Over the weekend Supervisor John Moorlach fired off a preemptive Op-Ed in the Orange County Register attacking public employees and blaming their pension benefits for budget shortfalls and what the headline to his commentary describes as a “Formula for disaster.”
“How do you downsize? How do you tell your employees that revenues are not enough to cover expenses? These sound like rhetorical questions, but some four years into this Great Recession many of us are still dealing with these two questions.”
“The Orange County Board of Supervisors on Tuesday will review its annual Strategic Financial Plan. Our county has been doing 10-year fiscal projections since our embarrassing bankruptcy protection filing in 1994. It is an excellent management tool. However, this year it tells us that the County of Orange is going to hit a wall. Why? Because our defined benefit pension plan is demanding ever higher annual contributions.”
Moorlach goes on with this misleading argument against defined benefit retirement plans. “In the private sector, unsustainable traditional defined-benefit pension plans (employer guarantees benefits) have been frozen and converted to defined-contribution pension plans (the employee contributes and reaps the compounding benefits). Municipalities in California may not have this management tool at their disposal and cannot impose changes to existing pension plans.”
What Moorlach leaves out is that the change from defined benefit to defined contribution plans in the private sector is due to the fact that most of the industries that offered defined benefit plans, such as manufacturing, have been moved out of the country, where the profits are greater, and responsibilities to their workforce less. The drop in prevelance of defined benefit plans is not due to their sustainability, it is due to corporate greed. Pensions that have failed have done so primarily because the corporations managed to raid their plans of their value.
Moorlach continues to fail to mention, in all of his arguments, that the increases in county benefit formula for general county workers is being paid for 100% by those workers. There is no ballooning liability for the vast majority of plan participants. But Moorlach won’t tell you that. While there is a definite problem with the funding of the public safety benefit, these problems have started to be addressed with recent contracts with the deputy sheriffs, and more movement in that area needs to be made so that all county employees are paying into their pensions equitably. But the argument that there is a looming pension debt which is coming due in the form of a multi-billion dollar balloon payment is a fairy tale.
The Strategic Financial Plan Moorlach mentioned in his editorial seems to have his finger prints all over it. In a nut shell, the plan coughs up the recycled hair-ball that Moorlach has been cramming down our throats for years; that defined benefit pension plans are bad and that our future budget situation is bad because of public employee pensions. The plan tosses into the mix the flawed notion that Orange County public employees are over paid, and should endure even more reductions in salaries and benefits so that these wizards of financial failure can dole out performance bonuses to contractors that historically fail to meet expectations.
Nick Berardino General manager of the Orange County Employees Association (OCEA), which represents more than 14,000 County of Orange public employees, is having nothing of this crap. Berardino sent an email to union membersWednesday alerting them to the short-sighted and hostile attitude that some members of the Board of Supervisors, and County CEO Tom Mauk, have towards public employees demonstrated in their 5 year Strategic Financial Plan.Â
“The plan” Berardino writes, “includes salary reductions, limiting step increases, a hiring freeze, limiting annual leave payouts, and proposed changes to your pension benefits. The County acknowledges that many of these proposals would require labor negotiations and legislative changes, and that could incite legal challenges.”
The following slides show the salary and benefit cost reduction measures that County Supervisors adopted yesterday as part of their five-year strategic plan.
At Tuesday’s Board of Supervisor’s meeting Berardino complained about being blind-sided by the proposals incorporated into the plan. “No one talked with us,” Berardino said. “some of these things are outright illegal. Why are we wasting our time talking about things that aren’t legal, that can’t happen without legislation or initiative.”
Berardino pointed out that the plan imposes cuts that will hit the lesser compensated general county workers, who have already born the bulk of cuts and made the greatest contribution to finding cost savings that have reduced projected shortfalls for the past several years. Among those concessions were the changes to the retiree medical plan, changes in the defined benefit pension plan that provided for a hybrid defined benefit – defined compensation plan which is a model for pension reform in California and nationally. “These proposals are distracting and not practical,” Berardino told the Board.
In talking to my coworkers the last couple of days I have heard a common concern expressed over and over; “Why are they going after us? We’ve given up raises, paid more for our pensions, endured layoffs, and furloughs, while contractors get bonuses for doing what they are contracted to do.” The fact of the matter is that we are making less now than we were two years ago because of inflation, no raises in the current contract, and increases in our pension contribution rates. One comment in response to Moorlach’s editorial was particularly enlightening; “Merry effing Christmas to you too Mr. Grinch.”
It seems inevitable that board members like John Moorlach and Shawn Nelson are gunning for county workers. It is likely that their rhetoric will become more and more hostile as they try to take away benefits and reduce already below market salaries from public employees in their quest for their “Precious,”the complete and total privatization of government services. What is also likely, at least based upon what I am hearing from county workers, is that they are in for one hell of a fight.
Berardino has made it clear to the Board that OCEA is ready to work together with them to find reasonable solutions that recognize the importance and value of our county workforce. Together we can find common ground and solutions that provide dignity and financial stability and security for both workers and the taxpayers. Much of the county workforce are also Orange County taxpayers. We have a shared interest in intelligent solutions that meet every-one’s needs. Having conversations that generate, fear, anger, mistrust, and confusion does not help resolve the significant challenges we are facing.
WORSE THAN BERNIE MADOFF – COLORADO’S 2010 PENSION THEFT.
What do the Colorado Legislature and Bernie Madoff have in common? Both stole retirement benefits that were earned over many decades.
We have 80-year old widows in Colorado, who worked hard for the State for thirty years, who trusted the State and made their pension contributions like clockwork for decades, only to see their contracted retirement incomes stolen by the State. This money was taken out of their pockets because the State failed to make pension contributions as recommended by their own actuaries, to the tune of $2.7 billion in the last seven years. If the state had responsibly followed the recommendations of its actuaries, the PERA trust funds would now be more than 90 percent funded. The Colorado pension shortfall is primarily a result of legislative action over the last decade, Bill Owens, et al, in 2000 cut contributions and allowed the purchase of cheap service credit, and now the Legislature wants retirees to bear the cost of legislative ineptitude. In testimony to the Legislature even the proponents of the reform bill acknowledged this historic under-funding of the pension. PERA claims that the pension fund was unsustainable without their actions, because the funded ratio of the pension stands at 68 percent. However, the funded ratio of the pension was in the low 50 percent range in the 1970s, and the pension still exists. If a funded ratio of 68 percent this year is unsustainable, how has the pension been sustained since the 1970s when the funded ratio was in the 50s? Not much of a rationale for breaking retiree contracts.
If you find yourself short on funds, you rearrange your spending priorities, or raise additional revenue, YOU DON’T BREAK CONTRACTS! Why would the Colorado Legislature choose to break pension contracts before breaking other contracts, such as construction contracts? How can a state that is in default, that breaks contracts, maintain its credit rating?
The fact that what Colorado did to public sector employees in this year’s pension reform bill (SB1) cannot be done to private sector employee pensions under I.R.C. Section 411(d)(6), says quite a lot about the moral underpinnings of SB1. This federal “anti-cutback rule†for private sector DB plans permits changes to the plans only if the changes operate on a prospective basis.
Colorado PERA’s actions make it clear that the time has come for the inclusion of public defined benefit plans under all Internal Revenue Code Qualified Plan requirements. It is now obvious that allowing the states to regulate public defined benefit plans does not afford equal protection to state and local government employees.
PERA has put it in writing in pension plan materials over the years, that the COLA “is guaranteedâ€. Members purchasing service credit gave PERA thousands of dollars based on these materials. Money that they could have left in their 401Ks. PERA officials now claim that the members cannot rely on their pension plan documents regarding their defined benefits. However, Goldman Sachs recently paid a half billion dollar settlement to the SEC based on promises made in plan documents. Apparently, some judges believe that plan documents can set forth contractual terms. In any event, the contractual pension language is set forth clearly in Colorado law.
Colorado’s retiree COLA (and those of 36 other states) are “automatic COLAs†as opposed to “ad hoc COLAs†(which exist in about a dozen states and can be periodically altered.) Colorado’s COLA of 3.5 percent is guaranteed in Colorado law in an identical fashion to the base retirement benefit itself. So, the PERA retiree’s claims are based on both statutory language and plan documents. This 3.5 percent COLA won’t look so hot in the coming years if inflation spikes.
The Colorado pension reform bill’s (SB1) proponents should accept that states cannot legislate away a debt for work that was completed in the past. What the state is attempting is a claw back of deferred pay. The bill’s sponsors should accept that states cannot avoid their contractual obligations simply because they prefer to spend resources on alternative public services or obligations.
Some pension reform advocates argue that public sector pensions should be held to the same standards as private sector pensions. My response to that is “I agree wholeheartedly!†Under the federal Internal Revenue Code reducing accrued pension benefits for private pensions is illegal. If the public sector PERA pension were covered under this I.R.C. law and held to the same standards as private pensions, then last February’s theft of accrued benefits by the Colorado Legislature would not have been attempted. Essentially, federal law provides higher protection to private pensions than it does to public sector pensions. Public pension members are forced to appeal to the courts to prevent the theft of their benefits. (Happening.)
Members of the Legislature pointed out many times, to no avail, that the so called “pension reform bill†was a violation of contracts to which the State was a party. Here are some examples (on tape from the floor debate):
Rep. Lambert: “I have heard from my constituents, as many of you have, that this proposal will breach retiree’s contracts.â€
Rep. Swalm: “We’re breaking new territory in this state by trying to reduce the COLA. We’re probably going to get a lawsuit out of that. If we cut the 3.5 percent COLA there will be a lawsuit.
Rep. Gerou said that it is a disservice to the state to rush a bill through when her committee knew that it will go to litigation, and said what we are doing to the retirees is wrong.
Rep. Delgroso said that it is tough for him to tell people that he is going to break their contract.
Senator Harvey said “We have made a commitment. We have a contract with current retirees. That is already in place. Reforms should be made for new hires. We do not have that commitment to new hires.
Senator Spence said “The bill places an unfair burden on retirees.â€
Senator Scheffel said “We are breaching our promises to existing retirees.â€
Senator Lundberg said “This bill is a deal that was cut before this body met.â€
The cavalier abandonment of contractual obligations brings shame to the state of Colorado, aligns Colorado with Third World countries like Bolivia. No person, Republican or Democrat should countenance the breach of contracts. Conservatives support contract law as the foundation of capitalism.
So, why is the SB1 theft more egregious than the Madoff theft? The Colorado Legislature stole money from retirees who are less well off than Madoff’s pre-qualified hedge fund clients.
The Madoff victims were taking risks to seek a higher return on their investments, the Colorado PERA victims simply trusted that their contracts would be honored.
Colorado PERA and the Legislature justified their theft on false premises, citing 2008 market numbers when they knew the markets had recovered approximately 20 percent in 2009. PERA’s General Counsel stated on tape before the 2010 legislative session began that he expected a pension return “north of 15 percentâ€) for 2009.
It appears that Colorado PERA used the very resources of PERA members to hire a team of lobbyists (up to a dozen) to take earned benefits from those same members. That’s just insane.
Many members of the Legislature acted in ignorance. Spoonfed by the lobbyists, they ignored the legal rights of PERA retirees, and swallowed whole without question the assertions of PERA’s CEO and its chief legal counsel. If the members had read any case law, (for example, the state defined benefit pension case law summary by Prof. Amy Monahan at the University of Minnesota School of Law, Google it!), or even the 2004 Colorado AG opinion on pension benefits (retiree benefits are inviolate) they would not have supported the bill.
PERA’s own General Counsel was quoted in a 2008 Denver Post article as follows: “The attorney general’s opinion seems clear that fully vested employees — those retired or with enough years of service to retire — cannot see any benefits reduced, including cost-of-living adjustments, Smith said.â€
Although members of the Colorado PERA Board of Trustees are fiduciaries, charged to act only in the interests of the members and the retirees, they recommended SB1, acting primarily in the interests of PERA employers who were concerned with keeping their contribution rates low.
Adding insult to injury the Legislature stole more money than it needed. The pension theft bill sought to increase PERA’s funded level to 100 percent, although an 80 percent funded level is considered well-funded among pension experts. You don’t have to pay off your mortgage tomorrow, and PERA doesn’t have to pay off all of its pension obligations tomorrow.
There were many other options available to address the pension shortfall, options that have been adopted, or are under consideration in dozens of states. See the legal, prospective pension reform that was accomplished in Utah this year.
Members of the Legislature have taken an oath to uphold the constitution and yet voted to violate the Contract Clause and the Takings Clause. Proponents of the bill refused to see that the retiree COLA (annual benefit increase) is set forth in Colorado law with the same force, status and weight as is the base retirement benefit. Only tortured legal reasoning, and wishful thinking, lead them to believe otherwise.
The Legislature had the ability to investigate the legality of its actions up front, but chose to act with no legal advice. Throughout the floor and committee debates on SB1 the members displayed an ignorance of, or an intentional disregard for the relevant case law. They failed to conduct the due diligence expected of an elected body. State legislatures across the nation are examining the legal limitations on their actions regarding pension reform, exploring all legal options prior to acting. (PERA claimed to have a legal opinion to justify their actions, but never released it.)
PERA has been disingenuous by claiming that the reform bill represents “shared sacrifice†among employees, employers, and retirees, by not making it clear that retirees bear most of the burden of their proposed reforms, for many retirees the confiscation of benefits will reach one-quarter of their total retirement benefits received over the rest of their lives. In debate, the bill’s sponsors said that retirees would bear 90 percent of the cost of the reform. In any event, I am not relieved of my contractual obligations just because someone else has better terms in their contract. The entire premise is ludicrous.
While ignoring its own contractual pension obligations (underfunding of $2.7 billion in the last seven years according to PERA’s own actuaries) the State of Colorado has pumped half a billion dollars into pension obligations that are not its responsibility, those of local governments (Old Fire Police Pension obligations).
The Legislature made a pact with unions to support the “pension reform bill†(SB1) to protect union jobs. Incredibly, these union members tossed their former members, their retired “brothers†under the bus. From the beginning the plan was “let’s steal the money we need from retirees.â€
Finally, Madoff eventually admitted to his crime, but the Colorado General Assembly is still pretending that their theft of pension benefits is something to be celebrated. They tout it as a “bi-partisan accomplishment. This will be a long-standing embarrassment to and black mark on our state.
I hope OCEA and the other bargaining groups do take Mr. Moorlach and the rest of the supervisors to task on the proposed cuts. There is a real danger that public sector employees will be pushed into the defined contribution boondoggle that has been forced on private sector employees.
401k and other defined contribution plans are not viable as primary retirement income. None other than a Forbes writer has suggested a recall of 401k plans because they are a complete fraud (http://blogs.forbes.com/edwardsiedle/2010/10/07/401ks-americas-biggest-investment-fraud-was-foreseen-and-preventable/).
Like Social Security, 401k, IRA, and other defined contribution plans were originally meant to be SUPPLEMENTAL retirement plans. People could gain some comfort in retirement by saving and investing in these plans to supplement the defined benefit plan offered by their employer. As employers have embraced defined contribution plans to improve the bottom line, private sector employees have been cheated out of any hope of financial security in their retirement years.
Public employee unions and bargaining groups remain among the strongest advocates for employee rights in this country. Other labor groups have been gutted by continual attacks from business and its pro-business government. The public employee unions need to remain strong in order to protect their members and act as an example to other labor sectors.
I hope that OCEA and other groups will not back down and will stay strong in this battle.
Careful now. Moorlach is going to use his last four years of his term in office to stick it to the workers.
County and all union workers will have to fight him tooth and nail. Once he is termed out he may want to be the congressman of the District and that would mean only more hell to pay!!