MOORLACH UPDATE — AB 701 — September 14, 2013

The battle over property tax revenues due to the County of Orange, but channeled to the County under the category of Vehicle License Fees (VLF), is nearing a conclusion. To recap, the County has been receiving $49.5 million per year in so called VLF revenues, as a designated revenue source to pay bankruptcy-related bondholders. Had it been characterized as property taxes (which is the true source of these VLF revenues), it should have grown to $74 million per year over the past seven years (the secured tax charge for the OC in 2004-05 was $3.4 billion and $4.8 billion for 2011-12). Consequently, the County Auditor-Controller took the position, with Board concurrence, that the amount in dispute was actually property taxes and that the OC should not be treated any differently than any of the other 57 counties. Judge Robert J. Moss, appointed by Gov. Gray Davis, recently ruled that Senate Bill 89, a budget trailer bill that caused this debate, overrides and that the County is required to return the $148 million and discontinue receiving the $49.5 million per year.

This is a big blow for a donor county. Sen. Correa, having served as a First District OC Supervisor from 2004 to 2006, understood that Orange County was receiving the lowest percentage of property taxes in the state (the OC, number 58, received 6%, while number one, San Francisco, was receiving 65%). This was due to the implementation of Proposition 13 in 1978, when this county’s population was much lower and its annual budget was much leaner. We’re also a major donor county in the area of individual income taxes, providing the second highest amount of revenues to Sacramento, behind Los Angeles County (which has a population more than three times that of the OC). To obtain at least some property tax equity, over the years many members of our County’s delegation in the State Legislature have tried to pass legislation that would provide some parity, to no avail. In 2009, when it still took a two-thirds vote to pass the state budget, Sen. Correa was the necessary vote to pass the budget and he held out. He did not give Gov. Arnold Schwarzenegger and Senate Pro Tem Darrell Steinberg his vote until he received a special allocation to Orange County. This apportionment was $35 million in the first year and a flat $50 million for every subsequent year. For the first time, the OC was closer to the statewide average funding ratio for property tax revenues going to counties. This did not go well with the Department of Finance and they would not forget. They saw that the law had not been modified concerning the VLF conduit, which was no longer required subsequent to the bankruptcy-related debt refunding (refinancing) in 2005. In June of 2011, the Department of Finance provided SB 89 on a Monday and it was approved by the Legislature and signed by the Governor the next day. SB 89 went after post-2004 VLF revenues (Prop. 57) and also impacted four cities in Riverside County that incorporated after 2004. The VLF is a significant component of the budgeted revenues of these victimized cities. One of the cities, Jurupa Valley, has already announced that they are considering disincorporation, a very rare occurrence. But disincorporation is probably more appropriate than a Chapter 9 bankruptcy filing (expect to hear more about the topic of disincorporation in the coming months).

The state is now taking away from the OC the annual $50 million Correa short-lived appropriation. In fact, the County has to literally pay back what the Correa money that it has received, and then some ($135 million is close to $148 million). The property tax component is being re-implemented, but at $53 million and not at the now $76 million level. Consequently, the County will see a net $73 million reduction in annual revenues, representing a 10.5% reduction to the County’s Net County Cost Budget (of which 50% is allocated for Public Safety). This puts the County back at the bottom of the County property tax ranking list, even when it is the largest overall tax revenue grossing county, outside of LA County, that underwrites Sacramento. This is the best deal that could be negotiated. And it will be unpleasant to implement, especially after some seven years of budget impacts resulting from the Great Recession and the numerous Sacramento-based realignment initiatives. The Governor is expected to sign Assembly Bill 701 within the next two weeks.

O.C. cuts loom as governor gets bill

Officials here say loss of $73 million in state revenue could hit social services and employee raises.


With the governor poised to sign a bill finalizing $73 million of lost annual state revenue to Orange County, county leaders say the effects could be most felt by the poor, disabled and elderly.

Administrators plugged a similar budget gap this year using temporary fixes, but they are now digging into each department’s budget to see where they can make ongoing cuts.

Officials say they will do everything possible to preserve public safety and other key services, and to minimize job loss. The task is large, though: About $50 million this year came from one-time maneuvers such as spending reserves and deferring maintenance.

Steadily increasing sales tax revenue will help, officials say, but it may not be enough to preserve all social services or to support employee pay raises.

“You’re not going to see us go out there with a hatchet and cut a bunch of stuff,” Orange County Board of Supervisors Chairman Shawn Nelson said. “More of the need is just going to go unfulfilled.”

About $5 million could be trimmed from community services – programs such as child support, health care for the poor and foster care – according to a recent news briefing by the county finance director.

Also, as the county negotiates its labor contracts, the budget cut could be a significant bargaining chip for management.

“If our revenues are going to decline, and we’re already having a difficult time,” Supervisor John ‍Moorlach said, “looking at any kind of wage increase is pretty remote.”

Representatives from labor unions, including sheriff’s deputies and the general employees associations, lobbied in Sacramento to preserve as much of the funding as possible. Some spent this week monitoring the situation at the Capitol, until both chambers of the Legislature unanimously passed the bill Wednesday and Thursday.

“This was a positive example of collaboration between the county and labor to secure the best settlement possible,” Orange County Employees Association General Manager Nick Berardino said. “Now as we go forward into negotiations, we hope the county will continue that collaborative and cooperative approach.”

The fruit of their lobbying was AB701, a bill that would help Orange County cope with the annual loss.

Shepherded by Assemblywoman Sharon Quirk-Silva, D-Fullerton, AB701 would close a chapter of fiscal uncertainty in county government.

The funding struggle started in 2011, when Gov. Jerry Brown – seeking more state revenue – seized on an anomaly: Orange County still received vehicle license fees, while other counties did not.

A relic of the 1994 county bankruptcy, the funds were pledged to pay off creditors. But county administrators failed to protect the funding during debt refinancing – some blame a clerical error – and the state ultimately cut off the money.

Then, the county withheld $148 million of property taxes in recent years to make up for the loss, and Sacramento sued to recover those funds. In May, a judge ordered the county to repay.

The bill extends the repayment terms of the $148 million. Originally, officials expected to pay the disputed funds over three years, but the bill spreads it out over five years, beginning in fiscal year 2014-15.

“Orange County can finally move forward in this longtime dispute,” Quirk-Silva said on Thursday. “This gives us a little more security.”

The bill would also give the county about $3.5 million more initially than officials had expected. Initially, the hole was $76.5 million.

But the bill’s co-author, Sen. Lou Correa, D-Santa Ana, negotiated a creative solution. If Brown signs the bill, the state would convert $50 million in special annual property tax revenue to a better formula. The funds would be tied to property tax rolls and could grow each year, instead of an essentially fixed allocation. The new formula would kick in at $53 million this year.

That means the county would essentially lose the $76.5 million, but would retain the $50 million and gain $3 million, with the potential to grow.



September 15


The Orange County Business Journal provided a Letter to the Editor, “Labor Agreement,” that rebutted another recent Letter to the Editor (see MOORLACH UPDATE — Piles On — August 27, 2013).

This is a response to the Aug. 25 letter in which union boss Jim Adams attacked Orange County Treasurer John Moorlach for his opposition to the union-only Project Labor Agreement. It would appear Mr. Adams has a problem with a duly elected county official calling the Orange County PLA what it is: a payoff to unions at the expense of worker’s rights and taxpayer’s pocket books.

Three years ago, when Orange County signed its PLA, it was recognized by most as an attempt by three of the members of the Board of Supervisors to curry favor with a few unions, so as to help get El Toro International Airport off the ground. The three years hence have borne witness to the questionable wisdom of that decision, with the overwhelming defeat of the airport, and both a reduction in bidders and an accompanying increase in costs for county projects across the board, as well as the voters’ ouster of one of the three supervisors who supported the PLA, Cynthia Coad.

With a new conservative majority on the Board of Supervisors, and with the possibility that Moorlach might be retained as the county CEO, the days of the OC PLA are surely numbered. It’s time for Mr. Adams and other union bosses to move on to other enterprises.

Art Pedroza
Director of Government Affairs,
Orange County Coalition for Fair Employment in Construction
Santa Ana


The Long Beach Press-Telegram provided an editorial with topics that loom even larger today in “Fixing public pensions – There is a simple, but not easy, way to deal with these unfunded liabilities.”

If you’ve despaired of finding a way to deal with politicians who give away the treasury to help finance their political careers, who could blame you? It seems to go on everywhere, and there seems to be no solution.

But it’s there, right in front of us. All it takes, at every level of government, is just one person.

The problem is as old as government. Once in office, politicians can serve others, or serve themselves. In California, there are so many ways to practice self-dealing legally it is almost a surprise when a public official stoops to ordinary, criminal bribe-taking.

The best illustration of legal self-dealing, because it was so blatant and on such a grand scale, was the performance of Gov. Gray Davis. In exchange for a few million dollars in campaign contributions, perfectly legal, he "negotiated" contracts with the state prison guards’ union that made them the highest paid by far in the nation, with the most lavish pension benefits, and in addition, handed over most of the management control of the prison system, which now is an abysmal mess.

For that, and other reasons, he was recalled from office. But his performance already had inspired similar payoffs to all other state employees, as well as state legislation enabling (inciting is a better word) counties and cities to grant fabulous pension benefits at local levels.

Consequently, local governments all over the state have piled up many billions of dollars in pension liabilities. In a few, like Long Beach, pension liabilities are funded or nearly funded, but most local officials have no idea how anyone will pay for them over the years, nor do most of them care.

What can voters do about the plundering of their money? The Gray Davis recall solution is hardly practical for thousands of politicians, and even if it were, how would voters know who should replace them? Political candidates don’t proclaim in advance that they will do this sort of thing.

The answer is to elect a reformer like Arnold Schwarzenegger, who refuses to take any money from the prison guards, to an office with veto power over public-employee handouts. That’s doubly ironic, because first, Schwarzenegger has so far reformed nothing and has put California into worse financial shape than Davis did, and second, the prison guards now want to recall him because he won’t give them Davis-style, lavish handouts.

The one example of a respected and effective elected local official willing to take on pension issues is Orange County Supervisor John Moorlach, who represents the communities of Rossmoor, Seal Beach, Los Alamitos and others. But why are almost no other politicians doing anything about this costly mess, when it would be relatively easy to fix?

Because they don’t have to. Voters haven’t demanded it.

Not yet, anyway.

The OC Register had s Letter to the Editor, “Undercut union power,” that continued the day’s theme.

The dirty little secret is that the politicians use these high wages to buy votes from the labor unions and then expect a certain percentage back as contributions to their political campaigns, all at the taxpayers’ expense ["Price of appeasing unions," Opinion, Sept. 11].

The only real way to stop this misuse of taxpayer funds is to have every part of these contracts approved by the taxpayers who pay the bill. Supervisor John Moorlach’s ballot proposition, which seeks taxpayer approval of pension spikes ["These worms make taxpayers squirm," Commentary, Aug. 24] is a start, but needs to include every aspect of the contract. This should include a two-thirds majority for passage, because the people in the unions are voting on their own contracts in the election.

Richard N. Cirino

Costa Mesa

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