| Sunday, July 10, 2005
Unreal surprise at pension mess
"Surprise, surprise, surprise." Say that slowly, in an
exaggerated Southern accent, mimicking the voice of Gomer
Pyle, the 1960s-era TV Marine who was always surprised at
something given his limited mental capacities and naive
outlook on life.
Now think about the recent words by Orange County
Supervisor Bill Campbell. Although presumably smarter, more
savvy and less naive than the above-mentioned TV character,
Campbell said he was downright surprised after a new actuarial
report found that pension fund liabilities are $1 billion
higher than expected.
"We've had for a lack of a better word, a 'June
surprise' here," Campbell told the Register [emphasis
added]. Supervisor Jim Silva was surprised, too. "These
numbers are different from the numbers we had in August," he
told me last week.
I'd be more sympathetic to Supervisors Campbell, Silva and
Tom Wilson, and claims of shock, dismay and surprise at the
bad news, had they not, as the board majority, done the
a) Stridently pushed forward a huge spike in pension
benefits for county employees last August, which is the source
of a large chunk of the added $1 billion in unfunded
b) Angrily criticized Treasurer John Moorlach, Orange
County Taxpayers Association President (and Orange County
Employee Retirement System board member) Reed Royalty and
others who predicted the very thing that has now happened.
(Wilson called critics "uninformed political
The above truth-tellers predicted such things
beforethe vote, yet the three surprised supes refused
even to back a measure by Supervisor Chris Norby and
then-Supervisor Chuck Smith (the two "no" votes) to delay
action to give the county time to more thoroughly study the
numbers. Campbell ignored the evidence in his rush to do union
Yet here he stands ... surprised.
County taxpayers, who will be forced to pick up about $114
million a year in new taxes or service cuts just to make up
for the pension shortfall, aren't surprised by the actuarial
reality, but they do seem angry, if callers and letter-writers
are any indication.
Some Republicans are talking, half-seriously, about
recalling Campbell and opposing Silva in his run for a
Huntington Beach Assembly seat. No one expected much from
liberal Wilson anyway, so he gets a pass based on the
principle of low expectations. (Supervisor Lou Correa wasn't
on the board at the time, but in the Assembly he authored
legislation that unleashed the statewide pension tsunami.)
Look, when one ignores the obvious consequences of a bad
decision, one cannot credibly claim surprise when those
consequences take place. The warning signs were there:
Treasurer Moorlach, whose credibility has been top-notch
after predicting the county's 1994 bankruptcy, said at the
time that a vote for the deal would cause additional unfunded
liabilities and could create financial problems rivaling the
Royalty sent a letter to the board arguing that there is no
guarantee that employees will pick up the entire tab for the
new benefits, that the contract is risky to taxpayers and that
the premises upon which the contract is based may be
County activist Kathleen Moran spoke against the plan at
the Board of Supervisors meeting last August. "Beginning in
the fall of 2003 I shared correspondences and met with
Supervisor Campbell and his senior staff regarding the
increased costs of the benefits and the devastating effect
they would have on future county fiscal health," she wrote
recently in an e-mail to the Register.
If a person throws a big rock through a picture window,
that person can't credibly stand there shaking his head in
bewilderment after the glass shatters. Yet here are the
supervisors, standing around scratching their heads, wondering
how this fiscal mess happened.
"Surprise, surprise, surprise."
Last year, the three approved a pension increase of 62
percent for county employees except for police and
firefighters (who already enjoyed an even-more generous plan).
Previously, county workers were allowed to retire at age 57,
with 50 percent of their final pay after 30 years. The new
contract allowed the workers to retire at the ripe young age
of 55, with 81 percent of their pay after 30 years.
The most egregious aspects of the plan: All employees
gained the benefit retroactively, even those ready to retire,
instead of it being a "go-forward" benefit. This meant that
virtually everyone on both sides of the bargaining table stood
to personally gain from the benefit, including four of five
supervisors, which, no doubt, resulted in widespread support
at every level of county government.
Here's how the Orange County Grand Jury explained the
county's pension problem in a recently released report:
"[A]recent calculation of retirement system funding by an
actuarial firm commissioned by [OCERS]puts the system's
unfunded liability at $2.3 billion as opposed to the previous
projection of $1.3 billion."
More than $300 million of those unfunded liabilities are
the result of the pension increase. To offset such direct
costs, the contract calls for employees to pay about 2.46
percent in additional payroll deductions, amortized over the
30-year contract. It's a transfer from young workers, who will
pay the additional amount for their entire working life, to
older workers, who will gain the benefits fairly soon, without
contributing much to the account.
But in addition to direct costs, the pension spike has
created indirect costs, as county employees change their
behavior in response to changed incentives. The younger
workers are predicted to stay on their jobs longer, given that
they will be made millionaires if they don't leave the
payroll, and the older workers are retiring earlier, given
that they will be working for a tiny percentage of their pay
if they work beyond age 55 (100 percent of salary working
full-time vs. 81 percent in retirement).
The new actuarial report reflects these and other
unexpected, indirect costs of that pension-benefit increase,
according to Moorlach.
The question now is: Who pays?
Campbell still claims that employees will foot the entire
bill. He marched union officials to the dais at the August
board meeting and got them to agree that the workers, not
taxpayers, would pay the additional costs if the assumptions
did not pan out.
According to the contract language, however, union
members must only pay for the direct costs. They are under no
apparent contractual obligation to pay the additional costs
caused by faulty assumptions, according to sources I've talked
to who are familiar with the contract.
The contract says, "After implementation of this benefit,
the county and OCEA will annually review its costs including
costs impacted by changes in the investment earnings and
evaluate whether any adjustments to employee contributions are
necessary." After the evaluation, "any adjustments to
employee contributions will be negotiated[emphasis
added]as part of the salary reopener discussions in 2006."
As I read it, unions are required to negotiate, not to pay
Now, I'm all for legal action to force the unions to live
up to the solemn promises they made in a public meeting. But
if those promises are not binding, I won't act like Gomer Pyle
or the pension-hiking supes.
I won't be surprised.
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