Thursday, November 21, 2013

CalPERS Actuary Provides Dismal News

As promised, I attended the Pension Oversight Committee meeting at City Hall yesterday to hear CalPERS actuary Kerry Worgan make a presentation and answer questions.  The meeting had been moved ahead to 2:00 in anticipation of a long session.  Good move!  The meeting took just a hair under four hours!  The agenda is HERE.

The entire committee was in attendance except for member Rick Kapko.  Neither council liaison Mayor Jim Righeimer nor his alternate, Mayor Pro Tem Steve Mensinger attended the meeting, which I thought was more than a little curious considering the potential wealth of information about to be presented.  They may have been out crawling around under their cars, looking for tracking devices.  A dozen members of the public and city staffers attended at least half of the meeting.  Following the short break at 4:00 it thinned out considerably, with only four of us remaining.

Over the past several months the Pension Oversight Committee met often - very often - trying to get their arms around the true scope of the "pension problem", and specifically the Unfunded Pension Liability problem.  They've worked VERY hard on this issue and should be commended.

Part of that work was the compilation of a 12-page document listing 58 questions for CalPERS (or other) experts that needed answering.  After unsuccessfully attempting to lure Worgan to town for weeks, yesterday was the day and they were ready for him - loaded for bear, as it were.

Kerry Worgan is "our" CalPERS actuary, charged with supporting cities in his territory, including Los Angeles, Ventura and Orange Counties.  He presented his material using a PowerPoint presentation consisting of many slides and handled most of the actuarial questions flawlessly and provided contact information for others - legal questions, for example.

I'm not going to attempt to parrot what Worgan told the committee, nor will I attempt to replicate all the inquiries the members had.  All those numbers make my head spin.  I will, however, give you my impressions of what I thought were some pretty important points.

First, I came away from the meeting discouraged - not with the efforts of the committee, but from the news shared by Worgan.  In a nutshell, and using my words, the City is in a world of hurt.  We sit today in the vortex of what turned out to be a perfect storm of fiscal calamity.

In the simplest terms possible, if we have fewer employees our rates go up.  If wages stay flat when the formulas anticipate a rise, rates go up.  If we increase benefits the rates go up.  If the economy tanks causing investment returns to drop, the rates go up.  Unfortunately, over the past few years ALL of those things happened and our so-called Unfunded Pension Liability has risen from $9 million ten years ago to over $220 million today!

And, if that's not bad enough, it looks like it's going to get worse.  We anticipate an increasing rate of retirements and other departures, further diminishing the pot of pension contributors over the next few months as employees read the Tea Leaves regarding the current labor negotiations and see that the City intends to reduce benefits one way or the other.  Just this week four more people announced they will soon be either retiring or quitting for other jobs - these are non-public safety jobs, too.  The City has at least 40 open positions among the 450 authorized slots - well down from the peak employment of 611 just a few years ago.  Fewer bodies means fewer folks to contribute to the pension costs, which means higher rates for the remaining staffers, even though new hires receive reduced benefits.

Most city employees have not seen pay raises for the past four or five years except for "step raises" within their job categories.  Flat salaries means higher rates.

The economy was in bad shape for several years recently resulting in very sub-par investment returns, which means higher rates since the cost of the pensions must be paid by someone.

Of course, we all recall the ill-advised attempt by our mayor to layoff half the "miscellaneous" employees right after he took office.  Had he been successful, an unintended consequence would have been a dramatic jump in CalPERS rates for the remaining employees.

There was discussion about "sharing the burden", which meant asking every employee AND retiree to consider accepting reduced benefits.  That idea didn't have much traction around the table.

There were discussions of pre-paying the unfunded liability, but the City has only recently begun showing a budget surplus - this year it was $7.1 million.  So far, this council has shown no inclination to pay down the pension obligation.  They didn't even pay the $500,000 budgeted for the pre-pay last year!  In fact, Righeimer has stated publically and in the strongest terms that he's not going to send one extra cent to Sacramento.  That makes us wonder if he has ANY plan to manage the pension issue short of municipal bankruptcy.

Eventually the conversation turned to that very issue - municipal bankruptcy - but it was addressed very quietly and without much vigor.  This committee has had a "Bankruptcy Workshop" within the past few months.  I've said in the past that there are clear signs that the current council majority may be aiming the City in that direction, presuming that could provide a way to wipe clean the labor agreements and allow them to impose their will on the employees.  Righeimer has a history of being strongly anti-labor and his actions while on the council have shown that to be true.  However, a bankruptcy filing is no guarantee that the pension obligations would be tossed out.

Worgan was cautiously optimistic about the future.  Their formulas depend on a 7.5% rate of investment return.  This past fiscal year ended with just over 12% and is at just under 9% year-to-date.  They look at the long haul while we sweat bullets over how to pay the short-term obligations, which will likely be over $20 million next year.

At one point I asked - yes, they permitted the audience to ask questions - what it would cost if the City decided to abandon CalPERS and simply withdraw from their program.  Keep in mind our current unfunded liability is $220 million.  The answer I received was imprecise, but close, as Worgan began tallying up the individual contracts in his head.  The answer - right at $1 BILLION!  Yep, over four times our current unfunded liability!  And that's a check we'd have to write to CalPERS to pull out today.  So, neighbors, we're not going to be doing that any time soon.

Worgan left with a pile of questions to research for us, and the committee will also attempt to get some guidance from CalPERS legal staffers regarding bankruptcy and other legal issues.  Member Gene Hutchins opined that he didn't think the residents of the city would sanction bankruptcy, but there were not many other options presented as they went around the table this afternoon.

In the meantime, I anticipate more employees to leave in the next few months.  I think of it as passengers bailing out of an airplane while there is still altitude enough for their parachutes to open.  Way back when this council took over I mused that their idea of the perfect city government would be all the jobs outsourced and only Tom Hatch and a handful of contract administrators left to manage things.  I thought I was making a joke at the time.... now I'm not so sure.

I'm told this meeting will soon be uploaded to the City website, so just go to the bottom of the homepage to "Costa Mesa TV", click on that link and look for "video on demand".  It's long and the numbers will have your head spinning - and you'll likely end up as I did - very depressed.

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Blogger Unknown said...

The old guard should accept slightly reduced pension benefits so that the new folks won't have to accept a standard pension that will be half of what the old guard gets. It is not ideal for the old guard, but the reality is that their great packages are just too much. The higher end should take the biggest hit.

I say this as someone who decries CEO/executive pay and benefits.

11/21/2013 06:54:00 AM  
Blogger Marquis said...

This is the legacy of Alan Mansoor, Eric Bever, and Gary Monahan. Mansoor was far too busy chasing illegal alien boogeymen to bother with boring fiscal stuff and the Beve and Killer Leprechaun just followed along. (Remember when illegal immigrants were the source of all our financial problems? Ah, the good old days...)

This stuff is complicated, requires careful analysis and hard choices. None of those guys have any capacity for complexity or analysis and they have no stomach for hard choices, so they just ignored it and played the old, "we're just doing what everybody else is doing" card.

While all those perfect storm items were happening, they did nothing. I can't find the exact quote from the Pilot at the time, but it was during the depths of the financial meltdown, 2007-ish, with about half the car dealerships on Harbor already shut down. Genius Al went on record saying that we weren't really seeing too much of an effect in Costa Mesa, that we were in good financial shape, and that there was no need to immediately take action, we could wait until the next budget year. As I drove down Harbor that day, where it it perfectly obvious that the meltdown had already hammered us, I was dismayed at the willful ignorance displayed by Mansoor. And of course, the next budget came up and we were financially deep in the crapper.

We elect stupid in Costa Mesa, at least for the last dozen years. Gary Monahan presided over the creation of this crisis. He had no idea what he was doing then and has none now. Yet, there he sits on the dais. Alan Mansoor led the parade of ineptitude and he got elected to another job where he continues to do absolutely nothing.

There are ways to negotiate and manage the pension situation. It will be difficult, but it's do-able. Unfortunately we don't currently have the people in place who can do it. Given that, I now think that maybe it's OK for bankruptcy to be put into play. Bankruptcy is a big scary word, much scarier than "unfunded pension liability", so maybe that would scare enough people into voting for non-idiots for a change.

11/21/2013 08:28:00 AM  
Anonymous Eleanor Egan said...

The average pension for the "Old Guard" is less than $30,000. Is that really too much for someone who devoted his entire career to public service and put a portion of his wages into the pension as well? What would you reduce it to?

11/21/2013 11:40:00 AM  

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