VIEWPOINTS

By WAYNE QUINT

Our view on Supervisor John Moorlach’s position regarding the 3% at 50 retirement benefit is that he believes he has a firm constitutional position that has not been substantiated by any court of law.

Our belief is that it is premature for Supervisor Moorlach and the county to go forward on this issue until there has been court review.

Supervisor Moorlach wants to rescind up to one third of a retiree’s pension despite the fact that the benefit was agreed to by the county in formal collective bargaining in 2001.

Supervisor Moorlach’s argument would have one believe the incumbent Board of Supervisors at that time, county counsel, the Orange County Employees Retirement System and their legal counsel all failed to recognize what would occur if the benefit was granted.

At that time, Supervisor Moorlach was a member of the Retirement System and the incumbent treasurer-tax collector of the county of Orange.

It is disturbing to our organization and to our members that Supervisor Moorlach and the county seem not to value the sacrifices that the men and women of the Orange County Sheriff’s Department and Orange County District Attorney’s Office have made and continue to make on a daily basis.

In the law enforcement community, a promise made is a promise kept.

Back in 2001 the county agreed to provide this benefit for the service and sacrifice of these officers. When these officers retired, they were provided a document at the time of separation that advised them of their lifetime benefit.

Now Supervisor Moorlach’s actions are intending to violate that agreement based on a legal theory that has not been reviewed by any court of law.

Quint is president of the Association of Orange County Deputy Sheriffs.

Retroactive Pensions

By JOHN MOORLACH

o appreciate why government employers are reeling from recent retroactive retirement benefit increases,which well could violate California’s Constitution,consider the following actuarial exercise.

Let’s say an employee starts working for you at age 25.

You provide a starting annual salary of $54,000 and promise that when he or she retires in 25 years, you will pay 50% of their last year’s salary for the rest of their life, plus an annual 3% cost of living adjustment. This formula is known in the public sector as “2% at 50.”

Your actuary tells you your 25-year-old employee is expected to live to age 80.

Your money manager tells you to expect a net annual rate of return on your investments of 7.75% to help fund the benefit.

Your business plan tells you that your employee should average an annual raise of 4% a year.

Believe it or not, the worker’s salary will be $143,955 at the time of retirement. The annual retirement pension benefit in the first year of retirement will be $71,978, which increases by 3% per year for the next 30 years.

Your actuary will tell you to contribute 17.3% of the annual salary at the beginning of the year. The first year’s contribution: $9,333. By the 25th year, the annual contribution will be $24,881. The funds available at retirement will be $1.1 million, which will last until the former employee reaches age 80. At age 80 the annual benefit will be some $169,620.

The power of compounded interest is one of the marvels of investing. You will have made your annual salary and pension plan contribution commitments and your employee will enjoy lifetime benefits until his or her anticipated death.

If the employee dies before age 80, you have an actuarial gain. If the former employee lives well past age 80, which is probable with advances in medical science, you will have an actuarial loss.

Other issues could occur. What if the investments don’t earn 7.75% per year? If they are higher, then your contributions will decrease. If you earn less, then your contributions will increase to catch up to the financial target where you should be.

In technical terms, the difference between where you should be in your funding level, as a result of contributions and net investment earnings, is the unfunded actuarial accrued liability.

What if the retirement formula is changed during the term of employment? It is unlikely that the formula will decrease the expected benefit, as pension plans tend to be a vested right. If it increases, then you will have an unfunded liability that will require increased funding.

Now if you increase the benefit and make it retroactive, then you will have a significant unfunded liability to deal with.

Let’s say that the benefit is increased, retroactively, to “3% at 50” when the employee is near retirement age. Well, the new benefit at age 51 jumps from $71,978 to $107,966 (a 50% increase). If the funding level is not changed, instead of ending with zero at the 80th year of life, the funds would dry up at age 65.

In year 66 someone would have to come up with $168,208 to pay that year’s benefit. To fund the extra 15 years, someone would have to fund $561,500 in the 26th year! This is approximately half of what you have earned in 25 years of methodical contributions and investments.

That is what government employers are facing by retroactively granting higher benefits to workers.

But how can a governing body give such a rich benefit, creating such a large debt, for services already rendered? If you believe in the state constitution, you can’t.

Article XVI, Section 18 states that if you want the taxpayers to absorb a debt, you had better get a two-thirds approval from them.

Article XVI, Section 6 states that elected officials “have no power to make any gift or authorize the making of any gift of public money to any individual.”

And “Lamb v. Board of County Peace Officers Retirement Commission of Los Angeles County” states that “a pension is a gratuity when it is granted for services previously rendered.”

Article XI, Section 10 states “a local government body may not grant extra compensation or extra allowance to a public employee after service has been rendered.”

Numerous elected officials have been approving potentially illegal benefits ever since Gov. Gray Davis signed “3% at 50” and retroactivity into law.

Even though “3% at 50” is extravagant, I have no quibble with that. But going from “2% at 50” to “3% at 50” overnight and gifting the extra 1% back to the date of hire is unconscionable. It’s also unconstitutional. That’s why my office is supporting legal action to rescind this burden on the taxpayers and returning the county to some semblance of fiscal responsibility.

What burden, you ask. Well, for the county of Orange the $561,500 was not paid in the year the benefit became effective. The unions recommended that it be amortized over the next 30 years. Now an annual contribution of $45,200 is required for the next 30 years for the new liability for this employee of $1.3 million, with the addition of the interest at 7.75%. And you thought you were paid in full. Your annual payment not only continues for another 30 years, but it jumps more than $20,000 over the amount that was supposed to be your last payment.

The retroactive portion of the contracted benefits is unfair, unreasonable and unconstitutional. And if it is not addressed, and soon, then it will be the straw that breaks the financial backs of municipalities around the state of California.

Moorlach is a county supervisor representing the 2nd District covering West County.