MOORLACH UPDATE — The Wall Street Journal — December 7, 2013

The first piece below is in The Wall Street Journal. It’s an editorial submission by Steven Malanga that covers the primary reason for my being in Washington, D.C. this past week. Meeting with Congressman Dave Camp (Michigan 4th C.D. – R), Chairman of the House Ways and Means Committee was the top priority. His District is just north of Detroit and Congressman Camp was fully aware of Judge Steven Rhode’s decision the prior day. I told him if there was ever a time that I was walking in with a solution for this nation’s cities, counties and states, this was it: Having the I.R.S. modify its position on Rev. Rul. 2006-43. I hope someone puts Malanga’s column on Congressman Camp’s desk. My thanks go to Congresswoman Loretta Sanchez for arranging the meeting and to Congressman John Campbell for being a co-author of H.R. 205, the County’s legislation to correct this poorly determined I.R.S. position. Also see MOORLACH UPDATE — Nineteenth Anniversary — December 6, 2013.

While in D.C., I met with our legal counsel on this matter, one that Orange County has led on and has been addressing for nearly four years. Here were the five reasons I was given as to why the I.R.S. has not budged over this time period, in order of priority:

1. Union opposition, in particular AFSCME and SEIU. Believe it or not, the AFL-CIO is supportive.

2. Public defined benefit pensions have different needs, complications and variations in various states. Therefore, there is concern about other issues cropping up. (This may be true, but is a very weak argument for not leading on this matter.)

3. Health care reform has sucked up all of the time and attention at the I.R.S. When I was practicing some nineteen years ago, the I.R.S. would issue rulings in the defined benefit pension area on a biweekly basis. It appears that this type of activity has ceased.

4. Consequently, with the Affordable Care Act, there is a logjam of regulations for pensions, going back to 2009.

5. There is a “do nothing” Congress that hasn’t stepped up to address the issue.

I also had meetings with various California Representative and Senatorial offices to discuss the above topic, John Wayne Airport’s efforts to apply for its Port of Entry designation, and the Santa Ana River Mainstem Project. I also met with a representative of the Army Corps of Engineers, who was a former Orange County employee, to discuss the Santa Ana River and the Westminster-East Garden Grove Feasibility Study. It was a packed and productive three days.

The OC Register has three separate articles in the Local section. The first one below is one you’ll have to look up on your own, as I don’t want to spoil the test. The second piece covers one of the many items that were addressed during a full-morning meeting yesterday for the Commission to End Homelessness. The third piece hits closer to home, as I had to recently endure a deposition and Federal Court appearance for attempting to engage a public speaker to clarify that the County actually did an analysis of his concerns through the Internal Audit Department, but he would not stop talking in order to hear the announcement. Because the ACLU has appealed, this is about all I wish to share on this article at this time.

BONUS: This would be the weekend to mail in your real property tax payment, due on December 10th.

The IRS Throws a Wrench Into Public Pension Reform

Workers who choose a defined-contribution plan could lose a big tax break. Or not. But the agency won’t say.

By Steven Malanga

Financially troubled cities got some good news this week when a federal judge ruled that the pensions of Detroit’s employees could be cut in a bankruptcy proceeding. The leverage provided by Judge Steven Rhodes’s decision may help bring public unions elsewhere to the bargaining table, but cities face another obstacle to pension reform: the Internal Revenue Service.

For more than three years the IRS has failed to clarify a rule on changes to public pension systems that would allow municipalities to shift workers into new, less-expensive plans without losing any tax advantages they had under the old plan.

The issue flared up in 2009, when officials in California’s Orange County negotiated an agreement with their union that included giving workers the option of moving from their expensive, defined-benefit pension into a hybrid plan featuring a less-costly defined-benefit combined with a 401(k). The plan saves the county money—at least $10 million annually and potentially much more, depending on how many workers sign up—and it also increases worker take-home pay by cutting employee contributions to the plan.

The Orange County Employees Association accepted the new plan to let workers choose more take-home pay now, but there was an unexpected glitch. Local government contributions into a defined-benefit pension aren’t counted as part of an employee’s taxable wages. However, officials discovered that thanks to a murky ruling a few years earlier, the IRS might decide that a portion of the employees’ pension contributions are taxable if a worker moves into a plan such as the one offered by Orange County. Such a ruling would remove a key tax-savings for the employee and probably cause most workers to avoid the new plan.


Orange County officials, worried about the tax issue, asked the IRS to endorse the idea of giving workers a one-time chance to join a cheaper system without any tax penalty. They got no answer. Since then the county and the union have continued to press for a ruling, including hiring a Washington law firm to lobby the IRS.

"There is no legitimate reason to deny localities this tool," San Diego City Attorney Jan Goldsmith told the San Diego Union-Tribune in April 2012, expressing the frustration of many municipal officials over the federal government’s failure to make a decision.

Other cities that have adopted or are considering similar pension reforms—including San Jose, San Diego and Mesa, Ariz.—have also petitioned for clarification. National groups like the U.S. Conference of Mayors and the National League of Cities have similarly urged the IRS to endorse the changes sought by cities.

So far, Orange County’s hybrid plan is on hold for city workers in the old plan. Meanwhile, total pension contributions by the county government and employees soared to $628 million last year, up from $545 million in 2009.

Last year, San Jose voters approved a pension reform championed by its mayor, Chuck Reed, that requires current employees to contribute more out of their own pockets to their retirement costs. As an alternative, however, workers can shift into a new, less expensive plan that reduces benefits but doesn’t oblige employees to pay more. But until the IRS clears up the tax issue, going ahead could prove risky for the city and its workers. "Nothing is ever easy in this area," Mr. Reed said recently, noting that the IRS doesn’t seem to view employee choice on pensions favorably.

Earlier this year, several members of Congress introduced a bill that would amend the IRS code to permit the kinds of changes enacted by San Jose and Orange County. "The federal government should not be standing in the way of states, cities and counties that are attempting to take the initiative in solving their own deficit problems," co-sponsor John Campbell, a Republican representing part of Orange County, said when the bill was introduced in January. The bill has bipartisan backing, including Democrat Loretta Sanchez, who also represents one of Orange County’s congressional districts.

But so far the bill has gone nowhere, in part because of union opposition. In August, Ms. Sanchez told the press that the American Federation of State, County and Municipal Employees and others are unhappy because clarification of the tax issue would spur more cities to move current employees into hybrid plans that feature defined contribution options.

Defined-contribution plans are like the 401(k)s that more than 50 million Americans use to save for their retirement. But according to Sandra Fox, president of Afscme Local 2076 in California, they’re too risky. "Let’s say you do the wrong investment. What happens? You lose everything."

The IRS has failed, for years, to resolve the pension issue. It has appeared several times on an annual list of priorities the IRS says it intends to address, but that has yet to result in any ruling. And the IRS doesn’t comment on pending matters.

Why are the bureaucrats sitting on their hands? Some critics believe the delay is thanks to the big government unions in Washington. The IRS is part of the U.S. Treasury, and from what he has been able to learn, Orange County Supervisor John M.W. Moorlach believes these unions "have a stranglehold on the Treasury Department."

Regardless of where the blame lies, the need for a solution is pressing. "Cities and counties all over America are losing their grip on solvency, and pension costs are often a factor," says Mr. Moorlach. "Offering employees a cheaper plan is a way to curb costs while attempting to sidestep what’s really the only other option: a showdown" with unions rather than a negotiated settlement like the one in Orange County. Ms. Sanchez has put it more simply: "We don’t want to end up like Detroit."

Mr. Malanga is a senior fellow at the Manhattan Institute.

Test your knowledge of the news

Five questions about people and events covered during the past week in the Register.


Homelessness post filled

Interim director made permanent; also oversees other O.C. programs


The county Commission to End Homelessness named a permanent executive director Friday.

Karen Roper, who also oversees the county’s housing, aging, veterans and workforce programs, has been serving as the interim director since June 2012. She takes control while the county struggles to build year-round shelters and to implement other initiatives in its 10-Year Plan to End Homelessness, launched in 2010.

“There’s a lot of work to do,” she said. “We’re working on huge system changes.”

The biggest priorities are to establish an emergency shelter and more permanent housing with support services, Roper said. On Tuesday, she plans to tell the Board of Supervisors the county needs an additional $11.5 million to build and operate two shelters.

Orange County has two coldweather shelters, and efforts to establish permanent facilities in Fullerton and Santa Ana died recently amid local opposition.

Roper, who was paid $169,000 in 2012, will not receive any additional compensation for the position. Previously, the commission had a full-time executive director who was funded partially by private foundations, but he could not raise enough private funds, said Supervisor John ‍Moorlach, a commission member . “Karen was a go-to person anyway,” ‍Moorlach said. One activist says the part-time role shows the county hasn’t prioritized the plan to end homelessness.

“This alone should be a full-time responsibility,” Cate Murphy told the commission. “But you cannot find a more dedicated, compassionate person” than Roper.

Roper began working on homelessness at the county in the 1990s, as the homeless coordinator. In 2008, she was named director of OC Community Services.


O.C. officials review challenges of hate speech as free speech


ANAHEIM – Sparked by an Anaheim man’s controversial public comments, two nonprofit Orange County groups hosted a presentation on Wednesday to address how officials can handle inappropriate comments, such as hate speech, during public meetings.

The Orange County Human Relations Commission and Association of California Cities-Orange County ran the presentation titled, “Free Speech vs. Hate Speech: How public agencies can maintain civility without infringing on free speech.” About 60 elected officials, city staff, police chiefs and staff and nonprofit and business representatives attended.

Rusty Kennedy, executive director of OC Human Relations Commission and moderator, said the event was organized to review speech rights and how to maintain a “hate-free” environment during public meetings.

“The point is, hate speech is legal,” Kennedy said. “You cannot restrict it, but you can work to hopefully discourage and prevent (it.)”

The event was prompted by incidents involving William D. Fitzgerald, an Anaheim resident who used “odious” anti-Semitic and homophobic remarks toward an Anaheim councilman in October, Kennedy said. A 2012 Register report said Fitzgerald also addressed county supervisors in what he testified was an intentional, "abrasive" manner during two meetings in 2010 and 2011.

At a July 27, 2010, meeting, supervisors Janet Nguyen and John Moorlach tried to interrupt Fitzgerald after he compared the clerk of the board to the commander of a concentration camp.

At an Aug. 23, 2011, board meeting, Nguyen and Supervisor Bill Campbell interrupted Fitzgerald after he referred to "cowardly Vietnamese" who he said were supporting a proposal to add a portion of Fountain Valley to Nguyen’s district.

The incidents led to a free speech lawsuit between Fitzgerald and the county. American Civil Liberties Union attorneys who represented Fitzgerald in the case argued that the county’s rule against "personal, impertinent, slanderous or profane remarks" violates the U.S. and California constitutions because it bars those types of remarks without regard to whether they are disruptive of the proceedings.

The county argued that the rule only applied to speech that creates a disruption.

After a three-day trial in August 2012, U.S. District Judge James V. Selna ruled for the county. Selna ruled that Fitzgerald did not have legal standing to challenge a county rule governing how members of the public speak to the Board of Supervisors.

Kennedy also said comments similar to Fitzgerald’s have occurred at meetings in Santa Ana and Fullerton.

Panelists Bardis Vakili, ACLU free speech attorney, and Manoj Mate, Whittier Law School constitutional law professor, reviewed speakers’ rights at public meetings and what constitutes free speech. Vakili said speech that is “impeding progress of a meeting” could be interrupted.

“A lot of this stems from training … what to do when someone comes to spew their anger, so to speak,” Vakili said.

Panelists Michael Houston, Anaheim city attorney, and Fullerton Police Chief Dan Hughes offered suggestions for preventing disruptions from members of the public during meetings.

“Attempt to build rapport and a trusting relationship before they (members of the public) come and speak,” Hughes said. “Try to engage with them…Even if they don’t know if they like you necessarily, you still have to serve them and meet their needs. They just want to express their frustration and concerns.”

In response to the guidance of fellow panelists, Rabbi Rick Steinberg, a member of the OC Human Relations Commission, asked that officials take an authoritative stance during public meetings should hate speech occur.

“Hate violence always starts with hate speech,” Steinberg said. “We have an obligation to speak out against it.”

Several public officials were satisfied with the presentation but Gary Fouse, an adjunct teacher at UC Irvine, said he was disappointed there wasn’t more attention on denouncing hate speech.

“They didn’t even touch upon the difference between the two (free speech and hate speech),” he said.

Contact the writer: (714) 796-3543 or kablaza


December 7


With the Honorable John Hedges leaving his position, I decided to have some fun with a Letter to the Editor in the Daily Pilot, titled “Hedges game plan.” The funding of some dubious public art in Costa Mesa was a hotbed of public discussion at the time.

It’s all coming together. The Honorable John Hedges, esteemed Newport Beach council member, appears to have a great game plan. Here is what I believe it is:

1. Discontinue funding the Newport Harbor Art Museum its $10,000.

2. Make the funds available for other needy causes.

3. Encourage the financially strapped city of Costa Mesa to submit a grant request for the $10,000.

4. Award the $10,000 to the city of Costa Mesa’s dog park trust fund.

5. Give John’s Rottweiler a place to create art comparable to some of the stuff the city of Costa Mesa has supported in the past.

It’s brilliant!


Costa Mesa


Jonathan Lansner, business columnist for the OC Register, did another analysis of the County’s bankruptcy in his Sunday column, titled “Lessons of bankruptcy resonate.” I spent some time reminiscing with a few individuals that were there at the time of the County’s bankruptcy and following yesterday afternoon while in scheduled appointments. So many stories to tell. The interview below shows that I have been consistently on the matter of pension reform for the last decade and more. And, with ten years of hindsight, a balanced budget amendment of some form for the state of California may have been a helpful tool (and still would be).

Nine years ago this month, Orange County went bust.

A stupendously idiotic investment scheme by Bob Citron, then the county’s treasurer, swamped the county government’s coffers with massive debts when his bond bets struck out.

The ensuing bankruptcy on Dec. 6, 1994, rocked the entire financial world, turned county government upside down and left county residents with bankruptcy-related debts that today total $880 million.

Lessons learned from that mess could be worthwhile in this age when financial matters dominate the political rhetoric throughout the state.

So I figured I’d check in with county Treasurer John Moorlach, the accountant who turned into a prophet when 1994’s disaster struck.

He ran against Citron for treasurer in the spring of 1994, losing badly as voters saw his warnings about Citron’s risk-taking as typical political name-calling. Moorlach was appointed treasurer after Citron resigned amid the bond-loss scandal, and has since been twice re-elected.

Despite becoming almost an institution within county government since the bankruptcy, Moorlach has no qualms about speaking his mind about the financial challenges facing this region’s governments.

“You can’t legislate against greed or stupidity,” he said at the top of the conversation.

It’s not just making the year-to-year budget cycle work that’s the big bureaucratic challenge. It’s gaining a handle on the true costs of doing the business of government.

Back before the bankruptcy, Orange County’s leaders could avoid many painful decisions generated by an economic downturn because Citron’s bond bets were temporarily producing unexpected income. That cash covered what otherwise would have been budget gaps.

Nobody had the smarts, or the nerve, to confront Citron on his methodology — until calamity struck.

Today, governmental monetary mistakes are more subtle, Moorlach admits, yet daunting and painful.

He points to the sweetened pension benefits for public-safety workers that have been offered in recent years.

Few politicians who approved the benefits fully thought out the long run, compounding costs of paying higher pensions over extra years. In Orange County alone, Moorlach guesses, it’s over $1 billion for 40 years.

Lawmakers were convinced — foolishly — that fat stock-market gains of the 1990s would continue and provide the cash for the pension sweeteners.

“You can’t have politicians saying, `I don’t know what you’re talking about’ on financial matters,” Moorlach says. “We need some financial brainpower on our elected boards.”

Citron’s mistakes and the pension mess do have one common theme: Markets go up, markets go down.

Moorlach sees too many government officials ignoring economic volatility when they’re making budgets. After spending too heavily in prosperous times like the late 1990s, the state government, for example, is now scrambling — and borrowing — as lean days arrive.

“We’ve lost sight of the fact there are cycles,” Moorlach says.

He’s a fan of placing caps on state spending, for example. But not the simple kind of annual caps tied to inflation and population growth that are being debated.

Instead, Moorlach would like to see the state spending tied to longer-term trends, like the average government revenue from the previous five years. That, in Moorlach‘s mind, would mitigate the harsh ups and downs in the state’s annual financial decision-making.

This system would also build a rainy-day reserve in good years and allow modest borrowing to shore up shortfalls in down times.

“They’d hate it,” Moorlach says of lawmakers whose spending power would be diminished by such caps.

Of course, Moorlach knows that caps or other budgetary restrictions are of little good unless common sense is used with their application.

Any sort of financial rules, including a spending limit, can be usurped by those folks willing to cheat. Harsh budget decisions can be skirted through everything from monetary gamesmanship, strange timing of income or payments, to complex borrowing arrangements.

“We all have to be diligent,” says Moorlach, who gives credit to an improved press corps for the lack of major municipal financial fiascoes since the county’s bankruptcy.

Still, thinking of Citron, Moorlach‘s wary of the reverence many municipal officials pay to Wall Street. He doesn’t forget the long roster of major financial firms that in one way or another helped Citron create fiscal bedlam for Orange County.

Obviously, Wall Street is a money-producing, bond-selling machine that is quite a lure to politicos when tax dollars or user fees are hard to find. The financial community will play a hand in everything from future state budgets to refinancing two Orange County toll roads.

Yet, Moorlach hopes elected officials and their staffs don’t forget that all those Wall Street folks in the suits with the thick dossiers and slick presentations show up at municipal meetings for only one reason: to make money for their firm.

“There are some good people on Wall Street, people who have a conscience,” Moorlach says. “But the bottom line is: There is no free lunch.”

Nine years ago, Orange County paid the price for a supposed free lunch served up by Citron. And a chunk of the tab, in the form of long-term bonds, remains to be settled.

In this tough economic cycle, when the stakes may be even higher on a statewide scope, you hope that elected decision makers are making choices with hard math in mind, not just simple politics.


Steven Greenhut’s weekly Sunday column in the OC Register focused on “Jail reform delayed is jail reform denied – Jail audit is recipe for the status quo and suggests that Sheriff Sandra Hutchens has no interest in changing the culture of the Orange County jail system.” In retrospect, the cynicism was valid, but the anticipated future events did not transpire. The Sheriff has hired more correctional officers, versus deputy sheriffs, and the report seemed to fade away into distant memory.

For years, those of us in the media have heard about and reported on various stories of abuse and corruption in the Orange County jails, with the most grotesque moment coming after the savage beating death of inmate John Chamberlain in the Theo Lacy Facility within view of the guard booth in October 2006. The deputy sheriffs responsible for patrolling the jail said they were watching a Dodgers game on TV and sleeping while the 50-minute beating took place.

A District Attorney’s Office report prompted by the death, released in April, found a shocking situation within the jails. Deputies "regularly failed to perform their duties of guarding the security of the jail and the safety of the inmates. … They routinely used inmates called ‘shot callers’ to enforce discipline or inflict punishment on other prisoners. … Some OCSD deputies at Theo Lacy denied medical treatment to inmates in order to avoid having to write required reports." The report went on and on. Deputies harassed inmates by shooting pepper ball rifles at them. And then some deputies – including an internal-affairs officer – tampered with witnesses during the investigation and perjured themselves.

The problems were so widespread and detailed that only a deputies union spokesman could say that these amount to anything less than a deep cultural problem within the jails, especially in the context of other recent jail deaths, lawsuits against the county regarding beatings of inmates by deputies and the frequent stories from former inmates and civilian employees who depict the jails as places where deputies are routinely abusive, indifferent and cruel.

But after the head of the jail system, then-Sheriff Mike Carona, was indicted on seven federal corruption charges (not related to the jails), the county Board of Supervisors’ focus moved from departmental reform to the replacement of a man whose highly entertaining but thoroughly despicable escapades are now playing out in a Santa Ana courtroom. The newly appointed Sheriff Sandra Hutchens ushered in a new era of Kumbaya, replaced most of the Carona hacks, and somehow the most fundamental issue – cleaning up the jail situation – faded away among new political battles (such as concealed weapons permits, as Hutchens has tried to clamp down on Second Amendment rights in the county).

As I wrote at the time, the board erred in picking Hutchens over Santa Ana Police Chief Paul Walters, primarily because Walters has a proven track record in setting up and running a humane jail. His city jail has earned accolades nationally as a modern "direct supervision" facility that features unarmed correctional officers rather than armed deputy sheriffs and resembles a community college more than a jail. It has been remarkably trouble-free and is a model that Orange County could follow if its leaders were more serious about jail reform than looking good on "law and order" for political purposes.

But this should come as no surprise. Hutchens’ appointment was a missed opportunity. She showed no grasp of jail issues. Rather than having a plan to reform the jails, she drew from her bureaucratic background and called for delaying reform in order to first hire consultants to produce a study. In the meantime, in her latest sop to the deputies union, she declared that there’s no cultural problem in the department. She didn’t even wait for her own report to jump to that self-serving conclusion.

And, indeed, the long-awaited report was released last week. Boy, was it a yawner. Produced by a consulting firm, Crout & Sida, comprised of former deputy sheriffs and government workers, it reads like something that could have been produced by the deputies union. It didn’t look at cultural problems and was filled with empty verbiage praising the "enthusiasm and dedication to public service" of those who work in the jails. It challenged no conventional nostrums and took on no vested interests. It is, in summation, the kind of report one would expect to be produced by bureaucrats who are committed solely to the status quo. In my experience covering local government, I’ve found that consultants always know the answers the officials who hire them are seeking, and they always produce reports living up to those expectations.

And so the folks at Crout & Sida came to the remarkable conclusion that the Orange County jail system is "in good shape and effectively managed." They did see a glaring need for more tax expenditures on the jail and for hiring 455 new deputy sheriffs to work in the system – a nonstarter given the county’s current budget problems and the enormous salary/benefit costs that such a move would entail. It’s too bad Sheriff Hutchens didn’t save the county $250,000 and simply ask union chief Wayne Quint what he thought. They would have gotten the same conclusions for a lot less money. There’s a reason a Register story described Quint as grinning ear-to-ear when the report was released.

This is so typical of government. When problems occur within these government-run systems, the officials who run them say that everything is well-run and that the only shortcoming is a lack of money. The new bosses come in, but aren’t much different from the old bosses. Officials always come to the taxpayer whenever there’s a problem. For an idea of the consultants’ mindset, consider this: When Supervisor John Moorlach asked one of the consultants about the possibility of using correctional officers rather than sworn (and more expensive) deputies to fill that role, the consultant, James Sida, answered: "You can’t contract away your responsibility. We’d never recommend that."

Since when is hiring correctional officers, public or private, a form of contracting away any responsibility? Clearly, the consultants came at this report with a union mentality, which should be a hint to supervisors about how seriously they should take any of these suggestions, as costly as they were to produce. The board has bumped the report to the county CEO for another 60-day review, which suggests the supes aren’t thrilled with the suggestions. But even Chairman Moorlach, an advocate for using correctional officers rather than deputies in the jail, isn’t pounding the table, demanding a more serious look at wide-ranging jail reform. He seems to be in defense mode for Hutchens, his sheriff choice, and most county officials are happy enough just to let this problem fade away.

The rest of the report mostly focuses on minor stuff. Although the consultants argue that the county should spend an enormous amount on hiring 455 more government workers, they do suggest cutting back on hot meals for inmates, to save money. They do make lots of excuses for problems in the jail (growing populations, more mental health cases, a higher number of felony inmates). They also blame outdated and poorly designed jail facilities, which is legitimate, but who doesn’t know that? How about proposing alternative ways of dealing with, say, drug offenders? There are plenty of ways to reduce the workload for anyone with an ounce of creativity and any concern for the taxpayer.

We’ll see what the sheriff does here, but the evidence suggests what I predicted early on. She will hire consultants, produce reports, call for lengthy reviews of the reports, delay, set up committees all while talking about being a "change agent." The jail situation will not change.

There was one encouraging sign last week, however, as Deputy Ryan Keith White "was charged with punching an inmate in the face with a fistful of keys," according to a Register report. The key to cultural change in the jail is to let the jailers know that abuse of prisoners will not be tolerated. Anyone can tell Sheriff Hutchens that for a lot less than $250,000.

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