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Coronavirus May Bankrupt Many OC Cities

This page’s chart shows the recent pension status of Orange County’s 34 cities as of June 30, 2018. Many cities will survive. Too many are in danger.

The data is derived from the California Public Employee Retirement System’s (CalPERS) 2018 actuarial evaluation reports and the Orange County Employees Retirement System (OCERS) for the city of San Juan Capistrano. The data shows the unfunded actuarial accrued liability (UAAL) Funding Ratios.

It’s not pretty. Most actuaries would encourage pension plans to be funded at 80% or higher.

These cities will now be making major fiscal decisions as a result of the coronavirus lockdown, as revenues have been decimated and future annually required pension contributions will rise even higher than projected just three months ago.

Cities will have to consider: raising sales taxes or other revenues; begging for funding from federal and California governments; reducing spending, if that is possible; tapping available reserves, if there are any left; selling unneeded assets; and/or renegotiating debts (such as issuing risky and inadvisable pension obligation bonds). They will need to work with creditors and employee bargaining units.

The most likely outcome is filing for Chapter 9 bankruptcy restructuring. And I would suggest going into a federal bankruptcy court should be on the top of the list of recommendations.

I’ve been there, as an Orange County official serving as the Treasurer-Tax Collector from 1995 to 2006. The Chapter 9 bankruptcy filing by the Orange County government 25 years ago made massive financial structural changes and improvements. Orange County’s plan of adjustment (the restructuring game plan approved by the filer and its creditors) was approved by a federal bankruptcy judge within 18 months.

If a plan of adjustment is approved by many Orange County cities, for the appropriate reasons, they will freeze the existing unsustainable defined benefit pension plans and going forward should implement shared-risk pension plans in their place.

One shared-risk pension plan that has been 100% funded for nearly 40 years is that of the state of Wisconsin, which introduced this successful, affordable and taxpayer-friendly retirement plan in 1982.

Unlike defined contribution plans such as 401(k)s, shared-risk pension plans are the light version of defined benefits plans. They have realistic investment return assumptions and real-world retirement ages. They do not provide for annual guaranteed cost-of-living adjustments (COLAs) to retirees. They require more employee contributions when actual investment returns underperform. They give COLAs when investment performance exceeds expectations. Those factors increase shared risk.

California’s current paradigm is where taxpayers pay the full freight for Rolls-Royce-type pension formulas granted over the years by councilmembers who benefited from public employee campaign contributions long ago and would never live long enough to see this day.

Don’t expect Sacramento to provide a legislative fix changing all plans to the shared-risk strategy.  Public employee unions in the Capital have significant clout and financial resources and will be reluctant to cooperate with even a reasonable solution to save retirement plans, as the current formulas will be hard to let go of. Consequently, don’t expect a statewide ballot measure to provide this necessary relief, for the same reason, as these unions will mount a massive and expensive opposition campaign.  And waiting until 2022 may be too late.

But a federal bankruptcy judge can amend state and local collective bargaining unit agreements. Since defined-benefit pension plans have been severely abused in California, it’s time to provide an approach that is fair to both city employees and their employers, the taxpayers.

Cities should also address their unfunded retiree medical liabilities, pursuing what the city of Stockton accomplished in its Chapter 9 proceedings just a few years ago. Unpaid vacation and sick leave plans that have not already been modified should also go under the microscope. This is another abuse that needs to be rectified, as it grants massive checks at an employee’s final hourly salary rate for unused hours when they exit the building.

Businesses do well when their host cities do well. Cities do well when their businesses are doing well. The coronavirus has illuminated this with bright lights. Well-run cities will be fine. Those that did not plan wisely for the future will have a professional and viable opportunity to achieve sustainability.

Recessions have a way of blowing the sand off mismanagement and overaggressive greed. Assuming the stock market would fix these unfunded liabilities was wishful thinking. Presuming that tax increases would take care of retirement benefits was misguided.

The coronavirus has just rocked the world and all the financial shenanigans that have gone on before. It’s time for Orange County’s cities to address these very sensitive issues.

This is a math problem. Solutions are available. But is the will?

Editor’s Note: John M. W. Moorlach, R-Costa Mesa, represents the 37th District in the California Senate. Moorlach, who has often been called the fiscal conscience of the California Legislature, presciently warned of Orange County’s risky investments before it declared bankruptcy in 1994.

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