Today’s OCERS-related Update. Your thoughts?

The difficulty with defined benefit pensions is determining the annual contributions that the County, or any employer, is required to make to the retirement plan.  In order to do the computations, you need the services of a qualified actuary.  An actuary does the math required to make sure adequate funds are available to pay out the projected benefits.  Consequently, the actuary has to make various assumptions in order to determine the annual contribution requirements.  Questions have to be asked, like:

(1)  What is the retirement formula that you are saving up for?

(2)  What will be the annual average investment earnings? 

(3)  If an employee started at age 25, over a long career, what will the average annual pay increases be?

(4)  If that employee retires at age 65, after forty years of service, how long will he or she live (10, 20 or more years)?

(5)  To make sure that the retiree does not suffer from a loss in purchasing power, what will the rate of inflation be for cost of living increases?

The process gets interesting when things change during the term of the plan.  Things like people living longer, formula changes, or unanticipated investment results, will require recalculations and annual contribution adjustments.

Other things can happen as well.  In today’s instance, there may even be human errors.  The employer gives the payroll data to the retirement system.  The retirement system gives the data to the actuary.

For the County, something did not get communicated accurately in the second handoff and now we have another event that will require a recalculation and an increase in our annual contributions—an increase we cannot well afford.  Expect to see further increases in our annual contributions as poor investment returns over the past couple of years are factored into the actuarial projections.

The news article below is from the Orange County Local News Network (

A similar story is also posted on today’s OC Register website in two locations, as a news item at and as a blog item at

County discovers $228 million pension error

By Erik HolmesOCLNN

What’s another $228 million, right?

The Orange County Employees Retirement System, or OCERS, has discovered a software error that caused county agencies to under-contribute to the employee pension fund for employees receiving special pay, creating an unfunded liability of $228 million.

That’s on top of the county’s existing unfunded pension liability of about $3.1 billion.

The OC Board of Supervisors was notified of the error on April 12. The error has been in place since a software update in 2003, according to OCERS, but it has now been corrected. No retirees have been underpaid for their pensions, according to the agency.

Second District Supervisor John Moorlach said he is not sure how the county will address the unfunded liability, and he has asked OCERS CEO Steve Delaney to brief the supervisors on the situation.

He said OCERS needs to be more meticulous about auditing its books.

“What OCERS should be doing about every five years is auditing their actuary to make sure the actuary is coming up with the right numbers,” Moorlach said.

County employees with in-demand skills or special assignments – such as bilingual employees, paramedics or cops who ride motorcycles – earn extra pay, but that extra pay was not accounted for in the contributions county agencies were making to the pension fund. Pension amounts are based on employees’ salaries, so such an error creates a situation where the county will owe retirees money it hasn’t set aside.

Delaney said the error occurred because OCERS’ pension administration software, which was updated in 2003, uses one data set for employees’ regular pay and another for special pay. But in generating its annual report for analysis by an actuary to make sure pensions are properly funded, the computer system was accounting only for the regular pay data.

“Thus, the salary being used to determine future liabilities was under-reported,” Delaney said in an e-mail. “There was never a problem in payment of benefits … but the data used by the actuary to project future benefits was incomplete, and contribution rates did not capture as much of the future liability growth as they would have.”

Delaney said the error disproportionately affected agencies that have more employees receiving special pay.

“An agency such as the Orange County Sheriff’s Department is more likely to find its employees at times in unusual and stressful situations that will require premium payments,” he said. “An agency like that would be more heavily impacted by finding that those premium payments had not been correctly forecast into the agency’s pension contribution rates.”

Delaney said OCERS has not yet decided how to fix the problem.

“There are a number of accounting process options available for dealing with gains and losses as they occur each and every year,” he said. “We are currently exploring appropriate funding methods with the assistance of our actuary and will discuss those in more detail at our May (OCERS) board meeting.”

If you have comments, news tips, questions or story ideas, contact Erik Holmes at erik.holmes(at) or call us at 714-966-4505. And follow Erik on Twitter at


April 20


Ms. Trudy Ohlig-Hall had her Letter to the Editor printed in the OC Register under the heading “Supervisors turn control over to the bureaucrats.”  Ms. Ohlig-Hall was an elected director of the Mesa Consolidated Water District, and still is.  Ms. Ohlig-Hall has always had trouble telling people how she really feels . . . Not!  Her comments seem apropos to the recent events at the Orange County Vector Control District.

                I am thoroughly disappointed in our county supervisors’ lack of resolve in taking back control of our county government from the chief executive officer.  As an elected official, my position has always been that the elected board is directly responsible to the public and not the manager or CEO.

The board of directors, city council, supervisors—whatever the case may be—hire the manager or CEO, but this person should never have control over the elected officials or policy makers.  The way the system is supposed to work, the manager makes recommendations to the elected officials who then make the decision.

At least we have one elected county official, John Moorlach, our county treasurer, who seems to be able to handle his department without direction from a subordinate.  Why have the supervisors not learned from past experience?

Trudy Ohlig-Hall

Costa Mesa


Michael Marois of Bloomberg has been covering me for a very long time.  So he was very knowledgeable about the County’s Chapter 9 filing.  He and William Selway covered a recurring theme in Merrill Vies for Orange County Job a Decade After Bankruptcy.”  For those newer to the Updates, here is the entire article to provide a little history.  (I only found one typo:  I was elected to the position of Treasurer-Tax Collector in 1996 and re-elected in 1998 and 2002.)


April 20 (Bloomberg) — Merrill Lynch & Co. is vying to arrange a bond offering for Orange County, California, for the first time since the world’s largest securities firm sold the county customized bonds that led to the biggest municipal bankruptcy in U.S. history.

“Merrill Lynch has a challenge,” Lou Correa, an Orange County supervisor, said in a telephone interview. “If this was a 100-yard sprint they’d be starting 5 yards behind everyone else because of the bankruptcy. But at the end of the day, you have to do what’s best for the taxpayers.”

Bankers from New York-based Merrill met in February with three members of the county’s board of supervisors, board Chairman Bill Campbell said. A decision on which investment bank may be selected could be made “within two months,” said county Treasurer John Moorlach.

The bid to refinance $600 million of Orange Country’s debt would help Chief Executive Officer Stanley O’Neal boost Merrill’s standing among municipal bond underwriters. Merrill was the No. 1 underwriter of state and local debt until the 1994 bankruptcy tarnished its reputation. According to Thomson Financial, the firm fell as low as No. 5 in 2002 before rebounding to third place last year.

“There was a pretty good purge at the time,” said Sacramento County Assistant Treasurer Dave Irish.

Orange County sued Merrill in January 1995 for providing inappropriate investment advice. According to the suit, recommendations made by former Merrill bond salesman Michael Stamenson to then-Treasurer Robert Citron failed to adhere to guidelines for municipalities.

Citron used money borrowed from Merrill and other firms to bet on the direction of interest rates by purchasing longer- maturity derivative securities. The strategy, which generated high returns initially, backfired as rates rose in 1994, resulting in losses of $1.6 billion.

No Ill Will

Merrill earned $62.4 million in 1993 and 1994 from its business with the county, according to executives at the firm who testified before state lawmakers. It settled with the county for $400 million in 1998.

Moorlach, who took over from Citron in 1995, says he harbors no ill will. The current refinancing involves some of the $1 billion of bonds sold as part of the county’s plan to emerge from bankruptcy.

“It would be a nice, sweet deal if Merrill’s involvement lowered our overall costs,” said Moorlach, 49. “Every little bit helps and if their being in the mix does that, then we win.”

Former Goldman Bankers

Merrill’s chances may be helped by the firm’s decision to hire two former Goldman Sachs Group Inc. bankers, said Moorlach. Richard Meister, a managing director in New York, and Edward Burdett, a managing director in San Francisco, were hired by Merrill in 2002. Both men declined to comment.

Meister, 51, was the lead banker on the California Bankruptcy Recovery Team formed to devise a plan to lead the county back to solvency. Meister, who spent 19 years at Goldman, left in 1999 with Burdett for, an online bond trader. That firm stopped trading in 2002. Burdett, 55, has more than 25 years experience in the municipal bond business.

Merrill ranked fifth as a senior manager of California state and local bonds last year, according to Thomson Financial data, a unit of Toronto-based Thomson Corp. Last year, Merrill underwrote $5.27 billion of municipal debt in California.

“We are interested in the opportunity to compete for the county’s business,” said William Halldin, a Merrill spokesman based in Sacramento. “What we’re looking to do in Orange County is to compete and hopefully offer innovative solutions.”

Competitive Deals

Merrill, the world’s biggest securities firm by capital, has climbed back in the rankings of California underwriters in part by winning more competitive offerings than any other firm for four of the past six years. In a competitive sale banks bid to win the right to underwrite securities by offering the lowest borrowing cost. In negotiated deals — where a borrower picks a dealer before a sale — Merrill hasn’t risen above fourth place, according to Thomson Financial.

In 2003 Merrill won the right to work as an investment broker for Orange County by a 3-2 vote of the supervisors. While Merrill isn’t currently a member of the county’s pool of underwriters, it may win the right to manage the sale should a majority of the board approve.


The last time Merrill underwrote Orange County bonds was before the bankruptcy when it co-managed a sale of $874 million of one-year notes. Merrill earned about $7.5 million on the deal, based on the average fees for negotiated sales in 1994 by Thomson Financial.

The county took the first steps toward refinancing its bonds on April 7 by selecting a financial adviser and lawyers, and has already approved 13 banks that could serve as underwriter, including Goldman, Banc of America Securities, Lehman Brothers Holdings Inc. and UBS AG. The county has yet to decide if the bonds will be sold through a negotiated underwriting or by competitive bid.

The pending sale would refinance $122 million of bonds sold in 1995 and $480 million of certificates of participation that were sold when Orange County emerged from bankruptcy in 1996. The county expects to save $75 million by refinancing the debt, which carry yields of more than 6 percent, according to Tom Beckett, county manager of public finance.

Orange County sued securities companies, accountants and advisers after the bankruptcy. Merrill, without admitting wrongdoing, agreed to settle in 1998. The county recovered almost $860 million from companies it blamed, including the $400 million from Merrill.

Merrill is a passive, minority investor in Bloomberg LP, the parent of Bloomberg News.

Guilty Plea

Citron, the former treasurer, had a direct line to Merrill’s structured note desk and often cited then Merrill Chief Investment Strategist Charles Clough’s optimistic outlook on bonds. Citron later told lawmakers that Stamenson encouraged the county to buy more of the derivatives that caused the losses.

In defending itself, Merrill released transcripts of a 1992 telephone call between Citron and Stamenson, in which the banker warned that the county was buying too many of the securities.

Citron pleaded guilty in 1996 to lying about the county’s finances and illegally transferring money between accounts. He served a nine-month sentence in a work furlough program.

Board Supervisor Campbell, who voted in 2003 to allow Merrill to work as the county’s broker, said he won’t discriminate against Merrill should it submit the best proposal. In interviews, supervisors Chris Norby, 55, and Correa, 47, both said they wouldn’t object to a Merrill bond sale.

“I don’t blame Merrill Lynch for the bankruptcy. I don’t hold a 10-year grudge against them,” said Norby. “It wasn’t caused by Merrill Lynch. It was caused by a Treasurer named Citron and by a Board of Supervisors that wasn’t supervising.”

Top Rating

Moorlach, who criticized Citron’s investment strategy during a failed campaign for treasurer in 1994, was appointed to his job in March 1995. He was elected to the post in 1996 and re-elected in 2000 and 2004. None of Orange County’s current supervisors served on the board in 1994.

Orange County, the fifth most populated county in the U.S., currently enjoys an Aa2 rating from Moody’s Investors Service and A-plus from Standard & Poor’s. That’s up from the junk bond ratings of Caa assigned by Moody’s and CCC from Standard & Poor’s after the Chapter 9 filing.

The county, with a per capita income 124 percent above the national average, currently has $960 million in debt outstanding.

As exciting as Merrill Lynch coming over the horizon may be, Jean O. Pasco and David Reyes of the LA Times brought up some difficult news with “O.C.’s Benefits Balloon Looming – Retiree health premium set-asides may rise so the county can be prepared for the future.  It affects bankruptcy recovery.” 

Some observations.  The first is how the county’s bankruptcy filing still permeates so many other areas of our budget and our strategic financial planning. 

The second is that I tried for years in the late 1990s to get the County’s CFO to change the method funds accumulated within the retirement system for retiree medical purposes would be appropriated.  Regretfully, the recommended changes were not made and in the early 2000s the reserves were wiped out thanks to the “Dot Com” bust.  This would be another reason for me to consider running for County Supervisor, to provide some fiscal leadership in these “post employment benefit” areas. 

The third is that after my election in 2006, we negotiated a dramatic restructuring of the retiree medical plan and are now able to pay the annual required contribution.  It also provided a reduction in our unfunded liability of some $1 billion.  It’s an accomplishment that the residents of Orange County can be proud of.  But here, we set the table for those upcoming changes, and the article is provided in full.

Orange County may have to budget at least $110 million annually beginning in July for retiree medical benefits — nearly five times the current plan — because it must soon show how it will cover the benefits for the next 30 years, officials said Tuesday.

The cost of covering only current retirees, without setting aside money for the future, would be $23 million next year.

However, covering just next year’s costs means the county would have to identify the amount due over the following 29 years — estimated at more than $1 billion — as a debt on financial statements beginning in 2007, according to new government accounting standards.

That could affect the county’s otherwise stellar credit rating, even as the county moves ahead toward paying off its 1994 bankruptcy debt 10 years early.

The increased medical costs could overwhelm much of the savings that the county hoped to achieve by paying off the bankruptcy debt in 2016 instead of 2026. On Tuesday, supervisors hired a financial advisor to restructure the old debt by applying $116 million in reserves to shorten its annual bankruptcy payments.

The strategy is much like that of a homeowner paying off a large chunk of a mortgage early to shorten the length of payments and is expected to save the county about $445 million in debt interest over the 10 years.

In 2002, the county hoped to deal with its future retiree medical payments by setting aside $22 million. That was supposed to cover its share of costs through June 2006. But skyrocketing insurance premiums consumed the money, which will run out this month.

The county’s portion of retiree medical costs increased from $8 million in 2002 to $12 million in 2004 and will jump to $23 million next year.

The good-news/bad-news in county finances was delivered in separate staff reports Tuesday. Supervisors decided to study retiree medical expenses for 60 more days before deciding what to do.

Board Chairman Bill Campbell said he didn’t want the cost of covering future medical premiums to swallow up so much of the budget that other county services would have to be cut. At the same time, he and other board members said they wanted to treat retirees as humanely as possible without passing huge premium increases on to them.

One county official offered a recommendation Tuesday: Bite the bullet and pay as much as possible now.

"It’s a debt that needs to be addressed," Treasurer John M.W. Moorlach said in an interview. "If you can’t hit the target, then you need to get as close as you can. The best way to address debt is to pay it off."

The situation is muddied by the county’s reliance on investment earnings to cover its costs for retiree medical payments. When the stock market performed well, the costs were covered. When it didn’t, the county had to dip into general funds to cover its payments. The recent jump in health insurance costs has exacerbated the problem.

Supervisors must come to grips with the rising retiree medical costs now, rather than later, said Kris Vosburgh, executive director of the Howard Jarvis Taxpayers Assn.

"It really seems like a lot of public officials are irresponsibly kicking the can down the road and hoping the next generation of public officeholders solves this," Vosburgh said.

Any changes in what the county pays toward employee and retiree medical expenses would be subject to approval by the county’s dozen labor unions. With those contracts not up until 2008, the county cannot negotiate in the meantime for retirees or current employees to cover more of the costs. Current employees have 1% taken out of their paychecks to help cover those costs.

New county employees may have to contribute more toward their costs or be put in cheaper health plans, said Supervisor Chris Norby.

"This has major financial and human implications," Campbell responded. "And we should look for a balance."

The quandary dates back to 1993, when county finances were flush and supervisors approved paying a portion of medical costs for workers after they retired.

The perk didn’t cost the county out of pocket while the stock market flourished. But when the market dropped, a reserve fund that the county used to cover the payments dwindled. In the past few years, the county has had to tap more general fund money to cover medical costs for about 5,500 former workers. The county has about 17,000 active employees.

If nothing is done, medical costs will continue to burden the county and retirees, said Robert A. Griffith, president of the Retired Employees Assn. of Orange County.

Workers who retire after 20 years get $300 a month from the county toward a $700 monthly health premium. The remaining $400 comes from the retiree’s pocket, Griffith said, with the total premium expected to increase at least 15% each year.

"It’s expensive now and going to get more expensive for everyone," Griffith said.

The sting over rising medical costs was softened with the decision to pay off the bankruptcy debt early.

"It has been a terrible drain on the county budget," said Supervisor Jim Silva. "Taxpayers get nothing for the interest and principal [paid]."

The bankruptcy was the byproduct of risky investments by then-Treasurer Robert L. Citron, who borrowed hundreds of millions of dollars to place big bets on highly speculative securities that depended on low interest rates. When rates rose, the county lost $1.64 billion.

The county still needs to make sure its restructuring plan meets guidelines of the Internal Revenue Service because it involves the sale of tax-exempt bonds.

The county has an overall bankruptcy debt of $763 million. It has made annual payments of $90.7 million, which officials said could have gone to county services that were cut because of the budget debacle, including park and beach improvements, flood control projects and social services.

April 21


In the Daily Pilot’s weekly “The Political Landscape” column by Alicia Robinson, she had a fun section titled “Lunch humors politicos.” 

The Costa Mesa Chamber of Commerce usually hosts a great community luncheon recognizing various individuals and businesses in the city.  For some reason, I don’t see this year’s luncheon on their website.  Darn.

If you didn’t know state Sen. John Campbell could sing, you were right. The car salesman-turned- politician warbling the Theodore Robins Ford jingle was one of a number of comical moments at Friday’s South Coast Metro Alliance Hall of Fame awards luncheon.

Business and community leaders, including Costa Mesa City Councilman Gary Monahan, Orange County Treasurer-Tax Collector John Moorlach and South Coast Plaza bigwig Werner Escher, turned out at the Westin South Coast Plaza to eat chicken and risotto and honor the hotel-building Ayres family, Bob Robins of Theodore Robins Ford, Rutan & Tucker attorney Patrick Munoz and Youth Employment Service Executive Director Lynne Graham for their contributions to the community.

It seemed everyone was a comedian. While giving a brief introduction, Campbell quipped about his time limit: "I could talk about all the good things happening in Sacramento, but that wouldn’t take three minutes."  One no-show at Friday’s event was Costa Mesa City Councilwoman and attorney Katrina Foley, who later said she was stuck in depositions all day.

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