MOORLACH UPDATE — Nick Berardino — January 28, 2012

Tomorrow’s OC Register will have a Reader Rebuttal submission by Nick Berardino, which is provided below.

Believe it or not, my State of the County PowerPoint presentation has 94 slides.  It is available at http://www.ocgov.com/portal/site/ocgov/menuitem.4981dc715fc6e27bdadd603d10000…; just click where it says “2012 State of the County address.”   Only 14 slides directly or indirectly address pension reform (slides 73-86).  Six of the 14 deal with the legal concerns that revolve around the reform proposed (slides 78-83).  There are legal minds that differ on the proposed reform, but most serious scholars who have analyzed the growing pension debt problem will tell you that changes with the current employees is the appropriate route to pursue.  I decided to broach the subject to begin a dialogue.  Here is where some of the discussion should go:

1.       What are the legal considerations and are they surmountable?  If they are surmountable, can we work together to accomplish the goals of (a) providing a satisfactory defined benefit plan; (b) reducing the County’s unfunded liability; and (c) consider salary increases to County employees as a portion of the total compensation package?

2.       My research shows that returning prospectively to the previous pension formulas will generate a large reduction in the County’s unfunded actuarial accrued liability (UAAL).  Actuarial studies confirm this.  If we disagree on the reduction, can we ask the actuaries to do further analysis?

3.       Reducing the UAAL will do two things.  It will lower the employer contribution rates.  And it should lower what is known as the reverse pickup.  The reverse pickup is what employees have withheld from their paychecks to pay for the UAAL that resulted from the pension formula enhancement approved in August of 2004.  Only existing employees incur this cost.  Employees who retire escape this expense.  Therefore, current employees are paying for their UAAL, as well as paying the UAAL for those who retired after August, 2004.  A reduction in the reverse pickup should provide an increase in the net paychecks of the County’s impacted employees.

4.       The County made significant pension reforms in the last negotiating cycle and I acknowledged that in my presentation and remarks (see slides 6-8).  The County is also working legislatively on its hybrid plan, which I addressed in slide 74.

Now to some of the ad hominem arguments.  The direction the negotiations go, I will go.  If managers have to pay for their employee contributions, County Supervisors should too.  Speaking for myself, the pension vote of August, 2004 was a financial disaster.  I would personally rather rescind this benefit, be reimbursed for my past reverse pickup contributions (which does not go into the pension system—it’s just an offset for the County’s pension contribution), and stay with the formula that I started with when I came to the County.  I believe this is the course of action every employee should take.  I believe it is the honorable approach to take.  I also believe it will prevent the County from more layoffs.  It should allow the County to provide for pay increases, something that I do not see under the current scenario as happening for years, if ever.  The three bargaining units have to make choices on which road to choose.  Will they adamantly cling to a pension formula that may cause the pension system to implode?  Or will they return to a formula that is fiscally manageable and may provide for increases in current take-home compensation?  That’s the discussion I believe we should engage in at the bargaining table.

Having said that, let me share what I have in slides 55-59.  The Orange County Employees Retirement System (OCERS) Board of Directors voted to raise contribution rates by 1.77% of payroll because retirees are living longer than anticipated, and 0.61% because pay increases have exceeded projections (most likely due to early retirements and the resulting internal promotions).  With a billion-dollar payroll, 2.38% is about $24 million per year in additional costs to the County.  The OCERS Board will consider lowering the investment earnings assumption later this year.  The current rate is 7.75% and the proposed rate is 7.5%.  This reduction will increase the system’s UAAL by $750 million and the annual contribution by 2.94% (about $25 million per year).  Even if the state and Federal programs picked up 80% of this cost, the County would be hard pressed to find another $10 million in its General Fund Budget.

To make things more interesting, OCERS had net earnings of about 0.75% for the calendar year 2011.  That means it fell 7% below its investment return assumption.  If OCERS were fully funded, and we said that it should have about $12 billion in assets under management.  Earning 7% on this portfolio means a return of $840 million.  Trying to replace the lost earnings over 30 years will cost the taxpayers some $70 million per year (assuming a 7.75% investment return assumption).

The interest-rate environment is at an historical low.  The last time the nation saw a low interest rate turn around with increasing rates was in 1994.  If interest rates rise, then bond values decline.  If the rates double during this calendar year, then the OCERS fixed income holdings may decline in value by half.  The international and domestic fixed income holdings represent about 24.7% of the portfolio.  A 12.25% loss on in a $12 billion portfolio is about $1.5 billion.  All to say, the defined benefit pension plan for the County is a really, really big deal.  Consequently, an honest debate on what is best for the employees, the employers, and the stakeholders (taxpayers) is the least we can do.  I believe both Nick Berardino and I would agree that the bargaining table is the best place to engage such a discussion and I hope that we can.

Reader Rebuttal (Nick Berardino): County pensions

Reader Rebuttal by Orange County Employees Association General Manager Nick Berardino

It’s not surprising that Supervisor John Moorlach spent the vast majority of his inaugural State of the County speech Tuesday beating his tattered anti-pension drum ["Pension battle ahead," Editorial, Jan. 25].

It is deeply troubling, though, that the so-called "pension reform" proposal he unveiled for Orange County Employees Association members during his presentation makes absolutely no sense: It’s illegal, would have no impact on the county’s fiscal health or unfunded liabilities, and would do nothing toward what taxpayers have been demanding when it comes to pension reform – that everyone pays their fair share.

As the new chairman of the Orange County Board of Supervisors, Moorlach would like to reduce pension benefits for current OCEA employees to pre-2004 levels. This is not a constructive approach, and it will do nothing to help the county’s financial position for two reasons:

1. The cost to the county under Moorlach’s plan would be exactly the same as it is today for OCEA-represented employees. That’s because OCEA-represented employees are already paying the entire employee contribution toward their pensions. Plus, they pay the county’s share of the cost for the benefit enhancement they received in 2004. Reverting back to the old plan would have no impact on the county’s fiscal health.

2. Courts have ruled time and again that pensions are legally protected property and that government has a contractual obligation to keep the promises they’ve made to employees, promises that employees rely on when planning for a responsible and secure retirement.

In contrast, Orange County recently achieved significant pension reforms that go beyond rhetoric and actually address retirement costs for current employees.

Under the recently negotiated hybrid pension plan, current employees will be able to choose a lower pension formula – which includes a 401(k)-type component – reducing pension costs for the county and for employees, some who divert 18 percent of their paychecks to pay for retirement benefits.

The OCEA is working closely with Rep. Loretta Sanchez and county Supervisor Bill Campbell to resolve an issue with the U.S. Department of Treasury so that this option will be available to employees as soon as possible.

And even with all of this progress, I agree that there is more work to be done. But there’s a very simple place Chairman Moorlach can look to find a good place to start: The mirror.

See, while rank-and-file employees pay the full share of their pension costs, the county’s executives, managers and elected officials, play by a different set of rules, just like the executives at private sector banks and corporations across this country protect their profits at the expense of their employees and the public.

In Orange County, elected officials and executives allow taxpayers to pay both the employee and employer pension contributions. On top of that, they receive a fully taxpayer-funded 401(k) plan. It’s time for that to change.

Unfortunately, Chairman Moorlach failed to discuss this, or propose any other ideas that have the potential to turn into the type of creative, groundbreaking initiatives that we’ve already proven we can achieve if we work together.

Instead, he chose to drum up political support by promoting ideas that he knows won’t save the county money and are not legal. The last time Supervisor Moorlach took this approach and challenged sheriff’s deputy pensions, the county had to pay deputies $1.3 million to cover their legal bills.

There is a better, smarter way, and I’m hopeful we can work together to get there.

FIVE-YEAR LOOK BACKS

January 29

2007

Rick Reiff had fun with a topic that continues to today in his “OC Insider” column in the Orange County Business Journal.  The title was Bush, Sanchez Tango; Moorlach to Iraq? Birth Announcements.”

Los Miserables: Supe John Moorlach’s idea of merging the small but independent-minded north-coastal communities of Seal Beach, Los Alamitos, Sunset Beach and Rossmoor elicited this e-mail from Los Al’s Jody Shloss: “A lofty goal. After you pull that off you could next govern Iraq.”

The OC Register’s “The Buzz” column had the title “Playing politics—who’d have thunk it?”  Peggy Lowe, Norberto Santana, Jr., and Julie Gallego were contributors to the column.

Did you see the full-page advertisement in the Register Sunday? It had a picture of a sad little boy and a widow wearing Jackie O. sunglasses, both standing behind a casket. The ad read: "Playing politics with funerals?"

Although the ad didn’t say so, it’s the work of Mark Bucher, a longtime member of the Orange County GOP who is best known for the unsuccessful 1993 school voucher initiative. Seems he’s now delving into the issue of "paycheck protection," code for "Let’s reduce the unions’ power." His new group is called Veritas Public Policy Center, a project of the California Foundation for Campaign Reform.

The ad plays on a recent dust-up between Supervisor John Moorlach and the Association of Orange County Deputy Sheriffs. The fight became bitter when Moorlach demanded an audit of the union’s health fund and called the union’s leaders "thugs." The union countered by mailing letters to the Board of Supervisors asking that Moorlach be barred from attending the funerals of anyone killed in the line of duty. Union bosses also threatened "job actions," code for a strike or a work slowdown.

A Veritas press release said the group was founded "to expose the union bosses’ efforts to distort truth and mislead their members and the taxpaying public."

Bob MacLeod, the union’s general manager, said he’s glad to see the ad, because it will clarify the issue.

"Anyone who wants to know what’s behind this issue should know now," he said. "It’s politics, and it’s nothing more."

MacLeod, who resigned last week for a new job in Santa Barbara, said he will continue to negotiate the union’s contract in good faith until it’s settled, which he hopes happens in the next couple months.

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