimate with this approach because he was an investment banker. My campaign warned them again, and it caused them to have some more meetings, pulling in Raabe. Ed Decker, who endorsed my candidacy, and Judy Franco, who endorsed my candidacy, both listened to me and they voted no.
But my campaign was not to try to convince districts to pull out. My campaign was to get voters to understand what the broad issues were. The campaign was to educate voters to vote for a change because there’s a guy in there who is overly aggressive.
It was just two votes and perhaps one reluctant finance director and we probably could have come out unscathed.
Then the next issue is this 100 percent on the dollar thing. If Costa Mesa residents are forced to pay 100 cents on the dollar, then their liability is about $654 per person. If we were only responsible for the loss the county incurred for countywide issues, as opposed to all of these investors, it would be about $700 million, which translates to about $270 per person. If the county has to make everybody whole, Costa Mesa will still suffer. I don’t hold to that argument. This is a county, not a commune. I don’t believe the residents of Costa Mesa should pay for the indiscretions of its neighbors. It should pay for its own indiscretions, in other words, be responsible for yourself. Anything more than that is coercive.
THE BREEZE: You mentioned earlier that you had a letter for Chairman Riley that you accept the appointment of treasurer. Do you have a letter ready now for Chairman Gaddi Vasquez?
MOORLACH: I’ve always been willing to serve, and I would love to help out with the rehabilitation plan. We have to move forward now and it’s a great challenge. I believe as a lay person that I’ve certainly got a pretty good grasp of what’s going on, but I’m very secure of who I am and where I am. I’m willing to give of my energies, but I understand that a lot of people are uncomfortable with someone who is secure and who is ready to step out and make some decisions.
THE BREEZE: What’s the most important thing that needs to be done now in the treasurer’s office?
MOORLACH: The most important thing is credibility. We were never really supposed to be the broker of record for every city in the county, every municipality, even cities outside the county. We need to be a holding place for funds that weren’t going to be spent immediately for whatever reason. They should just be invested prudently, with safety of principal as the first rule, liquidity as the second and yield as the third. Mr. Citron has yield as the first, yield as the second and yield as the third. He’s made us an additional $715 million but he lost us $1.7 billion. It was Will Rogers who said it is the return of your money, not the return on your money, that really matters.
THE BREEZE: Isn’t there an ego thing to being able to sit back and say I’ve got a $20 billion pool I’m in charge of?
MOORLACH: I’m sure for some, it would be. I’m more task-oriented. Here’s your job, and this is what we want to accomplish and if you do a good job, great, you’re rewarded, and if you’re not doing a good job, find someone else who can. I already get enough ego satisfaction in my own business. I’m pretty secure in who I am. I’m secure in my marriage. I’m secure in my job. I’m very satisfied. I feel I have a purpose in my life and I’m real comfortable with that. I don’t need to look for the next hill to climb to somehow prove myself. I can die today and say I’ve accomplished just about everything I’ve wanted to in my own life as it is. But I also have a real concern for my community.
I think we’ve seen with this whole fiasco that government is serious. We can’t just be elected and sit there like it’s some ego booster. You have to be there to do something. If you’re just there to be, then you’re not in the right place.
THE BREEZE: What is your purpose?
MOORLACH: My family is tops. My wife, Trina, is my most important asset. My kids – Sarah, 12, CJ, 10, Daniel, 4 – are my joy. I want to breed in them the philosophy I have, and that is, you’re destined to succeed. I believe on Day 1, when you roll into town, you have to be self-supportive. By Day 7, you should be giving to the poor. It’s a basic, almost Jewish cultural thing, although I’m not Jewish, it’s something I really admire, build a business, participate in your community, give back. We live, we die. It’s a very short cycle. Are you going to be a giver, or are you going to be neutral, or are you going to be a taker? I just really believe in being a giver. I’m a Rotarian, "Service Above Self." I’m very motivated by that.
THE BREEZE: You’re now known coast to coast as the guy who predicted the county’s downfall. What’s your greatest accomplishment?
MOORLACH: In life? I don’t know. For me, accomplishments are an end unto themselves. I’m real goal-oriented. I would just be happy in whatever I pursued, if I didn’t foresake the important things. Like my wife. Like my kids. Like my relationships with my friends.
No matter how important other people thought I was, that somehow I didn’t think I was important.
THE BREEZE: Your name is known throughout the state, throughout the country. How has it changed you?
MOORLACH: It hasn’t, yet. I’m in tax season. I’m here at the office working beaucoup hours. I’m not getting a chance to enjoy it that much. I feel bad that I’m in all these magazines. If it were just one magazine, it would be real exciting and I could just really savor that, but it’s been so overwhelming with so much so fast that I haven’t had a chance to say "this is great." It’s sorta like you get a letter from a company here in Costa Mesa that says we can do posters of your articles and I’m going "which one?"
I’m looking forward to the summer so I can go back and read and savor and enjoy some of this stuff. It’s been a lot of fun, but it’s just been awkward.
THE BREEZE: I feel like the next time we talk, we’ll be in Sacramento.
MOORLACH: That’s not up to me, that’s up to the people. But look at Sacramento. We have 80 Assembly members and 40 senators. Not one of them, not one, is a CPA.
THE BREEZE: What would you say if you bumped into Robert Citron?
MOORLACH: I have never spoken to Mr. Citron. I would say "I’m praying for you." He involved himself in what I would call an (improper) financial affair. And when you go beyond boundaries, you hurt more people than yourself. And I’m sorry that the consequences of his actions are so devastating. I would just tell him that I’m real grieved at what his decisions have caused. And I’d leave it at that. I feel sorry for him, too. Who wants to go down in history this way?
The lead article for the LA Times’ California section was Stuart Pfeifer’s “Merrill Aims to Handle O.C.’s Refi—Brokerage seen by many as responsible for the bankruptcy hopes to restructure the county’s debt and make $2 million doing it.” There will always be famous pairings: Moorlach/Citron, OC/Merrill Lynch. You’ll see these themes in the Look Backs. Here are the clippings of the personalities on both sides of the debate.
Supervisors Tom Wilson and Jim Silva said Tuesday they opposed Merrill’s involvement, arguing that it would allow the company to profit from a problem it created. Silva said he wouldn’t support Merrill’s involvement even if it would save the county $1 million compared with competing bids.
Other county officials, including Supervisors Lou Correa and Chris Norby, said allowing Merrill Lynch to bid for the job would benefit the county by creating competition. Further, they said, they would support Merrill if it made the best proposal.
“My duty is to the taxpayers, to give them the best possible deal,” Correa said.
Board Chairman Bill Campbell . . . said he was studying the idea.
Orange County did not do business with Merrill again until 2003, when the Board of Supervisors voted to allow Treasurer-Tax Collector John M. W. Moorlach to buy certain low-risk investment products from the company.
Campbell said Merrill’s proposal was worth considering in part because of personnel changes with the company. For example, one member of the Merrill team assigned to the refinancing proposal helped organize the county’s bankruptcy recovery plan while employed by brokerage Goldman Sachs, Campbell said.
Moorlach and Orange County Auditor-Controller David Sundstrom say they support considering Merrill.
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