The ugly moment has finally arrived. Certified Public Accountants who audit municipalities are now required to disclose the truth about the severity of unfunded actuarial accrued liabilities resulting from defined benefit pension plans. And the "State of the Municipalities" will be a cause for alarm to the residents of our nation’s cities, counties and states, as their audited financial statements are made public.
I addressed this Balance Sheet concern more than four years ago (see MOORLACH UPDATE — Financial Restatements — August 29, 2011 august 29, 2011 john moorlach). It is the topic of my editorial submission to the OC Register in the first piece below.
The topic may explain why Gov. Jerry Brown mentioned California’s $220 billion in unfunded liabilities in his "State of the State" speech Thursday morning, which is covered in the second piece below in the Murrieta Patch and Lake Elsinore-Wildomar Patch. (On the overstaffing at Caltrans, see MOORLACH UPDATE — Caltrans Fairways — August 28, 2015 august 28, 2015 john Moorlach and MOORLACH UPDATE — Transportation Strategies — August 13, 2015 august 13, 2015 john moorlach).
The third piece brings us back to the Commentary section of the OC Register. For background on the subject matter, see MOORLACH CAMPAIGN UPDATE — Endorsements — January 21, 2016 January 21, 2016January 21, 2016 John Moorlach and MOORLACH CAMPAIGN UPDATE — Fifty Percent Plus One — March 18, 2015 March 18, 2015 John Moorlach.
Report: Pensions drowning California and its cities
Possible fixes include lower benefits, outsourcing, tax hikes.
By JOHN MOORLACH
Get ready California. Without very much fanfare, the proverbial one-ton Government Accounting Standards Board gorilla has entered the room.
As the result of years of discussions over how best to account for the growing unfunded liabilities owed by government pensions systems, municipalities for the first time ever must include the unfunded actuarial accrued liability of their defined-benefit pension plans in their annual financial reports.
Orange County is one of the first municipalities to release its audited financial statements under the new rules. It is provided in a document known as the Comprehensive Annual Financial Report (see ac.ocgov.com/info/financial/cafr/2015).
The latest financial report is historic, and every resident should be interested in what it has to say. Although the county had a relatively stable year financially, the bottom line dropped like a rock when accounting for the pension liability. In fact, the bottom line fell to depths it has never reached before.
That’s what the GASB can do, and that’s why I’ve been warning Orange County taxpayers for over a decade that we must address our unfunded liabilities.
Orange County got a good start by reforming its retiree medical liabilities in 2006. Working with the public employee unions, the county reduced its unfunded liability by $1 billion and is now saving taxpayers $100 million a year. This is an achievement that I am very proud of. But it’s a small drop in the bucket compared with the arrival of the one-ton gorilla in the latest financial report.
With the inclusion on its balance sheet of the county’s unfunded accrued liability for its defined-benefit plan, the positive Unrestricted Net Assets – at a historic high of $331 million last year – went to a historic low negative Unrestricted Net Deficit of nearly $3 billion for fiscal year 2014-15, which ended June 30. This is a swing of $3.3 billion, resulting in the worst documented financial position in Orange County’s 126-year history.
We’re talking a gorilla twice the size of the bankruptcy losses Orange County incurred in 1994. Communicated a different way: If every one of Orange County’s 3.1 million residents chipped in $1,000 each, the county would be at the break-even point.
Fifty-seven other counties soon will be reporting their audited financial statements, and we can expect the same results on their balance sheets. The pension liabilities are that massive. This gorilla is no respecter of location or size. Cities will also be rocked into financial reality within the next few days or weeks.
GASB should have required the reporting of these unfunded liabilities for the past three decades, but failed to do so. Now they are being dropped in, and the wake of the splash is truly of tsunamic proportions.
It gets worse. California will be releasing its own CAFR in April. The Unrestricted Net Deficit last year already was $117 billion. Once the state’s unfunded liabilities are revealed and accounted for, expect the deficit to hit the $250 billion area. A quarter of a trillion dollars – that’s roughly $6,400 for every man, woman and child in California.
And we haven’t even thrown in your city, your school district, your community college district and your utility districts, like water and sanitation. The numbers will be so dramatic that you’ll see newspaper articles announcing the sad news.
Since public employee pension plans are reliant on the performance of the nation’s stock markets, the past few weeks on Wall Street mean that future audited financial statements may have even worse news to share.
I’m an accountant and a CPA. I’ve counseled for years that, just like spending more than you receive is irresponsible, so, too, is making unaffordable commitments to pay something in the future. The debts of maintaining a bloated government and providing overly generous pension benefits to government employees has a cost. And for the first time ever, governments must quantify that cost in their annual audited financial reports.
GASB is finally allowing municipalities to come closer to telling the truth about their total financial pictures. And those municipalities can tell their constituents that they will be tightening their belts, setting aside a larger rainy-day fund or, as government prefers to tell you, that more taxes are needed.
Taxpayers, we have a problem. And it needs to be addressed. It is now staring us straight in the face in the annual audited financial statements. The pension debts are no longer hiding in the shadows. The GASB gorilla has arrived.
What is there for our municipalities to do? More cuts and benefit modifications should be pursued. Outsourcing should be expanded. The public employee unions should negotiate to reduce pension benefit formulas for current employees, which is the best alternative. If municipalities experience unforeseen financial calamities, then it may even require a bankruptcy judge to approve a reorganization plan. Ask the city of Detroit how that worked for them.
The sooner these ideas are pursued, the better. Or expect continued pressures to increase car, gasoline, sales and income taxes.
John Moorlach represents the 37th State Senate District.
Murrieta Lawmakers React to Governor’s State of State
“In one breath, the governor stated we have a $7 billion surplus, and in the next said we need to raise taxes,” Melissa Melendez said.
By Renee Schiavone
By PAUL J. YOUNG, City News Service:
Gov. Jerry Brown’s State of the State address Thursday lacked a “real world” view of California’s future, a Riverside County lawmaker said, while another criticized the governor’s tax policy, and a third felt his priorities fell short on higher education.
“The Legislature was listening to how rosy the state’s economic outlook was,” Sen. Jeff Stone, R-Palm Desert, said after the address. “Sadly, those of us in the real world see higher gas prices, a sinking stock market and many of us fear about our economic futures.”
Stone pounced on the governor’s exhortation that “sooner rather than later, we have to bite the bullet and enact new fees and taxes” to pay for transportation infrastructure improvements.
“The radical special interests seem to have taken control of our state,” Stone said. “We need to build more roads and fix the ones that are broken … We can do all that without raising taxes.”
Assemblywoman Melissa Melendez, R-Lake Elsinore, said she was encouraged to hear the governor’s call for “greater savings,” but like Stone, was dismayed by his mention of more taxes.
“In one breath, the governor stated we have a $7 billion surplus, and in the next said we need to raise taxes,” Melendez said. “What we need is a re-evaluation of our priorities and an end to treating the taxpayers like an ATM. We have the money; let’s fix our roads and do right by the people of California.”
Assemblyman Jose Medina, D-Riverside, praised Brown’s call for “fiscal responsibility,” but was let down that the State of the State address offered no indication of the governor’s desire to boost in-state resident enrollment within the University of California system, as well as on Cal State and community college campuses
Medina noted that almost 16 percent of the undergraduate population in the UC system last year was comprised of nonresident students.
“This is troubling, and the University of California must do better to serve our highly qualified California students,” the assemblyman said.
Brown noted that, thanks to Proposition 30, spending on public schools and community colleges had increased 50 percent in the last four years. He regretted that UC tuition had doubled in the last 15 years, but did not offer any proposals on how to reduce higher education costs.
The governor struck a cautious tone on overall spending and the need for restraint.
“Here at the state capitol, we often think we have more control over things than we actually do. But the truth is that global events, markets and policies set the pace and shape the world we live in,” Brown said. “The challenge is to solve today’s problems without making those of tomorrow even worse.”
Brown said it was “imperative” to build up the state’s Rainy Day Fund in the event of a recession that could happen anytime.
“I was pleased to hear the governor again reiterate his commitment to fiscal restraint and building up the budget reserve,” said Sen. Richard Roth, D-Riverside. “I also believe that, in our region in particular, reasonable investments are absolutely critical.”
As in the previous legislative session, Roth is pushing this year for increases in the number statewide judicial positions. His last proposal to fund a dozen new judgeships was vetoed by the governor in October.
“Inland Southern Californians have been severely under-served in this area for many years, and the impact on the delivery of justice has been dire,” Roth said.
Brown complained of ongoing income inequality and the “disappearance of many middle class jobs” in the midst of “globalization” and “technological change.” He highlighted the problem of “outsourcing higher- paying jobs” to other countries but did not touch on how the influx of undocumented immigrants has impacted the job market or imposed a greater strain on state resources, as critics are quick to point out.
The governor acknowledged a “moral obligation” to pay down the $220 billion in unfunded retirement and health liabilities for state workers, but said there was little that could be done except “chip away” at the debt.
Sen. John Moorlach, R-Costa Mesa, has repeatedly called for reducing government bloat to hold down liabilities. In August, the certified public accountant circulated a state audit showing Caltrans has “3,500 more employees than it needs.”
Brown closed his address with an emphasis on water infrastructure and the environment. He expressed confidence in the “Water Action Plan” implemented to deal with the drought and said he remained open to suggestions on how to improve water storage and delivery.
The governor said it was necessary to “radically de-carbonize the economy” for the sake of the environment, as called for in the Paris Climate Agreement in which he had a hand last month.
Stone, Moorlach other Republican lawmakers counter that the state’s stringent environmental regulations already keep pump and electricity prices artificially high as a result of taxes and carbon trading costs.
Wagner wrong to challenge Moorlach
By DAVID L. BAHNSEN / Contributing writer
When a politician puts his personal interests ahead of the public good, it’s always ugly. It’s even worse when you once stood together with him and fought the good fight.
That’s why the conservative Lincoln Club of Orange County has taken a principled stand against Assemblyman Don Wagner. Wagner has said he will run against our sitting Republican State Sen. John Moorlach. The club’s board endorsed Moorlach unanimously.
Moorlach is a legend in Orange County government. As a young CPA, he – and he alone – predicted the Orange County bankruptcy of 1994. In the aftermath, Moorlach was appointed treasurer-tax collector to clean up the mess. Moorlach was the only person who had a plan that would work.
Just Google the names of John Moorlach and his predecessor, Robert Citron, and the search results will show college-level textbook references to Moorlach’s skillful moves that pulled Orange County out of bankruptcy.
Later, when Moorlach was elected county supervisor, he worked to fix another looming financial threat – runaway public employee pensions.
Moorlach pushed for openness in negotiations, pulling back the veil so that taxpayers can see public employee contract negotiations. He also built consensus to reform the county’s retiree medical obligations, saving taxpayers $100 million a year.
Moorlach did his duty for Orange County. When the 37th state Senate seat opened last year, he decided it was time to bring his brand of truth-telling to Sacramento. In a three-candidate special election, including Assemblyman Don Wagner, voters made a strong statement by giving Moorlach over 50 percent of the vote on the first ballot.
We see the same Moorlach in Sacramento as we have in Orange County. In his first nine months, Moorlach led the effort to block a gas tax increase – and won. He’s fought more deficit spending. And he’s exposed waste and excess at Caltrans and agitated for wholesale reform there.
That’s why he’s been called “the fiscal conscience of the state Legislature” by a leading news site.
But none of that matters much to Don Wagner. Last week, he filed to run against Sen. Moorlach once again, this time in the 2016 primary for the seat’s full four-year term.
So, why does Wagner feel the need to challenge a conservative, a Republican, and an incumbent of Moorlach’s stature and put personal ambition before party?
Even worse, Wagner gratefully takes government union money. He’s courting the big union bosses for campaign cash – the same people who spent hundreds of thousands of dollars attacking Moorlach in last year’s Senate special election.
The union bosses want to send the message that any Republican who tries to reform the out-of-control public employee pension system will be their target. And Wagner wants to help them.
Wagner is happy to shed Republican blood. Taxpayers and conservatives will back Moorlach; Wagner will be backed by big government union bosses.
For Wagner, it’s only about Wagner. He’ll force Republicans to spend valuable campaign funds that should be spent elsewhere, winning swing seats to keep Democrats from capturing supermajorities in the state legislature and passing their tax hikes at will. Wagner doesn’t seem to care.
Just about every Orange County Republican elected official and organization supports John Moorlach for re-election to the state Senate. Many of them once endorsed for Don Wagner for Assembly. Now, they are shaking their heads in disappointment.
Don, it’s time: Turn away from the dark side.
David L. Bahnsen is a director of The Lincoln Club of Orange County.
This e-mail has been sent by California State Senator John M. W. Moorlach, 37th District.
If you no longer wish to subscribe, just let me know by responding with the request to do so.