MOORLACH UPDATE — OC Register — February 28, 2010

It looks like I’ve found Sunday’s Greenhut column a day early.  Expect to see this piece in tomorrow’s OC Register Commentary section.  If you need an explanation of my quote, please see “MOORLACH UPDATE — OC Register — February 25, 2010.”

Steven Greenhut: Retreat from pension reform fight

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By STEVEN GREENHUT

Special to the Register

letters@ocregister.com

Anyone who thinks that gubernatorial candidate Meg Whitman offers much hope for fixing the state’s structural fiscal mess should now wonder whether the billionaire former eBay chief executive might end up being nothing more than another Arnold Schwarzenegger – a governor who sometimes talks a good game but who, ultimately, is too timid to take on the vested interests that are destroying our once-golden state.

Whitman (and Schwarzenegger) last week backed away from any support for a proposed initiative for the November ballot that would institute a second-tier pension for government employees. Politicians and actuaries from all political perspectives warn that the current situation – which includes 15,000 government retirees receiving more than $100,000 a year in cost-of-living-adjusted pensions – is unsustainable and could lead to insolvency for the state. Referring to the pension obligation crisis, Orange County Supervisor John Moorlach told CalWatchdog: "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."

The state is in deep doo-doo. More people are recognizing this. Current pensions cannot be touched – they are vested benefits, and the courts have ruled that they must be paid for, come hell or higher taxes. But the state at least needs to institute a second tier of lower pension benefits for new employees to ease pressure on the crumbling system.

Such a plan was the goal of a proposed ballot measure being circulated by the California Foundation for Fiscal Responsibility, which announced Thursday that it was suspending its campaign. If anything, the plan was overly generous in that it maintained a defined-benefit-style plan, whereby the retiree is promised a certain payout, rather than shifting government employees to the defined-contribution, 401(k)-style pensions that private-sector employees receive, if they get anything.

Whitman and Schwarzenegger have both talked somewhat about the state’s pension crisis. In a speech to the Sacramento Valley Republican Party last month, Whitman said, "There is no question that we have a situation on our hands that is very challenging, and I’ll point to the unfunded liabilities as one of our problems. … The private sector cannot afford this, and we cannot afford this, either." Our current governor – who has alternately proposed and backed away from specific pension reform ideas – last month said, in reference to unfunded pension promises, that "we are about to get run over by a locomotive."

But, according to a Sacramento Bee article last week, Schwarzenegger has done what he typically has done – found some reason to back away from real reform once he faces opposition to his proposals. Marcia Fritz, president of the California Foundation for Fiscal Responsibility, told me that Whitman and her campaign simply stopped returning phone calls even though a top aide had previously pledged an endorsement and financial backing for the pension-reform measure.

The business community helped sabotage the pension-reform effort, Fritz said. California business leaders – known more as deal cutters than reformers – unsurprisingly found that they didn’t have the stomach to directly take on the public employee unions, even as more people are recognizing the level or problems caused by public-employee enrichment schemes. The business community, she said, was fearful that such an initiative would energize union voters in November, when Whitman hopes to be propelled into the governor’s office.

There’s always an excuse to avoid these types of tough but necessary fights. "When are we going to fight the war?" Fritz asked. It’s a good question. The timing is right. The public is agitated at the high level of debt, taxes and pension liabilities. Apparently, the Whitman forces believe that they must first win the governor’s race before tackling tough issues, but I have never seen a candidate who avoids tough issues in a campaign to tackle those issues once in power.

Last week, the well-respected Howard Jarvis Taxpayers Association endorsed Whitman as "the only reliable fiscal conservative in the race, and her commitment to cutting spending and eliminating waste, fraud and abuse is the way to restore prosperity to the Golden State." That’s a great endorsement, but then she bails on pension reform. Most disturbingly, Fritz claims that the Whitman campaign actually torpedoed the initiative by leading CFFR to believe that support and money was coming, but then never delivering. That leaves nothing for CFFR to do but to pull the plug this election cycle.

This is the response I got from Whitman spokesman Tucker Bounds: "There is no question Meg supports the goal of reforming California’s bloated pension liability. She supports the goal, but there may be a difference of opinion about the tools and way forward."

And not much reform will come from the Capitol. The Assembly is considering a bill that could significantly add to the state’s financial burden for retirees. Basically, if firefighters or certain peace officers develop cancer, it is presumed to be job-related, and that unleashes a torrent of payments and benefits. Despite the abuses inherent in the current system, Assembly Bill 2253 – which is even co-authored by six Republicans, including Curt Hagman of Chino Hills – would extend the presumption to these government retirees to up to 15 years after their termination. So many people develop cancer late in life, that this will spark an enormous increase in costs to taxpayers.

Well, suppose you have a friend who spent his last 10 years running up debt, drinking to excess and making every bad decision imaginable. He is down on his luck and one step away from living on a park bench. You’ve been lecturing him for years, and he has mocked and ignored you. Now that even he understands the fruits of his decisions, he tells you, "If you’re so smart, then what’s the answer?"

Had the friend – or the state government – listened to oft-repeated fiscally responsible advice, there would be no current crisis. But no. And even now, as we point to reasonable solutions such as second-tier pension systems, the unions and their backers intimidate potential reformers and candidates from addressing the problem. Yet we’re the ones who are supposed to fix the problem. Talk about chutzpah.

At least now you know why I have little optimism and am thinking about lobbying the Sacramento city government to reword its nice welcome signs to read, "Abandon hope, all ye who enter here."

Steven Greenhut is director of the Pacific Research Institute’s www.calwatchdog.com journalism center.

FIVE-YEAR LOOK BACKS

March 1

1995

MBIA had a magazine for the municipal finance community, titled “PUBLIC Issues,” and its Spring 1995 issue was dedicated to “The Crises of Orange County – A Special Report.”  MBIA is a bond insurer and they’ve had their fun over the past fifteen years.  By reviewing their website, it does not appear that they still have this publication.  I was quoted in two  of the six articles.

The first, and lead article, was by Patricia Carey and was titled “A House of Cards—An investment strategy built on quicksand sinks a wealthy community.”  Here is the opening paragraph:

With its swimming pools and sprawling subdivisions, Orange County, California is the picture of a prosperous economy—which made its December 1994 bankruptcy filing all the more shocking.  Under the leadership of Treasurer Robert L. Citron, the county’s investment pool transformed $7.5 billion in contributions from local governments into a $21 billion portfolio before things began to fall apart.  As the dust cleared early in 1995, the county was buried in lawsuits, and pool participants were counting combined principal losses of $1.69 billion.  “The overall lesson is, if it seems too good to be true, it probably is,” says John M. W. Moorlach, a Costa Mesa, California, accountant who unsuccessfully challenged Citron in the 1994 election.

The other article was also by Patricia Carey and was titled “Managing the public purse – Hard-learned lessons in safekeeping public funds.”  This paragraph comes under point number six, “Write an investment policy:”

Investment records should be kept scrupulously up-to-date using accepted accounting standards.  In Orange County, record keeping reportedly was so sketchy that weeks after the fund’s meltdown, auditors discovered $310 million in a previously unknown bank account.  Investigators are also looking into allegations that interest income was diverted from fund participants into county accounts.  “It’s getting to seem like Citron ran his portfolio out of shoe boxes,” says John M. W. Moorlach, the California businessman who opposed Citron and lost in the 1994 elections.

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