Guest Contributor
John Moorlach

John M.W. Moorlach is Orange County's treasurer-tax collector and a member of the board of the OC County Employees Retirement System.

O.C.'s Pension Time Bomb isTicking
The San Diego analogy is not precise, but it's close enough...
[John Moorlach] 6/27/05

Now that we're talking indictments in the city of San Diego concerning their public employees' defined-benefit pension plan, it's time to compare and contrast what's happening south of our border with what's happening here in Orange County.

Lately reporters have been asking me the following question: "The unfunded pension plan ($1.2 billion) and retiree medical ($1 billion) liabilities for Orange County are similar to those in the city of San Diego, so why are they getting all this press?"

Well, the San Diego City Council, its support staff and members of the city's retirement board made decisions that caused the U.S. Attorney's Office, the Securities and Exchange Commission, the FBI and the San Diego County District Attorney's Office to invite themselves over for a visit.

Orange County is guilty of making similar decisions, but not ones that are necessarily of a criminal nature.

Pension plan boards do not set benefits. The board of the Orange County Employees' Retirement System is rather emphatic about this. San Diego's board has a parallel policy.

Both boards have to make sure that benefits granted are fully funded over the life of the system. Both boards are encouraged to keep employer contributions as low as possible. Both boards should work together with municipal to meet their mutual goals. But they must not conspire to accomplish mutual goals by improperly sweetening the pot for those who can assist them.

However, that is just what San Diego's retirement board did. Even after years of steady increases in pension benefits, the board allowed its plan sponsor, the City Council, to resolve city budget problems by artificially reducing annual pension plan contributions. This was done against the advice of the plan's actuary. Why? Because in return, the City Council raised benefits for certain plan members - specifically members of the retirement board. One board member, the president of the city's firefighters union, increased his monthly retirement benefit from $2,530 to $9,703!

The retirement board also sold additional years of retirement credits on the cheap, against the advice of its actuary, to City Council members. On Friday, April 22, the Voice of San Diego - an independent news Web site - disclosed that the city's mayor purchased five years of additional retirement credits for $71,760. This increased his annual retirement benefits by $17,500, which would allow him to recoup his cost in only four years. Mayor Dick Murphy resigned the following Monday.

Quid pro quos are dangerous when both sides are making unreasonable requests. Conflict of interest is a serious offense. Covering it up makes it all that more dicey.

In San Diego, the cover-up extended to large amounts of debt the city issued in recent years to build infrastructure, including the city's new baseball stadium. Municipal debt issuances require an official statement that accurately discloses the financial condition of the issuer. San Diego's officials decided to not disclose their recent pension plan shenanigans. When this was revealed, it brought in the SEC.

What brought in the DA's indictments was the fact that six current and former members of San Diego's retirement board received exorbitant retirement benefit increases as a result of assisting the city in its now-failed cash-flow management. These six now face the possibility of three years in jail - and I'm sure indictments of the City Council aren't far behind. Given these circumstances, the benefits now have the appearance of being illegally bestowed, and should be rescinded.

Meanwhile, San Diego's large underfunding - think of it as being like a mortgage that has low payments up front and higher balloon payments at the end - is already causing problems. The result will be layoffs (more than 300 are proposed) and the cutting back or discontinuing of certain programs.

It gets worse. Now that San Diego's retirement board has been caught with its hand in the cookie jar, it has decided to be uncooperative, withholding documents from the city's external auditors and outside investigators. No documentation results in no audited financial statements. No audited financial statements result in no federal funding. No federal funding brings about even more budget cuts.

Some of the details of San Diego's problems may be unique, but all local governments that were too generous in granting more retirement benefits will eventually face similar fiscal headaches.

Which brings us to Orange County.

In more than 10 years on the county retirement board, I do not recall witnessing any acts of self-dealing or flagrant conflicts of interest. If it was a close call, board members excused themselves.

In almost every instance, our retirement board has bent over backwards to assist county leadership. But because the board is independent, this is not automatic. Recently we've voted contrary to the county's wishes on such issues as lowering our projected rate of annual earnings and shortening the period to pay for new benefits that are granted retroactively. With our hiring of a new actuary, we've also adopted more conservative assumptions about funding future benefits, which may raise our unfunded liability to an amount much higher than the anticipated $1.5 billion, effective July 1.

Unfortunately, the Orange County Board of Supervisors has twice recently raised retirement benefits for groups of employees without including retirement board members in the decision-making process. I was not contacted in 2001 on the efficacy of increasing public safety retirement benefits by 50 percent and making them retroactive. In 2004, I was very vocal in opposition to the significant increases to benefits for the county rank and file (even though I personally stood to gain) to no avail.

The problems this has caused could get much worse. That's because some county retirement board members - those with employee union affiliations who backed the enhanced defined benefits for county employees - now want the Board of Supervisors to transfer the county's retirement funds to the California Public Employees Retirement System. Why? Because CalPERS has recently implemented "smoothing" formulas designed to lower employer contributions, as the Sacramento Bee's Daniel Weintraub detailed last month. Thankfully, a majority of the county retirement board prefers to listen to its actuary and not manipulate the numbers in this fashion.

This is crucial, because disregarding sound actuarial advice by going actuary shopping is the main reason so many public pension plans are so far underwater in this state. One begins to think that the pension plan train wreck just south of our borders has gone completely unnoticed by the leadership of Orange County's employee unions.

Now San Diego, like Orange County and many other municipalities around the state, must face reality and deal with very difficult fiscal issues to remedy this pension underfunding.

Make no mistake: There will be budget cuts, there will be layoffs, and new hires will receive less generous retirement benefits - perhaps much less generous. So keep your eyes on San Diego. Orange County may face these same tough choices in the not-too-distant future. CRO

This opinion piece first appeared in the O.C. Register

copyright 2004 John M.W. Moorlach

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