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The Mechanics of Pension Reform – Local Actions

Part 2 of 2…

Introduction

In Part One, I enumerated reforms needed at the state level. That list was in part plugging up the “cheats” used to run up the statewide pension deficit of about a trillion dollars. Employee unions control the state legislature, the attorney general, all executive offices and all retirement administrators; therefore I prefaced Part One with an opinion that reform at the state level was and is basically a pipe dream.

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Picturesque Pacific Grove is being destroyed by government unions.

This part will discuss reform at the county and city level only, simply because I have not researched education and special districts sufficiently to include them.

Premise

This analysis is based on the conclusion that current local government defined benefit pension plans are under 50% funded based on market analysis.

The common lament about pension deficits is that it was caused by the 2008-09 investment crash. But most PERL Agencies were under water after the 2001-02 high tech stock market crash. Most pension bonds were issued in exchange for pre 2008 pension unfunded deficits or to fund pension enhancements (Marin and Sonoma counties, for example).

Vallejo filed for Chapter 9 in 2008, before the crash with a market pension deficit of about $400M.

Pacific Grove went from a zero deficit in fiscal 2001 to 2002, to a nineteen million dollar deficit in 2004 to 2005. About 50% of the pension deficit was in the 2%@55 plan for non safety employees and the other 50% for the 3%@50 safety employees. Non-safety 2%@55 plans suffered substantial pension deficits again after the 2008-to 2009 crash and all PERL plans had an additional deficit from poor results in 2013-14. It had a good return for fiscal year 2014 to 2015, but recent results (June 2015 to date) are catastrophic. Based on the size of the 2%@55 deficits, that level of benefits is unsustainable and if it was the highest level of benefits, it would still break all but the very richest agencies.

Contribution rates have doubled and tripled; yet the PERS estimate of the funding level for PERL plans as of fiscal year end 2012-13 is 70.5%, using its assumptions. But financial experts using fair market assumptions – those used competitively – estimate the funded level at well less than 50%, a funded level that PERS has stated was beyond saving.

Based on the above, it is mathematically probable that PEPRA which grants a defined benefit as high as 2.7% at various ages of eligibility will go down like the Titanic, in spite of its prospective limits on the size of maximum benefits. If 2%@55 plans are under water; it means that 2.7% at age 57 plans must fail. PEPRA is a palliative measure that has delayed curative reform.

In CERL agencies, much of its pension debt, including pension bonds, was created between 2002-07, after it had incurred a deficit in 2001-02. In Sonoma county a phony lawsuit about calculating pensionable salary was created. Plaintiffs and defendants then contrived a settlement of the lawsuit that circumvented the public notices of CERL and Govt. code 7507, to grant every full time employee a 3% benefit at some age (between 50 and 60). The reason it was important for the staff to avoid the notice statutes was because compliance would have shown that the increased annual budget costs of the pension enhancements would have violated Article XVI, section 18 of the state constitution, which required a 2/3 vote of the people to approve the enhancements. (The Orange county debt limitation case did not involve the issue of increased annual budget costs, and that is why it lost).

Marin had a similar experience as documented in a precise 2015 grand jury report. The pension deficits in Marin and Sonoma are about a billion dollars each. In each county, the agency lawyers, the supervisors, the unions and staff, the sheriff, DA, et al took no action on the grand jury reports. They had a duty to set aside the illegally adopted pension increases, but did not. The ratification of the illegal pensions was unanimous.

Except for a chapter 9 that modifies pensions and other post-retirement benefits, there is no way out of the financial demise of Sonoma and Marin county and all but the very richest local entities.

Chapter Nine is a Game Changer

Until Judge Klein (in the Stockton Chapter 9) produced a total analysis that showed that employee’s pensions are modifiable in a chapter 9, PERS and the unions claimed pensions were untouchable for a variety of tenuous reasons.

Article I. Section 8 of the U.S. Constitution says “The Congress shall have the power…To establish uniform Rules of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;.” Judge Klein went on to clearly define how pursuant to a Plan of Adjustment in a Chapter 9, pension contracts could be rejected and the obligations modified in a fair and equitable manner along with all of the creditors. Judge Rhodes in the Detroit bankruptcy agreed . The Supremacy clause applies to a chapter 9 and is still the law per the two judges and all neutral experts on the matter. Pensions do not have a special status in a Chapter 9.

In his decision, Judge Klein said: “..it is doubtful that CaLPERS even has standing to defend the City pensions from modifications. CaLPERS has bullied its way about in this case with an iron fist insisting that it and municipal pensions it services are inviable. The bully may have an iron fist, but it turns out to have a glass jaw.”

Karol Denniston, a bankruptcy attorney and chapter 9 expert (SQUIRE Patton Boggs), who followed the Stockton bankruptcy carefully, in one of her several writings about the Stockton decision said: “Klein’s opinion provides a handy road map of how to put pensions on the bargaining table thus creating a more balanced approach to restructuring. That means pensions get talked about at the front end of a case and not at the back end. It also means a city can tackle its restructuring plan by looking at all of the significant liabilities, including a plan that really works.”

“..including a plan that really works.” The elements totally lacking in the Vallejo, Stockton and San Bernardino bankruptcies. Those chapter 9’s were union controlled political bankruptcies that intentionally used all of the available assets to pay for a bankruptcy, while protecting its employee’s million dollar pensions. As of 6/30/2013, San Bernardino had a fair market unfunded pension liability of about $1.05B and was 43.4% funded; Vallejo a $650M unfunded pension liability and 45% funded, and Stockton a $1.3B pension liability. The new losses for the succeeding two years will be daunting. Imagine another recession!

The Political Landscape for Chapter 9 Filings

In all cities and counties you hear the refrain: “another loss like that one and the city or county will be bankrupt.” Therein lies the problem; taxpayers view a chapter nine as worse than slashing services, raising taxes and fees, with a future doomed to more cuts, taxes and fees. Because the three municipal bankruptcies to date were “rigged” in favor of city staff and the unions, the public lacks an example of a successful chapter 9.

Therefore, the first bona-fide chapter nine will be critical so that it will encourage other agencies to negotiate from a position of strength. Cities and counties must comply with Myers, Milias and Brown, but any deal that leaves the agency in a defined benefit plan is off the table. If that goal is achieved, there is much to talk about.

The key issue is the level of adjustment to be made to pensions so that employees and retirees will receive a reasonable pension? Unless the taxpayers are convinced that retirees and employees are not taken advantage of, it will not support a bona-fide chapter 9 in bankruptcy.

Pension Adjustments in a Pre-chapter 9 Settlement or in a Plan of Adjustment Must Be Fair and Equitable

Government agencies usually do not belong to the Social Security system. Additionally, PERS and CERL systems do not have an insured component to fill in for pensions modified in a bankruptcy. In chapter 11’s and 7s, canceled pension benefits are often replaced by the federal pension insurance system. So modifying pensions in a chapter 9 is a serious business and must not only appear to be fair, but in fact be fair.

On the one-hand an egregious PERL and CERL system has already caused massive tax increases and prop. 218 fees with a dramatic drop in the number of employees and service levels. As a game-wrecker, prop. XIII dwarfs it by comparison. On the other hand, retirees are not entitled to million dollar annuities, but should receive reasonable pensions for their service. Mathematically, the status quo is not an option. Convincing taxpayers that the modifications are essential but fair is the key to electing a legislative majority with the support to negotiate pension reform from a position of strength. That strength is the right to modify pensions in a chapter 9.

The opposition to a chapter 9 will be massive. In addition to PERL and CERL, the unions will invest millions in opposition. More importantly, the agency lawyers, managers and administrators will use agency monies for store-bought legal opinions that pretend that modifying pensions along with other debt is illegal and bad (like Pacific Grove, Sonoma and Marin county regarding illegal pension adoptions). So if a reform majority is elected, it must replace those who fight for the status quo no matter what. Current attorneys, managers/administrators must go to be replaced by contract experts during the financial emergency.

In order to elect a legislative majority of pension reformers, a lengthy public relations plan is an absolute prerequisite. That program must analyze the outstanding liability for pensions, including pension bonds, and then postulate reasonable modifications for the affected retirees and employees.

Older retirees with lower pensions should not suffer modifications. The younger retirees with massive retirements should be cut to as much as 2 times the social security maximum (about $60,000 per year). The goal is to provide a reasonable retirement for those affected, and to arrive at a plan of adjustment that permits a city or county to repair its roads, sewers, water systems, etc. while providing amenities for every age group (senior, recreational, library, etc) without a separate levy or fee in addition to property, sales and franchise taxes.

In cities like Pacific Grove and counties like Marin and Sonoma, the press is a huge problem. In Monterey County no news source understands the magnitude of the pension conundrum.

In Marin and Sonoma, the issue is treated superficially by the press, but the news media does not portray the magnitude of the deficits together with the illegality of it all so that the reader understands that taxpayers have been defrauded to the tune of a billion dollars. Without a chapter 9 the pension deficits will grow in Sonoma and Marin to one and a half and then two billion dollars and so on. Only chaos can follow such incredible juvenile behavior by all involved. Even reform groups fail to shout out the critical nature of the problem. If the ordinary taxpayer understood the situation, electing competent legislative majorities and reform would follow.

In Monterey County, if you asked a city council member about the size of the city pension deficit, it would be confused. In Pacific Grove they would admit that it was bad, but believe it is curable. But if you told a member of the Carmel council that the city pension debt per household was $24,000, it would be curious about whether that was good or bad. Carmel has so much revenue, it does not concern itself about whether it gets its money worth. My point is that the prospect for pension reform varies from agency to agency, but there is NO avenue to inform the citizens of Seaside, Salinas, Pacific Grove and other communities of the continuing decline in the quality of life in their community; and that a bona fide chapter 9 could make them free. Therefore Reform groups must educate the press, but also provide bi-weekly or monthly pamphlets by mail to citizens so that they can use their vote to defend against the pension tsunami by electing bona fide pension reformers to their city council (or board of supervisors in counties). It will require a sizeable flow of cash.

Paying For a Chapter 9

According to a reliable source, the legal costs in the Stockton chapter 9 exceeded $15M. Costs for experts added a significant sum. For a residential entity like Pacific Grove (15,599 residents) it could be as much as $6M. If a city has pension and other bonds that will be modified in the bankruptcy, the annual payments may be a source of funds to pay for the bankruptcy. Because a modification of pensions or OPEB is contemplated, cash from those sources may be available.

There has not been a bona fide chapter 9 in California; therefore, a material modification of pensions lacks guidelines; but it will be based on federal bankruptcy principles, not state law. According to one highly qualified chapter 9 expert it is important that the PERL or CERL contracts NOT be terminated until after the 9 filing in order to prevent a lien claim by the pension plans.

Qualifying For a Chapter 9

In California, a municipality, like a city or county, is qualified for chapter 9 treatment if it is “insolvent” and “desires to effect a plan to adjust such debts” and has complied with Government code section 53760 et seq. That section provides for a choice to pursue a neutral evaluation process in an attempt to obtain a compromise, or, the local public entity may declare a state of emergency pursuant to Government code Section 53760.5.

Generally, the local agency will qualify if it can show it is “unable to pay its debts, or unable to pay its debts as they come do” (cash insolvency). Cash insolvency may include charges that are not immediately due, but are imminent, such as increases in annual pension contributions and annual pension bond payments, sewer debts, etc. Unfunded pension liabilities will probably not carry the day, except to the extent they will become cash obligations through rate increases. This is a complex area, beyond the scope of this article, except to again make the point that local entities need experts that are not subject to the bias and influence of staff; otherwise, the advice from staff will be, “you can’t touch our pensions” and it will advise a “rigged” chapter 9 like Vallejo, Stockton and San Bernardino.

Alternatives to a Bona fide Chapter 9

Insolvency may be delayed by massive salary reduction, staff and service cuts, new taxes and fees and so on; but such a process cannot promote sufficient financial healing to permit a reasonable level of services at a reasonable cost, or avoid massive deficits. Stockton had a $7M deficit for 2014. So much for its chapter 9.

The “police power” rule of contract law is theoretically available. That rule provides that the state police powers allow modification of contracts when it is necessary to protect the general public welfare. And if that power is extant, does it extend to local agencies? I don’t have the answer, except to note that the California government as now constituted would never use the power, and if attempted by a local agency, the cost for legal representation by reformers is too great.

A better choice is “The Kern Doctrine.” In Kern v City of Long Beach and later in Allen v City of Long Beach, the California supreme court determined that a Charter provision granted employees a vested pension right and in Allen, concluded that the right extended to “work not yet performed.” But in doing so, especially in Kern it noted its second rule, that in a case where the pension system was financially broken, the local entity could make reasonable modifications to vested rights and no off-set was required. In Kern it noted several examples that it had permitted; in one case it allowed a benefits reduction from 2/3 of salary to 1/2 for all employees who had not yet retired. In Allen, the court noted that in that case the financial integrity of the pension system was not in question, so any reductions in pensions required a corresponding off-set. Then it immediately noted again that it was NOT a case where integrity of the system was in issue, thereby reaffirming the Kern doctrine that vested rights could be modified without off-set to save the pension plan..

Hundreds of local entities now have pension plans that are broken with no chance to pay the benefits promised. In 2014, Moody’s released a statement that Vallejo was again insolvent because of pension promises and needed to go into a new chapter 9 to shed pension obligations. It warned that Stockton and San Bernardino needed to shed pension obligations or would again become insolvent after its chapter 9.

There is now a “perfect storm “ for pension reduction under the “Kern Doctrine,” but most lawyers simply do not understand it because they read Allen, without reading Kern. Kern gives an example of the exercise of the police powers by a local entity to protect the public welfare. Entities with impossible pension deficits, like Oakland, San Jose, Pacific Grove, Salinas, King City, Marin and Sonoma counties, etc., etc. could modify pensions for employees to save their plans from insolvency. Read Kern!

Anticipating the Opposition’s Tactics

The gimmick used by Stockton to justify not modifying pensions in its Chapter 9 bankruptcy was a claim that it would be unable to recruit and retain safety and other experts, particularly police; and it already had a raging crime fest on its hands. In fact, it had depleted its police department because of raging pension costs arising from excessive million dollar pensions and the 2008 to 2009 financial crash. Ironically, its manager spread the theme that Stockton could not hire and retain qualified people across the board without the million dollar pensions; then he retired? He was hired by San Bernardino to spread the same theme for its bankruptcy.

Despite claims that police departments cannot recruit new officers without 3%@50 pension benefits, there are over 150 local entities in California with police receiving a 2%@50 pension and they fill positions readily. Until about 2003, almost all local agencies were 2%@50 and there was an overflow of qualified applicants. The age 50 level is much too low, but it is there, created by greed. The claimed shortage arose because of the fraudulent adoption of 3%@50 in 1999; now they naturally seek a 3%@50 annuity and refuse to believe that it has destroyed representative government.

More troubling about the claimed police shortage are allegations that police departments like San Jose discourage applicants and certification schools to create a shortage. But the critical component of the police shortage theme is the inability to gain the truth about the number of applicants for open positions. Somehow it was learned that Stockton had numerous applications for its police force. To counter, its manager wrote a guest editorial in the Sac Bee and said only one in a hundred certificated police applicants could qualify as a Stockton police officer (Yes,he really said that!).

Additionally thousands of police officers were laid off after the financial crisis. Where are they? If you make a records request about applications for open positions, you will feel you are on a railroad by the response. The key is to make the staff produce its evidence of a shortage and that objection should go away. If not, can they really argue that the entity must go broke to maintain the status quo! No. To the extent that high crime cities have a genuine component to its shortage, it will need an on-the-job training plan to fill vacancies at an affordable cost. Ex MPs are a good source for the program.

The other response to pension modification goes to the heart of the public reluctance and lack of information about the issue. The benefits were promised and now they are to be reduced. There are many arguments that should mitigate that reluctance:

(1)  The assets in the DB plan belong to the employees and will not be used except to pay pensions. If a plan is 30% unfunded, the 70% will provide a reasonable retirement if the defined benefit plan is eliminated going forward;

(2)  Pensions exceeding 2%@55 and 2%@50 for safety, were obtained by PERS and local entity fraud;

(3)  Compared to social security, the pensions are much too high, by three to four times;

(4)  Compared to the private sector, the pensions are too high;

(5)  The pension promises were based on unrealistic market returns;

(6)  Each employees union representative was part of the pension scam and unions control PERS;

(7)  Per the California Supreme court employees are only entitled to a “reasonable” pension, not a specific formula;

(8)  Spiking and other illegal activities contributed to the crisis;

(9)  The cost of pensions has curtailed government services, contribute to rising crime and is a dagger to education. Even community colleges can no longer meet demand;

(10)  Deficits compound at 7.5% a year. There is no revenue defense to that fact, so services will continue to suffer due to a lack of funds because of increased pension costs;

(11)  After the defined benefit plan is discontinued in whole or part, employees will be part of the social security system, plus a defined contribution plan, a hybrid system providing fair and financially sustainable retirement security;

(12)  Thanks to the work of Dr. Joe Nation, director of The Stanford Institute For Economic Policy Research and the financial reporting of David Crane of “Govern for California,” reformers have two sources of accurate information about the true state of the pension crisis; impeaching charts used by PERS to mislead the public about the irremediable nature of the pension deficits.

Opponents of reform may respond that Prop. 13 contributed to the crisis. But since prop. 13, sales taxes have increased by 6% and income taxes by 5% and more than make up for lost revenue. If we assume that without Prop. 13 property taxes would be 2% rather than the 1% limit (a doubling), property values would drop proportionally because the higher tax eliminates purchase money. If opponents blame Prop. 13, and they will, polls indicate that voters oppose repealing Prop. 13. Given a choice they will cancel the defined benefit plans and save their communities.

Would a bona fide Chapter 9 that eliminated the entity defined benefit plan reduce its borrowing power going forward? Pension bonds and unfunded pension deficits would be reduced and deficits eliminated, providing cash flow going forward. Entities could fix infrastructure with bond money and the bondholders would have confidence in re-payment because of the improved balance sheet. Using Sonoma County as an example: would bond issuers rather lend to it with its billion dollar pension deficit, or with much of that deficit eliminated?

SUMMARY

(1)  Defined benefit pension plans for government employees are mathematically destined to fail;

(2)  The three chapter 9’s to date did not modify pensions and according to Moody’s, Vallejo is once again insolvent and Stockton and San Bernardino will suffer the same fate for failing to modify pensions in its chapter 9 cases;

(3)  The law is clear that California local entities may modify pensions and other post employment benefits in a chapter 9 plan of adjustment;

(4)  If a local entity has great voter support for pension reform, it may reduce pensions pursuant to the supreme court’s “Kern Doctrine” in order to restore some vital services without a chapter 9; but PERL and CERL administrators may oppose such a plan, forcing a chapter 9.

(5)  Because there has not been a chapter 9 in California wherein a local entity has requested pension modification, there is new legal ground that must be covered, but that is the nature of legal solutions. In the case of pension deficits, a chapter 9 in bankruptcy modifying pensions as part of a plan of adjustment is the only solution. There is no other conceivable reform that can scratch the surface of the problem.

(6)  Modifications to pensions must be fair, taking into account that SB 400 was adopted based on fraudulent representations about its cost.

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Read part one “The Mechanics of Pension Reform – State Actions,” December 22, 2015

Read Kern v City of Long Beach, and Allen v City of Long Beach.

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About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

Note to readers:  During 2012 author John Moore published the “final” chapter of “The Fall of Pacific Grove” in an four part series published between October 20th and November 9th:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

During 2014 author John Moore published the first chapter of “The Fall of Pacific Grove” in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand

Why Pacific Grove Matters to Pension Reformers

UnionWatch has just released the fourth and final installment of “The Fall of Pacific Grove – The Final Chapter,” written by John Moore, who is a retired attorney and resident of Pacific Grove. This four part series constitutes an extended epilogue to a eight part series on Pacific Grove which was published last year on UnionWatch. Links to all twelve installments appear at the conclusion of this post.

Moore’s earlier set of articles describe in detail how Pacific Grove slid inexorably towards insolvency by yielding, again and again, year after year, to pressure from local government unions to award unaffordable pension benefits to city employees. Pacific Grove’s challenges are a textbook case of how there is simply no interest group, anywhere, currently capable of standing up to the political power of government unions. This small city now faces the possibility of selling off every asset they’ve got, primarily real estate, to private developers to raise cash for the city’s perpetually escalating annual pension contributions. They face the possibility of rezoning to allow construction of huge tourist hotels that will destroy the quality of life for residents, in order to enable new tax revenue producing assets to help pay the city’s required pension contributions.

Anyone familiar with local politics knows that one of the only special interests with the financial strength to oppose government unions in small towns are land developers. This end-game, where public assets are sold to developers to generate cash for pension contributions ought to put to rest any remaining debate as to who runs our cities and counties. Of course developers aren’t going to oppose government unions. By extension, and in a disappointing twist of irony, why should any libertarian leaning private sector special interest oppose government unions? As these unions drive our public institutions into bankruptcy, private sector investors buy the assets of our hollowed out public institutions at fire sale prices.

In this new four part series, author John Moore challenges the so called “California Rule” that supposedly makes pension modifications – even prospectively – legally impossible. But he also summarizes another legal approach to reform, one that takes into account the lack of due process and the ignorance of specific commitments made in the original granting of financially unsustainable pension benefit enhancements. It is an approach that has many facets and can be utilized in many California cities and counties. Unfortunately, Moore also exposes why this approach to reform, while viable, was only tepidly attempted in Pacific Grove.

While anyone serious about pension reform should read Moore’s work in its entirety, one of his key points concerns the “California Rule.” He writes:

“Cases discussing state employee pension rights are not germane to the issue of whether a local agency’s employees have a vested pension right, because the discussions in the state employee cases assume that the employees have vested rights, while in non-state cases the issue is whether the legislative body granted a vested right.”

Moore’s point, delved into in great detail in part one, is that unless a lifetime (full career) annual pension benefit accrual at a specific rate is explicitly granted by a legislative body, the presumption is that it is not. This means that changing pension benefits for existing employees from now on, prospectively, in many of California’s cities and counties, is not a violation of the California Rule.

That is hardly encouraging, of course, to pension reformers in those cities and counties where lifetime pension benefits have been explicitly granted at a specific rate of annual accrual for the entire career of any currently working employee. But where Moore’s first point may not apply, his second point might find wide application. Because as Moore alleges in Pacific Grove, an allegation echoed by Californian pension reformers in assorted cities and counties from the Oregon border all the way to Mexico, lifetime pension benefit enhancements were granted without due process.

Whether it was on the basis of negligently optimistic financial projections, the lack of independent financial analysis, missing steps in the oversight, review and approval phases, and other violations of due process both before and after implementation, pension benefits enhancements rolled through nearly every one of California’s cities and counties between 1999 and 2005. Many of them were rubber stamped by politicians who had no idea what they were doing. And many of them violated due process every step of the way.

If pension reform weren’t necessary, then litigation wouldn’t be worth considering. But what’s happening to Pacific Grove will happen elsewhere, if it hasn’t already. In hundreds of cases across California, cities and counties are just one sustained market correction away from selling off their parks, libraries and parking garages to feed the pension systems. And unlike tiny Pacific Grove, many of these larger cities and counties have a sufficient budget to take another shot in the courts to avert that fate. They may save not only their civic financial health. With appropriate reforms, they will also save the pensions.

It is impossible to summarize Moore’s entire body of work in a few hundred words. Pension reformers are urged to review this gripping story of how powerful special interests are destroying his home town, take notes, and think about how some of his ideas may be applied where they live.

*   *   *

Ed Ring is the executive director of the California Policy Center.

Read the entire series – The Final Chapter:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

During 2014 author John Moore published the first chapter of The Fall of Pacific Grove in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

About John M. Moore:  Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

The Fall of Pacific Grove – The Immediate Future

The Final Chapter, Part 4 of 4

The facts and law indicate that the lawyers defending the city in the POA pension reform law suit, directed by the city attorney, and supported by a city council majority, consciously and intentionally failed to uphold two legal ordinances which could have prevented the financial “Fall of Pacific Grove.”

Current annual pension costs for Pacific Grove, including the pension bonds and a new $625,000-per-year charge are about $4 million, soon to increase to $5 million, then $6 million, and increasing forever. Its unfunded deficit grows at about $3 million per year, and in 9.2 years will grow at $6 million per year. Average revenues are about $17 million. The current unfunded deficit (based on a 3.5% income rate) is about $90 million; it will double every 9.2 years. Pacific Grove is upside-down financially.

It is important for pension reformers to understand that a legislative body, after negotiating with the unions, and after impasse, can reduce salaries under California law. Currently salary reduction is the only leverage for pension reform, but it will require the election of a majority loyal to the salary reduction plan to save cities and counties like Marin and Sonoma.

An alternative for Pacific Grove would be to terminate with CalPERS and modify pensions and salaries in a chapter 9 bankruptcy. Bonds like pension bonds get reduced dramatically in bankruptcy, and pay for the bankruptcy.

Neither of the two alternatives will happen in Pacific Grove, because it is impossible to apprise the voters of the impending peril. The local press does not have forensic capabilities in law and accounting, so it refuses to acknowledge the serious financial plight of Pacific Grove and surrounding cities.

20151019-UW-Moore4

 

Pacific Grove’s current commercial district contributes insufficient tax revenue to fund
six-figure pensions for the city’s retirees. Time to rezone and sell public assets!

 

The current Pacific Grove (union controlled) council majority plans to pay for pensions by attacking the current zoning laws and thereby build three large hotels and permit several bars in the downtown area. Pacific Grove is fully built out and has a dearth of parking spaces; it has one-way streets each way, so its current residential culture will disappear with such development. A second plan of the unions and the council is to sell off city property, like the recreation field and center. So far they have granted a long-term lease of its 18-hole municipal golf course. Tennis courts and parks will be sold off for development. There is no alternative without pension reform.

Lack of Impartial Lawyers and Financial Experts

Recent grand jury findings in Marin and Sonoma counties document corrupt pension enhancements since 2002, benefiting all unions, staff, the board of supervisors and the local pension administrators. Marin just announced that next year’s pension contribution cost for each supervisor is $54,000. The Marin county counsel receives an annual retirement payment and a salary that total about $475,000 a year. He was county counsel in Sonoma at the time the corrupt pension enhancements were adopted there.

In both Marin and Sonoma, the agents who planned the illegal pension enhancements were experts in the laws mandated for pension enhancement. The law mandated an actuarial declaration of the yearly cost of the proposed benefit. The lawyers, actuaries and financial experts in both counties had to knowingly and covertly by-pass the law. Including interest on pension bonds, each county now has about $1.5 billion in pension debt (up from almost zero).

Each county hired outside lawyers to respond to the grand jury reports. Each outside law firm treated the beneficiaries and the perpetrators of the wrong-doing documented in the grand jury reports as the client, and wrote astounding mythical legal opinions saying that everything was fine with the law. There were no lawyers in the system to protect the voters and the integrity of the grand jury findings. Where were the district attorneys? Evidently they intend to keep every penny of the illegal pensions.

The State Bar must enter this fray and set forth rules for public agency lawyers that provide legal representation to the voters and protect them from the insidious practices that occurred in Marin County, Sonoma County, Pacific Grove, and cities that went through bankruptcy without modifying pensions.

A Surprise Ending

In the game of golf, there is a saying, “Don’t ever say that things can’t get worse.” They can and do.

Take the POA v. Pacific Grove pension reform law suit as an example:

  1. As referenced above, the law firm of Liebert Cassidy Whitmore (LCW) sponsored a CEB-approved course about the acquisition of vested rights. The course was accurate and faithfully laid out the rules to establish a vested pension or OPEB in California: A+
  2. A partner from LCW applied the referenced principles to convince the trial and appellate court that the South Pasadena POA did not have vested rights based upon years of MOUs and reliance by employees, providing a medical benefit that had been reduced going forward: A+
  3. Pacific Grove was represented by LCW in the POA law suit discussed at length herein. The lead attorney in that defense was the same LCW partner who led the defense in the South Pasadena law suit, and totally failed to explain the principles set forth in the CEB course and in the South Pasadena law suit to Judge Wills, the voters, and the city were defrauded by their lawyers. F-

Conclusion

As demonstrated by this case study, also by the response to the grand jury reports in Marin and Sonoma counties, the current agencies of state and local government are opposite to the interests of its citizens.

I believe there will always be collective bargaining in the agencies; talk of eliminating collective bargaining is a pipe dream.

The problem is that in the current system, the governor, city and county managers and administrators, lawyers, and financial experts are de facto union members. That must change. The executive staff of each agency, particularly the lawyers, administrators, and financial experts, must be removed from the collective bargaining process.

It is beyond the scope of this effort to provide the solution. But as shown in Pacific Grove, Marin, and Sonoma, the current system of de facto union membership will trash each and every pension reform.

Read the entire series:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

*   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

*   *   *

Note to readers:  During 2014 author John Moore published the first chapter of The Fall of Pacific Grove in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

The Fall of Pacific Grove – The Judge's Ruling

The Final Chapter, Part 3 of 4

The parties to the law suit made final oral arguments, and on June 18, 2013, Judge Wills issued his Statement of Decision, setting forth his conclusions and the legal reasoning that led to his conclusions.

First, he found that because the charter stated that the city council was directed to set the compensation of all officers and employees, the people could not process an initiative that set compensation. Recall that the attorneys for the city did not cite the case of Spencer v. City of Alhambra (or any of the 122 cases in which it had been cited) which said that articles in a charter which direct the body that is to set compensation do not preclude an initiative that sets compensation.

The city failed to argue that the city council had in fact adopted the initiative ordinance as its own, thereby complying with the charter.

The city failed to inform Judge Wills that a legislative act, like setting compensation, could only preclude the right to petition a compensation ordinance via the initiative if the charter had expressly excluded that power from the initiative process; and there was no such exclusion in the Pacific Grove Charter.

20151019-UW-Moore3

The Pacific Coast shoreline – rezoning these areas for high-density luxury hotels will
bring tax revenue to the city so they can afford to pay their pension fund contributions.

Measure R was affirmed by a vote of 74% of the voters. It had clarified that Article 25 of the charter was amended (if necessary) to assure that the voters retained its initiative power to set compensation and affirmed that employees did not have vested pension rights. The POA argued that Measure R was too late, because it didn’t apply at the time the council adopted the initiative as its own. Incredibly, the city attorney had not submitted his declaration indicating that Measure R was to apply retroactively to supplement the pension reform ordinance. He could have pointed out that the video of the council meeting placing Measure R on the ballot would have clearly shown that Measure R was to apply retroactively. That was the only reason for Measure R. His failure to point out that he had drafted Measure R to concur in time with the earlier adoption of the retirement reform ordinance was an omission much more serious than malpractice, it was a breach of his fiduciary duty to uphold the ordinance and to act with his singular fidelity to the city and its laws.

Second: Finding that employees had a vested pension right, Judge Wills said:

“The Retirement Contribution Ordinance is invalid in violation of Article 1, Section 9 of the California Constitution, the Contracts Clause. The employees were told that they were to receive retirement benefits under a CaLPERS administered plan with an employee cost set at a fixed percentage of their salary. The fluctuating portion would be borne by the employer.”

“Upon entering employment with such a promise, the employee has a vested right to earn a pension on those terms and conditions.”

“Measure R Resolution 10-055 violates the Contract Clause of the California Constitution for the same reasons.”

“Again, the Court reiterates that what is vested in the employee is a right to earn a pension on the terms promised him or her upon employment. That right commences when the promise is made and the employee then commences or resumes work.”

Based on the facts and the law, the judge was in error on every point he made to justify his conclusion:

  1. Per the city charter, compensation must be set forth in an ordinance. There was no ordinance that promised employees a vested pension right (ever).
  2. Prior to the trial, the court had ruled that the MOU (contract between labor and the city) did not grant a vested right.
  3. Prior to the trial, the court had ruled that the contract to administer pensions between the city and CaLPERS did not grant a vested pension right:
  4. As set forth in the LCW CEB course on vested rights, an “implied” vested right can only be implied from the legislative intent.
  5. Legislative intent by implication looks to evidence that showed the intent of the legislative body at the time of adopting an ordinance or adopting a contract (County of Orange case, South Pasadena case, and other cases). There are no appellate cases contra to this principle.
  6. An “implied” vested right can only flow from a statute or contract that created the benefit, in this case a pension. The issue was not whether a pension benefit was granted, but whether the council adopted an ordinance or contract that promised the benefit for life. The POA did not even argue that there was a statute that granted a vested right, and the only documents it had included in its complaint were stricken from the evidence. The city did not inform the court that a statute or contract was essential to the analysis.
  7. The opinion makes it clear that Judge Wills was unaware that the law presumes that an instrument does NOT create a vested right. He was not even aware that a statute or contract granting a benefit was a precondition to determining whether the benefit was vested (for life). So he hung his decision on alleged oral promises, promises which had not been made by the legislative body.
  8. Only the police unions sued, but the court invalidated the ordinances totally, thereby giving all of the unions not before the court and the non-union staff a gratuitous judgment. Each union negotiated most MOUs separately from other unions. There was no evidence related to their rights.
  9. If there had been a basis for invalidating the ordinances, it certainly was still valid for new hires. New hires had no right to an expectation of any kind. The ordinances would have limited the new hires to a pension whereby the city could pay no more than 10% of salary. Over time, if the city could survive through the cost of current employees’ pensions, Pacific Grove could have been saved by applying the ordinances to new hires. In fairness to the judge, the attorneys for the city did not even request that if all else failed, the ordinances clearly applied to new hires. In the San Jose pension reform law suit, defendant unions stipulated that the contested reform ordinance applied to new hires.
  10. The most critical flaw in the judge’s decision was his failure to apply the two-step process described in the LCW State Bar seminar: was there a benefit? Yes. Was it granted for life, or only for the term of the MOU? Only for the term of the MOU.

Read the entire series:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

*   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

*   *   *

Note to readers:  During 2014 author John Moore published the first chapter of The Fall of Pacific Grove in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

The Fall of Pacific Grove – The City's Tepid Defense of the Vested Rights Lawsuit

The Final Chapter, Part 2 of 4

In June of 2010, the City of Pacific Grove (City) received an initiative petition from a citizen’s group containing the requisite number of signatures. Thereafter the city adopted the petition as an ordinance. The ordinance limited the city’s obligation to pay for employee pensions for work not yet performed to 10% of salary. Employees retained full credit for work already performed. At that time, the city attorney and city manager openly and intensely opposed the adoption on political grounds. In an attempt to raise a legal objection, the city attorney referred to Article 25 of the city charter, which indicated that compensation should be set by the city council. He argued that it could not be set by initiative.

There were two problems with the city attorney’s legal point: first, the council was in fact adopting the ordinance as its own, and second, because setting salaries was a legislative act, it was subject to the citizens’ power of initiative regardless of the gratuitous charter directive that the council should set salaries; that point had been held in the case of M.R. Spencer v. City of Alhambra (as of this writing it is good law and has been cited in 122 appellate cases). The only way that the people could have excluded “compensation” from the initiative power was to set forth the exclusion in the charter, and it had not.

The council approved the ordinance 6-1; the current mayor who was and is against any pension reform for Pacific Grove was the lone dissenter. He was elected mayor in November 2012 (along with two other pro-union anti-pension reformers), and that became important in allowing the unions, the city attorney, and city manager  to ultimately defeat the pension reform measure by throwing the law suit challenging the ordinances. What follows is a description of how they pulled it off.

20151019-UW-Moore2

The Monarch Butterfly’s Pacific Grove Sanctuary – selling this to developers might
pay for one year of employer pension fund contributions! Maybe even two years!

When I first learned of the pension reform initiative, I had the three legal sponsors of the initiative delay obtaining signatures until I had researched whether PG city employees had vested contract rights by actual contracts or by a statute or the charter. Through public record requests, I reviewed the original charter (1927) and every change going forward. Until 1955, the charter expressly prohibited a pension. In 1955, the charter was amended to allow the council to enroll the city in a pension plan where the sole obligation of the city was to pay premiums. Another part of that charter provision allowed a “complete” (vested) pension plan by a vote of the people. In 1957 the council, without a vote of the people, authorized the city to join CaLPERS. Thereafter, there were no further amendments to the city charter dealing with pension rights.

I reviewed all of the resolutions, codes, and ordinances, together with all MOUs (contracts between the city and labor) and the contract and all amendments thereto between the city and CaLPERS from 1957 to date.

There was no document that even hinted that the pension rights were vested. To the contrary, because there was no vote of the people approving a “complete” pension it was clear that if it was claimed that joining CaLPERS created a vested pension right, it was void because of the absence of a vote of the electorate. As noted, in the POA case, the court had made a pre-trial ruling that there were no documents that created a vested pension right.

Article 16 of the city charter states: “The right of initiative and referendum is hereby preserved to the citizens of the City to be exercised in accordance with procedures proscribed by the Constitution and General Laws of this State.”  If the citizens wanted to prevent initiatives about compensation, then it needed to say so in Article 16, but did not. Otherwise, as a legislative act, fixing salaries and compensation was reserved to the people in the initiative power (Spencer). And of course, the council did in fact adopt the pension reform ordinance as its own.

As a safety measure, at the time that the council adopted the pension reform ordinance, it had the city attorney prepare a council-sponsored ballot measure that simply clarified that the people had the authority to sponsor an initiative about compensation regardless of Article 25. It also reaffirmed that employees did not have and never had vested pension rights The measure became Measure R on the ballot. Because it was sponsored as part of the pension reform ordinance, it was clearly intended to be retroactive to protect the ordinance from any claim that it could not save the ordinance because it came after adoption of the ordinance. The city attorney was clear that the measure was timely to protect the reform ordinance. Otherwise, why bother? And of course it was unnecessary because the law was so clear that the people retained the legislative power to set salaries and compensation. You can probably guess how the city attorney and SF counsel took a dive on this issue in the trial.

In November 2010, the Pacific Grove Police Officers Association et. al. (POA) sued the city, alleging that the new ordinances breached vested pension rights as set forth in MOUs and the contract with CaLPERS; that only the council could set compensation and setting compensation was not subject to the initiative (Article 25 of charter); and that plaintiffs had an “implied vested pension right” based on hiring advertisements and oral statements made by a city administrator to new hires.

During 2011 through November 2012, the law suit was processed on normal punch and counter punch practices. The city initially had notable success. On July 27, 2011, the court (not by the trial judge) made its order granting the city judgment on both POA claims that it had vested pension rights arising out of the MOUs between the city and the unions and arising out of the contract between the city and CaLPERS. The POA had not referred to any statute, code, resolution, or charter provision as the basis for a vested pension right, so that left the unlikely claim of a vested pension right by implication. But the law is clear, as set forth in the CEB seminar and the cases, that even such a claim must have its genesis in a legislatively adopted contract or a statute, and there was none. The trial court was not informed of this by Pacific Grove’s attorneys, who as experts in the legal issue, knew this requirement beyond all doubt.

In November 2012, Bill Kampe, a dyed-in-the-wool union backer was elected mayor, replacing then-mayor Carmelita Garcia. Garcia was a determined pension reformer whose love of the city was like a tattoo on her forehead.  After Kampe’s election, defense of the POA case by the city deteriorated from winning to lost; based on its attitude and statements, it became clear that the Kampe council majority hoped that the city would lose the law suit. Per the charter, the council, the city attorney, and the city manager all had an unqualified duty to enforce the pension reform ordinance. Measure R passed by a vote of 74% of the voters and thereby created a second pension reform ordinance that was challenged in the POA law suit.

I was concerned because it was clear that neither the city attorney, nor the San Francisco law firm defending the city, was aware of the content of my research of the charter, codes, resolutions, ordinances, MOUs, and other contracts. The history about the prohibition in granting a vested pension in the charter at the time PG joined CaLPERS would have defeated any claim of a vested pension right. And in particular, the CA Supreme Court had stated that there could be no implied vested right if it violated a legal prohibition. The vote requirement of the charter was such a prohibition.

When the POA sued, I protested to the council and the city attorney about the city attorney’s bias as openly displayed by him at the time the city adopted the pension reform ordinance. I, joined by the sponsors of the initiative, demanded that he not be involved in defense of the POA law suit. Regardless, he was allowed to choose and to supervise the lawyer selected to defend the case. In doing so, he restricted the lawyers from interviewing Dr. Daniel Davis and me.

Dr. Davis was the author and one of the three sponsors of the initiative adopted by the council. He had served for years on the city planning commission and two terms as a member of the city council. He was a practicing mathematician, with graduate degrees from Georgia Tech and a Ph.d. in math from Cal Tech. He had worked as a scientist at the Monterey Bay Aquarium Research Institute (MBARI) for 18 years, interfacing with David Packard. He was the key representative of the thousands of citizens favoring the pension reform (74%). He was ably qualified, and in 2008 wrote an academic-quality article about the risks arising from defined benefit pension plans. How could he not be allowed to participate in the defense of the law suit? Unless, of course, the mayor and the attorneys wanted to lose the law suit (at a defense cost of hundreds of thousands of dollars).

After the 2012 holidays I became very concerned that the city was not prepared for the trial of the POA law suit. I had made numerous e-mail requests to the city council and the SF attorneys demanding that Dr. Davis and I be allowed to participate in the defense of the vested rights case. Trial of the case was set for March 21, 2013. I met with Mayor Kampe and councilmen Cuneo and Huitt on March 13, 2013 and explained the need for our participation in the case. I received nothing in response, just blank looks. No “Yes,” no “No,” just “This meeting is over.”

On February 22, 2013, each side in the law suit filed its trial brief. I read both briefs and concluded that the city attorney and the SF lawyer wanted the city to lose the case. Why did I believe that? Most importantly, the city brief did not inform the judge about the law and evidence necessary for the POA to prove a vested right. The judge should have at a minimum been provided the six points listed in Part One from the LCW CEB seminar.

As set forth in the CEB seminar, when analyzing whether a pension or other benefit is vested, the beginning point is the language of the document conferring the benefit; and that vesting is a two-step process: is there a valid contract conferring the benefit, and if so does the contract contain an express or implied term that the benefit is not just for a limited term, but vested for life? Most importantly: there is a presumption that a vested right has not been created and the POA had the burden of producing evidence (the burden of proof) to overcome the presumption. The judge was not even informed of this basic principle.

The law in the case was so basic. The attorney for the city, supervised by the city attorney, did not inform the trial judge of the simple rules for determining the existence of a vested contract right. The omission concerning the presumption against creation of vested right, that put the burden of proof on the back of the POA, was well beyond legal malpractice.

As I have demonstrated, the judge assigned to the case had no understanding of the city’s defenses because the trial brief did not inform him of the basic law of vested contracts. I attended the first day of the trial. It was assigned to Judge Wills. By agreement, the case was submitted on declarations, documents, and judicial notice of documents. There was no testimony.

Judge Wills acknowledged that he had never seen the file until that moment and that he would review the file and the trial briefs and decide the matter. The city had turned a case that could not possibly be lost into a certain loser. I wrote several e-mails to the council and the press explaining how the case had been intentionally thrown.

Was there a statute, charter provision, code, ordinance, or resolution that provided for a vested pension benefit? No. To this day, none has been asserted by the city or the unions. There is none.

Was there an implied term in any of the statutes, charters, codes, ordinances, resolutions, or contracts that created an implied vested contract right? As set forth in numerous cases like Retired Employees of Orange Co., Inc. v. County of Orange, the implied vested right must flow from concurrent evidence surrounding the time of adoption of the contract or statute (minutes, agenda reports, etc.), not an oral utterance or publication for new hires years later. Attorneys reading this must be thinking, “How in hell could the court admit a hearsay statement made 50 or more years after adoption of the benefit? How could one witness be allowed to testify in a declaration that all new hires were told they had a fixed-cost pension benefit?” Even the declaration of the witness was not so raw as to say that they had been promised the benefit for life. Both the city and SF attorney understood that for the last 40-50 years, retirement benefits for new hires were set forth in a writing, an MOU agreed to after collective bargaining; the best-evidence rule required that the writing, not an oral comment of one union member to another, was the best evidence of what employees were to receive as pensions. And the court had already ruled that the MOUs did not create vested contract rights. But the attorneys for the city could have, but did not, object to the hearsay declaration of the union witness. In my view, a failure of that magnitude could only be intentional. Both the city an SF attorneys were experts in this area of the law.

According to the Pacific Grove Charter, “The compensation of all officers and employees shall be fixed by Ordinance.” Under the law there are no exceptions to such a provision. In June 2012, LCW in its California Public Agency Labor and Employment Blog discussed the case of San Diego Firefighters, Local 145 v. Board of Administration of the San Diego City Employees Retirement Board. In the case, the appellate court held that because the benefit in question had only been approved by a resolution and not an ordinance as required by the city charter, the contract granting the benefit was void. So clearly, oral statements by administrators describing compensation as asserted by the POA could not possibly grant a vested right. Only an ordinance could do that. The case also held that there was no estoppel based upon the employees’ reliance on the contract. The case was not cited in the city brief.

As set forth in the LCW CEB seminar outline, it is “legislative intent” expressed at the time of the adoption of a contract or statute granting the pension benefit that is critical to establishing an implied vested pension right. Why? Because, by law, the only intent that could create a vested contract right is the legislative intent (the city council); after it adopts a contract or statute, the only type of evidence that supports an implied claim is evidence “concurrent with the adoption,” but not set forth in the document.

An administrator informing a new hire of the current pension plan orally or in a publication of any kind 50 years later cannot prove the required legislative intent.  LCW proved that beyond all doubt in its defense of the city in the South Pasadena case discussed above. To date, all of the appellate cases that dealt with a claim of an implied vested right have been lost by the claimants. In every case, like the Orange County case and the South Pasadena case, claimants argued that decades of  MOUs proved a vested benefit right. They lost because they could not show legislative intent by evidence concurrent with the time of adoption of the benefit.

What evidence would provide the legislative intent to grant a vested right although the contract or statutes did not? I believe a concurrent agenda report or benefit committee report that made it clear that the adopted benefit was intended to be for life would do the trick. But that is just my opinion.

After reviewing the trial briefs, Dr. Davis and I independently did what we could. Dr. Davis wrote a letter to the council indicating that the city’s brief did not set forth even a token defense, let alone the clear winning evidence. Dr. Davis said: “We have repeatedly pointed out that the City Attorney’s opinions . . . created a conflict of interest with regards to a defense of the 2010 initiative. . . . Now that the City has utterly failed to defend the fundamental basis of pension reform in the POA law suit the City has proven that our fears were justified.”

I wrote several e-mails to the city council, the SF attorney defending the case, and even met with the pro-union mayor and two of his council yes-men prior to trial. I expressed that based on the city trial brief, the case was not ready to be tried, would be lost, and that it was imperative that Dr. Davis and I be allowed to participate in defense of the city’s case. It did not happen. The Kampe council majority, the city attorney, city manager, and the unions made sure that the city lost the pension reform law suit.

Read the entire series:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

*   *   *

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

*   *   *

Note to readers:  During 2014 author John Moore published the first chapter of The Fall of Pacific Grove in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

The Fall of Pacific Grove – A Primer on Vested Rights

The Final Chapter, Part 1 of 4

Editor’s Note:  In early 2014 we published a eight part series, “The Fall of Pacific Grove,” written by retired attorney and Pacific Grove resident John Moore. It describes in detail how this small coastal city slid inexorably towards insolvency by yielding, again and again, year after year, to pressure from local government unions to award unaffordable pension benefits to city employees. Pacific Grove’s challenges are a textbook case of how there is simply no interest group, anywhere, currently capable of standing up to the political power of government unions. This small city now faces the possibility of selling off every asset they’ve got, primarily real estate, to private developers to raise cash for the city’s perpetually escalating annual pension contributions. They face the possibility of rezoning to allow construction of huge tourist hotels that will destroy the quality of life for residents, in order to enable new tax revenue producing assets to help pay the city’s required pension contributions. Anyone familiar with local politics knows that one of the only special interests with the financial strength to oppose government unions are major developers. This end-game, where public assets are sold to developers to generate cash for pension contributions ought to put to rest any remaining debate as to who runs our cities and counties. Of course developers aren’t going to oppose government unions. By extension, and in a tragic twist of irony, why should any libertarian leaning private sector special interest oppose government unions? As these unions drive our public institutions into bankruptcy, private sector investors buy the assets of our hollowed out public institutions at fire sale prices.

In this new four part series, author John Moore challenges the so called “California Rule” that supposedly makes pension modifications – even prospectively – legally impossible. But he also summarizes another legal approach to reform, one that takes into account the lack of due process and the ignorance of specific commitments made in the original granting of financially unsustainable pension benefit enhancements. It is an approach that has many facets and can be utilized in many California cities and counties. Sadly, Moore also exposes why this approach to reform, while viable, was only tepidly attempted in Pacific Grove. Regardless of how Pacific Grove’s situation evolves, what Moore has come up with here offers insights to anyone serious about pension reform in California.

The California State Bar governs the practice of law in California. Licensed active attorneys must continue their education by attending Continuing Education of the Bar (CEB) courses on a wide variety of subjects. Recently the law firm of Liebert Cassidy Whitmore (LCW), a large multi-office law firm emphasizing public law, was authorized by the State Bar to present a CEB course entitled Understanding “Vested” and Other Post-Employment Benefits. In order to understand precisely how the city government of Pacific Grove (city attorney, city manager, unions, and a union-backed council majority) defeated citizen pension reform, I can now, for the first time, with reliance on the course materials and the seminar, set forth important established principles of vested pension rights in California government agencies without being subjected to the retort that my assertions are only my opinions. The LCW seminar materials provide ample gravitas to my assertions. But first, here are some general principles that limit the applicability of vested right determinations.

Principle One: As set forth in the CA Supreme Court case of Valdez v. Cory (1983), state employees have vested pension rights. The court found there was a statutory scheme that gave state employees a contract right that continued for the life of each affected employee and was protected by the state and federal contract clause. Cases discussing state employee pension rights are not germane to the issue of whether a local agency’s employees have a vested pension right, because the discussions in the state employee cases assume that the employees have vested rights, while in non-state cases the issue is whether the legislative body granted a vested right.

Principle Two: California Teachers Assn v. Cory (1984), like Valdez, grants teachers in the State Teachers Retirement System a vested pension right.

Principle Three: Certain counties and some other local public agencies provide pension benefits pursuant to the County Employee Retirement Law (CERL). There is no case holding such benefits as vested, but a government code provision provides that benefits cannot be reduced or eliminated without the consent of all agency unions. A trial judge in Ventura found that unlike CaLPERS, CERL agencies did not have the right to terminate its plan. Its pensions are clearly vested-like.

Principle Four:  The California Constitution grants plenary authority to charter cities to provide for compensation of officers and employees (Article XI, Section 5[b]).

20151019-UW-Moore1
Will Pacific Grove’s parks be sold to developers to fund pension contributions?

There is no sweeping principle that provides a vested-right litmus test for particular at-law cities, charter counties, charter cities, cities and counties in CaLPERS and other cities and local municipal agencies.

The LCW CEB seminar sets forth the general rules that govern the process to determine whether a governing body had granted a vested pension or other post-employment right. Here is a summary  of those rules, based on the seminar and CEB course documentation:

  1. Vested rights are created by contract (that contract is protected by the state and federal contract clause). Contracts can create vested rights, but also charters, ordinances, resolutions, codes, etc., dependent on the expressed intention of the legislative body.
  2. When analyzing whether a pension or other benefit is vested, the beginning point is the language of the document conferring the benefit.
  3. Vesting is a two-step process: Is there a valid contract conferring the benefit, and, critically, does that contract contain an express or implied term that the benefit is only for a limited term or is it vested for life?
  4. The established rule, supported by a legal presumption, is that a statute–like a charter, ordinance, resolution, or contract–does NOT create vested contractual rights. Employees have a heavy burden of proof to overcome the presumption.
  5. Written contracts like MOUs (contracts between labor and the employer) and contracts with a pension administrator like CaLPERS have the potential to contain contract language vesting a benefit, but rarely do. In the 2013 Pacific Grove vested rights law suit, the court, in a pre-trial ruling, held that neither the MOUs, nor the contract with CaLPERS, granted vested contract rights. Recently, the US. Supreme Court in M&G Polymers, Inc. v. Tacket (2015) held that benefits (medical) provided under a collective bargaining agreement are presumed to expire when the contract expires.
  6. The final area covered in the seminar dealt with implied vested contract rights. As an example, for analysis, LCW discussed the 2015 case of South Pasadena Police Officers Assn et al v. City of South Pasadena. LCW in fact defended that city against a claim that plaintiffs had a vested contract right to certain medical benefits at a fixed cost. To succeed in such a claim, the facts must show that the legislative body intended to grant the claimed benefit for life. Such claims are very difficult to prove, and the LCW attorney successfully and adeptly defeated the claim.

In the Pacific Grove case, the Pacific Grove POA argued that evidence set forth in the affidavit of a police officer and job advertisements indicated that new hires were entitled to a “fixed-cost pension benefit” and hence an implied vested pension right for all. That turned out to be the KEY issue in the law suit.

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Why is there so much confusion about whether a government agency has granted a vested pension right? In my experience, the present confusion is caused by statements by commentators, CalPERS, city, county, and agency lawyers describing the law that applies IF it has been established that a vested contract right existed. Quotes from Allen v. City of Long Beach (1955) are consistently out of context.

Kern v. City of Long Beach and Allen, were the foundation of the California Rule, which holds that in California (and 12 other states), if employees have a vested pension, not only pensions earned are vested, but employees are entitled to the rate of the current benefit and any increases for life (a benefit for work not yet performed cannot be eliminated). Earlier, in Kern, the Supreme Court held that a certain pension right set forth in the Long Beach charter could not be unilaterally eliminated by the city because current employees had a vested contract right created by the charter. A later attempt by the city to increase the employees’ contribution rate from 2% to 10% was struck down in Allen as a violation of that charter-granted vested contract right.

The confusion arises because quotes from Kern and Allen are cited as if the state and federal contract clauses created a vested pension right upon the date of employment without first establishing that a contract or a statute (charter, ordinance, resolution) had created the vested contract right for work not yet performed. In Pacific Grove, there was never any such statute, or any vested right to any employment contract ever adopted by the city legislative body or the charter. In both Kern and Allen a charter provision created such a right. The federal and state constitution protected the contract right, but did not and could not create it for a charter city like Long Beach or Pacific Grove.

Part Two will discuss Pacific Grove’s unprecedented non-defense in opposing the POA claim that the Pacific Grove police had a vested pension right based NOT on a document indicating legislative intent, but  by a claimed instance of an oral contract between one administrative city agent, possibly the police chief, and one newly hired police officer, opining that all new hires had been told they had a fixed-cost retirement benefit.

Additionally, both Kern and Allen distinguished modifications by an agency when there is no financial threat of the pension system losing its integrity (the ability to pay pensions). If facts were presented showing that a pension system was flawed, e.g. that by mistake or fraud its cost was so great that all pensions were threatened, the system could be modified without off-setting benefits. The most oft-quoted misstatement of Allen is: “Reasonable alterations of pension rights must bear some reasonable relation to the theory of a pension system and its successful operation, and changes to a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.” The court went on to say (this is always omitted by commentators): “There is no evidence or claim that the changes enacted bear any material relation to the integrity or successful operation of the pension system.” Also in Allen (and earlier in Kern), the court said again: “The city does not claim (that changes) were necessary to preserve the pension program applicable to persons employed prior to March 29, 1945 (the date pensions were eliminated in Long Beach) and there is no indication that the city would have difficulty in meeting its obligations.” Several cases where pensions were reduced without off-setting benefits, because the integrity of the pension system was in peril, were cited in Kern and alluded to in Allen.

In other words, Kern and Allen dealt with a city where there was no threat to the ability of the system to pay pensions, but both cases made it clear that even agencies that have created vested pension rights may claim that the vested pension rights are unsustainable, but it must offer financial evidence that the system is failed. A court, pursuant to Kern and Allen, could find that the financial condition justified a reduction of vested benefits without off-setting benefits. No such evidence was offered in Kern or Allen, but it is maddening that pension reformers do not demand that legislative bodies reduce even vested benefits pursuant to the integrity doctrine of Kern and Allen. Almost all California pension systems are irrevocably under water financially. And the assertion that Allen stands for the proposition that vested pension rights have been created by the courts without the creation process described in the CEB LCW seminar is simply based on ignorance.

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About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

Read the entire series:

The Fall of Pacific Grove – A Primer on Vested Rights
 – The Final Chapter, Part 1, October 20, 2015

The Fall of Pacific Grove – The City’s Tepid Defense of the Vested Rights Lawsuit
– The Final Chapter, Part 2, October 27, 2015

The Fall of Pacific Grove – The Judge’s Ruling
– The Final Chapter, Part 3, November 2, 2015

The Fall of Pacific Grove – The Immediate Future
– The Final Chapter, Part 4, November 9, 2015

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About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

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Note to readers:  During 2014 author John Moore published the first chapter of The Fall of Pacific Grove in an eight part series published between January 7th and February 24th. For a more complete understanding of the history, read the entire earlier series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

Judge Quashes Pension Reform Initiative in Pacific Grove

Monterey County Superior Court Judge Thomas Wills ruled on June 26th that the 2002 ordinance enhancing public-safety pensions was legally enacted, and therefore could not be voted on by the citizens of Pacific Grove.

To put the decision in perspective, Judge Wills encouraged the citizens to Appeal his decision. His decision was based on his opinion that it was “plain” to him that Govt. Code 7507 was not “mandatory.” That code section stated that the city council could not adopt a pension increase unless it first learned the “future annual costs” from a qualified actuary and made the estimated annual cost known to the public, at a noticed public meeting.

I used the word “plain” because that is the legal standard for a judge to prohibit a vote on an initiative. If Govt. code 7507 is not mandatory, that fact must be “plain.” It is not the test that based on the evidence the judge first concludes that a statute is not mandatory and then based on that finding rules that the proposed initiative is “plainly invalid.”

Judge Wills noted that his opinion that Govt code 7507 was not mandatory is a legal issue of first instance and therefore a test case via Appeal was called for.

In one sense, his opinion that whether Govt code 7507 was mandatory has not been litigated is true, and that is that never before in the history of that code has anyone had the ballderdash to assert that it was only directory as an issue in a case. But there are several cases that assumed it was mandatory and neither side raised the issue of whether it was or not. Govt. Code 14 says that is mandatory and CaLPERS says that it is mandatory.

But what does the Ca. Supreme court have to say about whether it is/was mandatory? In VOTERS FOR RESPONSIBLE RETIREMENT v. BD. OF SUPERVISORS OF TRINITY COUNTY et al, 8 Cal 4th 765 (1994) the court said:  “In addition section 7507 provides that the local legislative body, before adopting increases in public retirement benefits for its employees, must obtain actuarial evaluations of future annual costs of the plan, and make that cost information public “at a public meeting at least two weeks prior to the adoption of any increases in public retirement plan benefits.”

“Must” sounds Mandatory? Right? Probably not to City Atty. Laredo, or the mayor.

In the case before judge Wills, there was NO evidence of a noticed public meeting wherein the notice indicated that a pension retirement plan increase and the “future annual costs” of that plan would be revealed in the meeting. And the law is clear that an Agenda Report can “Never” supply that notice even if there was a direct reference to it (e.g.”see Agenda Report). And there was not even a reference that an Agenda report existed in the instant case. So, if 7507 is mandatory, the 2002 adoption was illegal and the initiative is valid.

I am waiting to learn whether the PG-Three will Appeal before taking my gloves off. If they appeal and the judgement is stayed, the appeal could not be concluded, so the Initiative would be on the ballot. That contest would be exactly what this city needs—the pension reformers running for office and encouraging voters to elect them and to vote for the initiative. And the Unionist like Kampe, Huitt, Fischer, Cuneo and Cohen on the other side trying to explain why they have not done anything while in office but to protect the ill gotten gains of our troubled police union and our departed fire dept.

The above are the opinions of John M. Moore/ PGTA.

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Click here to read more posts by John Moore.

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although Moore did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. Moore is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner at his law firm, Moore understood the goals of bankruptcy filings and its benefits and limitations.

Comparing Pension Reform in Pacific Grove vs. Bakersfield

Editor’s note: Several times this year we have published in-depth investigative reports written by John Moore, a citizen activist living in Pacific Grove. This recent letter from Moore was addressed to the local newspapers serving Pacific Grove. Moore is unhappy with the coverage these newspapers have given the city of Pacific Grove’s pension crisis. The Monterey County Herald is a daily. The Cedar Street Times is a weekly, printed each Friday and is the only Pacific Grove newspaper. The editors of these newspapers have a journalistic obligation to provide accurate and balanced reporting on the pension crisis in Pacific Grove. Given the magnitude of the financial challenges facing Pacific Grove because of pensions, it is also their journalistic obligation to investigate serious allegations of financial misconduct relating to Pacific Grove’s pension obligations.

An open letter to the editors of the Monterey County Herald and the Cedar Street Times from John Moore, a Pacific Grove resident:

I continue to list your papers as the primary recipients of my pension reform circulars, because your reporting indicates more than a reluctance to factually describe the recent pension history of Pacific Grove. So you need to know what is going on. Whether you consider my research and opinions news is for you to decide.

In 2002, both Pacific Grove and Bakersfield adopted 3%@%50 for Police and Fire. It was a 50% pension increase negotiated by the fire and police unions. At that time, both cities already had significant pension deficits. Until 2001, both cities had generous surpluses in their pension plans. Until 2002, both cities had a 2%@50 pension plan for the safety unions (2% x number of years service x final salary at retirement).

By 2006, Pacific Grove had an unfunded pension deficit of about $19,000,000 and Bakersfield had a pension deficit of about $93,000,000. Of course Bakersfield is much larger than PG, but, based on population, Pacific Grove had a larger deficit per resident.

In 2010, Pacific Grove adopted a citizen’s initiative that capped the city’s annual pension contribution going forward, at 10% of salary. In 2010, Bakersfield voters adopted Measure D which, for new public safety hires, reduced the pension back to the 2%@50 level.

In both cities, the safety unions sued. In Bakersfield, the case was thrown out of court and the reform is in place. By now about half of the police and fire are new hires receiving the lower pension. In Pacific Grove, as I have documented several times, the City council allowed a seriously conflicted city attorney to supervise the reform law suit to defeat, by assuring that key evidence was not put before the judge.

The Cort-Colangelo city council simply allowed city manager Jim Colangelo (city manager 2006-2009) and city attorney David Laredo to multiply the pension deficit via borrowings, raises, a costly fire dept. merger etc. etc.

The current council majority basically takes the position that nothing can be done at the local level. The Bakersfield example proves otherwise.

Please understand, that I do not believe that any of the council members are criminals (like in the Bell, Ca. case). But the council majorities simply do not want to “confront” the likes of former city manager Jim Colangelo, current city manager Thomas Frutchy and city attorney David Laredo. Instead of demanding reform, the council majorities have allowed the city managers and city attorney Laredo to bury Pacific Grove in debt that is at least ten times more than a small town like Pacific Grove could possibly handle.

Pacific Grove has lost its fire dept. and Museum. The police dept. is in a constant state of disgrace. Recently it was learned that a tenured Commander and his wife were in effect, running a criminal gambit out of the Pacific Grove police dept. for at least a couple of years. Former police Commander Nyunt has pled guilty to several felonies in both state and federal court and is now in federal prison. His ex-wife is in jail awaiting trial on charges of identity theft of victims she identified via her husbands access to police computer programs. These facts were printed several times in the Monterey County Herald. And all this happened right under the noses of the responsible supervisors; the Chief and the city manager. The city manager even placed a letter on the city web site that defended the now incarcerated criminal Commander – before the commander pled guilty.

In San Jose, Salinas, Stockton and several other cities, the police and fire depts. claim that without the 3%@50 pension benefit, recruiting will be affected. Most citizens feel that 2%@50 (60% of final salary) at age 50, is ample. But what are the facts?

In Bakersfield, in 2011, the first year of the reduced pension benefits, Bakersfield recruited a few dozen “new hires” who would receive the reduced pension. It had just over 1,000 qualified applicants.

I believe that the current Pacific Grove unfunded pension deficit is about $45,000,000. There are still 15 payments of about $1,500,000 per year due on the 2006 pension bonds, or, about $22,500,000. Three council seats are up for election in November, including mayor. The 2014 election is the defining moment for Pacific Grove. Pacific Grove needs and deserves three strong new council members who will defend this once great town. The decisions going forward are daunting, but must be made. It will be hard work.If Bakersfield could do something, so can Pacific Grove.

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Click here to read more posts by John Moore

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although Moore did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. Moore is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner at his law firm, Moore understood the goals of bankruptcy filings and its benefits and limitations.

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009

Part 7 of 7:

How the City and Unions Covered Up the Illegal Pension Enhancements

In 2009, through a series of public records requests, I discovered a document entitled “Contract Amendment Cost Analysis.” It was the document mandated by State Government Code Section 7507 (for the 2002 pension increase for the safety unions), which said: “The . . . local legislative bodies shall secure the services of an enrolled actuary to provide a determination of the actuarial impact upon future annual costs before authorizing increases in public retirement plan benefits.” I showed the report to one of the members of the 2002 Pacific Grove city council, and he shared its astonishing content with other members of the 2002 council. The local legislative body in Pacific Grove is the city council. The report by the CalPERS actuary was hidden from the 2002 city council. In 2002, the city manager informed the city council that the annual cost for the new pension benefit for safety was $51,500. The newly discovered actuary report indicated that the actuary’s estimated cost exceeded $800,000 per year (and in fact, it cost about $900,000). Case law holds that the failure to provide the legislative body with the mandated report is fatal to (voids) a grant of any new retirement benefit. As set forth in part 6, the adoption of the new benefit also violated the “debt limit” established by the state constitution (Article XVI, Section 18).

After discovery of the report in 2009, Dr. Daniel Davis (a member of the 2002 council) and I constructed the Davis-Moore report, a chronology of the actual city documents that proved beyond all doubt that the 2002 retirement benefit had been adopted illegally.

We were asked to meet with the city attorney, and we did. Within five minutes into that meeting, it was clear that a “cover up” of the illegal adoption was in the works. The city attorney suggested wild fanciful theories as a justification for adoption of the illegal benefit. Since then he has acquired three legal opinions that the 2002 adoption was probably legal. Not one of the opinions discussed: (l) the fact that the council had not received the mandated actuary report; (2) that the actuary report stated that the future annual cost per year exceeded $800,000, not $51,500 as the council had been informed; and (3) that the new benefit granted full credit for prior years of service. None of the opinions even referenced the 2002-2003 budget that readily showed an absolute constitutional “debt limit” violation. All three opinions simply ignored the material facts and omitted the statutory and case law that applied to the case.

In my view, here is what followed after public announcement of the discovery of the mandatory actuary report in 2009. One of the safety union members contacted Ross Hubbard, who was the 2002 city manager. He flew out from Florida to Pacific Grove believing that he could clear things up. But he was shown the Davis-Moore report, which revealed the actuary report that he had hidden in 2002. He indicated to the union leaders that the safety unions had worked hand-in-hand with him in 2002 to get the new benefit adopted by the council without the council and the public knowing the true cost. He and the unions believed that the council would not have adopted the new benefit if it knew the true cost, because there was no present or future revenue to pay for it. Because he implicated the safety unions, he was encouraged to return home without comment. Since 2002, the city unfunded pension liability has grown to about $75 million+. About $45 million of that sum grows at 7.5% per year compounded.

The Way Forward

Pacific Grove arrived at its present financial condition because of artificial collective bargaining, nonmarket-based salaries, CalPERS misrepresentations, collusive defense of a pension reform law suit, the cover-up of an illegal pension increase, a pension deficit-inducing fire department merger, and fiction-based legal and consultant opinions. But the most important factor was the council’s inability to deny the unions raises and pensions for which there were not, and will never be, the revenues necessary to pay for them. After discovery of the hidden actuary cost report for the 2002 pension increase in 2009, Daniel Davis (Ph.D., Math), a member of that 2002 council, revealed the contents of the report to the other members of that council.

The six who responded affirmed that–had they known the true cost of that benefit–they would never have voted for it. There obviously were not sufficient revenues for the next decades to pay for the new obligation.

Retired Fire Chief Don Gasperson (recently deceased), a highly respected Pacific Grove citizen, responded to Dan Davis (in an email) as follows:

“To answer your question, I voted for an increase in Public Safety Retirement from 2%@50 to 3%@50 in June of 2002 because the information presented indicated that the costs were acceptable. Prior to my vote on this issue, my thinking was that as a retired Public Safety employee of 37 years, my retirement of 2%@50 was a very fair retirement. During most of my working years retirement was ½%@ age 55. As I remember, many other cities had adopted the 3%@50, including the city of Monterey, so it was my concern as well as the Fire Chief and Police Chief at that time, that without 3%@50, the city of Pacific Grove could have problems in recruitment. Based on the amount of money we were told was required to adopt the 3%, I did approve the increase. With the information you quoted to me yesterday, I would have NEVER voted for the 3%@50, NO MATTER WHAT THE CONSEQUENCE MIGHT HAVE BEEN!” [Emphasis Don Gasperson].

To protect Pacific Grove, voters need to elect realists like Mr. Gasperson to the council in November 2014. Hopefully, the voters will also be allowed to vote to repeal the 2002 illegal adoption of a pension increase for safety that was procured by fraud and sustained through coverup. Or, the newly elected council could repeal it.

If five reformers are elected to the council in 2014, its first action must be to replace the current city manager and city attorney with a non-conflicted expert dedicated to solving the pension-salary bubble. Until that change is made, the situation is hopeless. Eventually, CalPERS will sue Pacific Grove for its multi-million-dollar pension debt to impose a parcel tax on all real property located in Pacific Grove. There are defenses to such an action, but not if the city simply takes another dive as the facts indicate it did in the recent pension reform law suit and the continuing cover-up of the illegal adoption of huge pension increases for the safety unions in 2002. In my view, after removing them, the city should hold the current city manager and attorney accountable for the dive and for the pension increase cover-up. Get them under oath!

On Dec. 3, 2013, the judge in the Detroit bankruptcy case ruled that city pension obligations may be modified under federal bankruptcy law. The ruling is instructive and may provide Pacific Grove with needed leverage; but, first it must elect a new city council that then replaces the current city manager and city attorney. Finally, it must get out of CalPERS, no matter what.

Read the entire series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions

Part 6 of 7:

Unions Will Seek Court Imposed Tax Increases Instead of Reform

In a corporate bankruptcy, the judge can close down the business, sell the assets, and determine which creditors get paid. But in a municipal bankruptcy (MBK), a judge cannot force a city out of business. The city should come out of bankruptcy in a condition to provide municipal services, but that will not happen in Pacific Grove unless the city requests a modification of both pensions and salaries. There is no doubt that the U.S. Constitution specifically granted Congress the power to modify pensions in a MBK. The question is whether Congress has authorized bankruptcy judges to do so. CalPERS claims that state law makes pensions untouchable. Judge Klein, in striking
down Stockton retirees’ medical benefits, noted that federal law trumps state law in a bankruptcy proceeding. There is no law on whether pension benefits may be modified in bankruptcy, because thus far no city, until Detroit, has requested a court to modify them. The California unions and CalPERS have foiled all attempts by a California city to request modification of pensions. So all eyes are on Detroit.

If it is determined that pensions may be modified in a MBK (municipal bankruptcy), then there is a way out for Pacific Grove and for several other local cities. But if this Pacific Grove council was forced to file for bankruptcy on behalf of Pacific Grove, it would likely not request modification of pensions. Stockton, San Bernardino and Vallejo did not, and now Vallejo is considering another bankruptcy, this time to modify pensions. Incredibly, Stockton is proposing higher taxes rather than a modification of pensions.

In both Detroit and Pacific Grove, because of sharp reductions in the work force, pension contributions are down and the number of retirees is up. Both cities have also promised investors the repayment of pension bond money. Detroit is offering retirees a pension modification of 19 cents on the dollar. Pagrovian pension reformers have been fighting since 2008 to avoid a like tragedy for Pacific Grove retirees, but so far with no success. Pacific Grove could now pay about 50 cents on the dollar, but without reform, that will get worse.

Pacific Grove recently paid a bankruptcy attorney about $100,000 for advice. She informed Pacific Grove of the critical need to be prepared to file for a MBK, and that it would take about a year to prepare properly. But her advice has been ignored. Why? Because the unions, policy staff, and the council majority exist in a state of delusion. When Pacific Grove is no longer able to pay CalPERS, CalPERS will terminate the Pacific Grove pension plan. By law that gives CalPERS a lien on all Pacific Grove city-owned property, including revenues. That would trigger an emergency bankruptcy. Pacific Grove is not prepared for such a crisis. If Pacific Grove does file a MBK and does not request a material modification of salaries and pensions, it could eventually cost Pacific Grove taxpayers about $22,000 to $25,000 per parcel to eliminate its pension obligations. That sum grows every day.

CalPERS and the unions are looking at court-imposed parcel taxes to pay for their perfidy. There is no other source of funds. Meanwhile, the Pacific Grove city council listens to the same bad advice that led to Pacific Grove ‘s financial demise. Retirees and taxpayers beware.

The Size of the Municipal Deficit Because of Overcompensation

The Pacific Grove mayor asserts that Pacific Grove is no worse off financially than other cities and that the 2002 pension increase was not a big deal. He is wrong. Carmel collects $5 in revenue per resident compared to Pacific Grove ‘s $1. Monterey $3, etc. Del Rey Oaks and 200 other cities never adopted the 90% of salary benefit (3%@50). Pacific Grove was and is uniquely unable to afford even a 60% of salary pension benefit (2%@50). Carmel can continue to pay bubble salaries and pensions so long as it can continue to raise its TOT and sales taxes at will. Monterey, Salinas, Marina and Seaside are not as well off as Carmel in that regard.

The mayor overlooks that before the illegal adoption of the pension benefit for the safety unions in 2002, the pension contribution rate for safety and non-safety were about the same from year to year. Presently, Pacific Grove contributes about 12% of salary for non-safety and about 29% of salary (including the 9% employee contribution) for safety. Otherwise, the safety pension fund would be totally depleted and the safety pension deficit triple its present size (increasing the size of a court-ordered parcel tax).

In 2002, without the new pension benefit, the council had already adopted a budget that authorized expenditures that were $2,300,000 more than revenues. It was told that the per-year cost of the new benefit was only $51,500, but in fact the true additional cost per year was about $880,000 (failure to provide the true cost information to the council and the public made the adoption illegal). CalPERS, the unions, and the city manager knew the true cost of the pension increase, but nobody else did until the true cost was discovered in 2009. Since that discovery, the Pacific Grove city attorney has purchased three legal opinions opining that staff and the unions can defraud the council to get pension increases. We’ll see.

The adoption of the new pension benefit by Pacific Grove in 2002 illegally violated the state constitution’s “debt limitation.” A city cannot take on a new obligation, except by a 2/3 vote of the electors, if it is probable that in any future year it would not have revenues to pay for the obligation. As set forth above, Pacific Grove did not have sufficient revenues to pay for the current benefits, let alone a new benefit. There was no vote by Electors. If the 2002 pension increase is repealed: (1) It would stop all payment of the illegal benefit going forward, and annual contribution rates would drop by at least 1/3; (2) Safety retires would continue to receive a generous 60% of salary benefit; (3) If there were to be a clawback of prior payments, it would be limited to three years; (4) the $22,000 to $25,000 per-parcel tax needed to make the pension plan whole would be materially reduced; and (5) Otherwise-certain-to-occur pension deficit increases (increasing the size of the parcel tax) would be thwarted.

The council should repeal and rescind the 2002 illegal adoption of the pension benefit for safety, but instead it wants new taxes. The initiative repealing the 2002 increase must be approved by the voters in 2014. Election of a city council that will honor that vote is critical. Otherwise, be prepared to pay up again and again.

Read the entire series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform

Part 5 of 7:

A New Reform Initiative is Proposed

Mayor Chuck Reed of San Jose is a genuine pension reform advocate. He has been working on a state-wide pension reform initiative for the last year. On Oct. 15th, the proposed initiative was filed with the state attorney general. Pacific Grove’s Mayor, a dyed-in-the-wool anti-pension reformer, endorsed the initiative. Because Pacific Grove is in CalPERS (San Jose is not), if the initiative is enacted, CalPERS will not implement it. But it is a good start towards reform.

Two of the cities in the state that spend the greatest portion of their budgets for pension costs are San Jose and Pacific Grove. Both spend over 20% of their budgets for pension costs.

The Reed initiative is similar to the 2010 initiative approved by 76% of Pagrovians. It allows cities to modify pensions for work not yet performed. In 2010, the Mayor was the only council member who opposed placing the Pacific Grove initiative on the ballot. As a Charter city, the initiative was legal, but as described earlier in part two of this series, the city attorney did not allow an honest defense of the initiative, so Pacific Grove lost a law suit about the initiative by default.

In 2013, when the legality of the 2010 Reed-like initiative was set for trial, I met with the Mayor and two other council members and informed them that the city attorney was in my view taking a dive in the law suit about the initiative. I requested but was not allowed to be interviewed by the law firm defending the case under the city attorney’s direction.

In 2009, it was discovered that a large pension increase granted in 2002 for police and fire had probably been adopted illegally. The Mayor and a majority of the council sided with the union-conflicted city attorney, who successfully urged them to disregard the matter and to refuse a presentation of the newly discovered evidence.

In 2012, Pacific Grove citizens collected over 1,000 signatures and a new initiative was certified to be placed on the ballot. But with the Mayor in the lead, the council has spent about $200,000 to date to keep the initiative from the voters by refusing to place the initiative on the ballot.

The latest Pacific Grove initiative repeals and rescinds the 2002 pension increase. If successful, the matter would then go to CalPERS, which has a set of rules relative to recalculating invalid pensions.

The mayor has said over and over that Pacific Grove is no worse off than surrounding cities regarding pension matters. He is dead wrong on the facts: Pacific Grove spends over two times more of its budget for pensions than any surrounding city. And, while Pacific Grove compares with surrounding cities in the size of its pension deficit, Pacific Grove has, in addition, a $36 million pension liability—which makes it twice as bad off.

Has the mayor had a change of heart? Will he now support the current Pacific Grove initiative and let the citizens vote on it, or is he just grabbing headlines? His conduct indicates the latter.

The Need for Deeper Reforms to Counteract a Rigged System

The Sarbanes-Oxley Act of 2002 (SOX) was enacted in response to major corporate, legal, and accounting scandals related to companies like Enron, Tyco, Adelphia, Peregrine, and WorldCom. As a result of SOX, top management, including legal and accounting, must certify that they have supplied complete and accurate information in their public reports. Penalties are severe.

Pacific Grove and other cities and counties need a SOX that applies to CalPERS, union officials, managers, attorneys, and department heads. In my view, if a SOX had been in place for CalPERS in 1999, when it defrauded the legislature into approving a 50% retroactive pension increase, the responsible CalPERS officials would still be in jail.

In my opinion, every incident that I have described in in this series occurred because of intentional and grossly negligent conduct by some or all of the Pacific Grove agencies involved, and of course by CalPERS. Many of my readers believe that the city councils should have seen through the flawed presentations, but I disagree. Must it be necessary for the council to distrust city staff? They deserve help. As an example, consider the 2002 adoption of the illegal pension increase for police and fire. My 40 years of experience as a trial attorney enabled me to pursue missing documents. One of those documents was the actuary report describing the cost of the new benefit: it was required to be in the hands of the council before it could adopt the 2002 pension increase, but had been intentionally hidden from them. The report meant little to me. But when I showed it to a member of that 2002 council (a Ph.D. in math from Caltech), he immediately realized that the council had been flagrantly defrauded into approving the massive pension increase.

A real problem in city government (since the legalization of public unions) is that there is no trained advocate for truth in government decision making. The present system has the unions and city management on the same side, both in favor of unconscionable salaries and pensions. It has created a runaway train-like effect for city and county finances. That has been accomplished by control of truth (or not), including the purchase of biased and “as requested” studies and legal opinions. Every city in Monterey County has an uncontrollable pension deficit, sparked by a system of raising salaries and benefits to the highest of any surrounding city (in total defiance of the laws of supply and demand). Pacific Grove is worse off than surrounding cities because management took higher risks in
a city with a low tax base. Greed has had no limits in Pacific Grove. I would like to see the Pacific Grove charter amended to provide for a “Citizens’ Advocate” elected every two years, to fully advise the council and citizens and to represent the city in collective bargaining. The advocate would be a contract auditor of the truth and completeness of staff proposals, and completely independent of staff.

In Pacific Grove, and in many other cities and counties, staff and legislative bodies act as if the destruction of its financial condition just happened and that no entity or officer was at fault. It is time to make Pacific Grove government responsible to its citizens. Reform is in order. The status quo is not an option. If not now, when? And of course electing qualified citizens to the council is key. Why won’t they run?

Read the entire series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits

Part 4 of 7:

How the Unions Control the City’s “Pension Subcommittee”

In Pacific Grove (Pacific Grove), the employee unions rule. They have the full support of the city manager, the city attorney, and the council majority. True “collective bargaining” is a myth.

The Pacific Grove Charter established a strong city manager form of city government. The council is precluded from delving into day-to-day management of the city. The city manager and city attorney are supposed to be talented experts who advise the council about necessary policies and reforms; they control the flow of information provided to the council. In my view, it is that control of information which has been used to trick council after council into approving pension and salary increases that have created unimaginable deficits A good example of how misinformation works is provided by the current council pension subcommittee. It is chaired by the mayor, and has two other pro-union, antipension,
anti-salary reform members. The mayor has voted against every single progressive pension reform opportunity since he has been on the council.

The subcommittee just issued a report that concluded:“The funded ratio (of the Pacific Grove pension plan) compares the market value of our portion of the asset pool to the accrued liabilities for the Pacific Grove plan.” It then went on to say that Pacific Grove was one of the four top-funded plans. Oops! They omitted that Pacific Grove has a $38 million pension bond liability, which, when included, gave Pacific Grove the most poorly funded status by a wide, wide margin. Neither the city manager nor the city attorney corrected the misrepresentation.

The pension subcommittee excuses the city manager and the city attorney from their responsibility to mend the pension/salary problem. The city manager and city attorney are the only two city employees selected by the council. If the two are unable to resolve the pension/salary bubble, then the council should replace them. Currently, the city manager the city attorney, and the council have expended hundreds of thousands of dollars to defeat the 2010 pension initiative that was approved by 76% of the voters—and now to keep the latest initiative off the ballot. At the Sept. 4 meeting, one of the subcommittee members stated that Pacific Grove needed to find a way to stop the annual deficit accruals. Hello. That was precisely the purpose of the 2010 pension reform initiative and of the current initiative.

The current dirty trick is a move by the police unions to get on the payroll of another city, or the county, to avoid the effect of the voters approving the repeal of the 2002 50% pension increase in the 2014 election. Like the fire merger, that would leave Pacific Grove with the deficits created previously. In addition, CalPERS just announced that because of investment losses, the actuarial value of assets is now 120% of market value. So if any public agency quotes its deficit based on CalPERS actuarial valuation, the deficit is materially under-stated.

How Service Cuts and Layoffs Took the Place of Pension Reform

In Pacific Grove (Pacific Grove), large salary and pension increases have been approved with absolutely no cash flow analysis to determine whether the increases are affordable. As a result, Pacific Grove is financially distressed to a level well beyond most neighboring cities.

Pacific Grove also has a severe services deficit. In 2002, it had 234 employees; presently about 70-75. In 2002, the police force had 32 officers; today 12-14. It rents 10% of the Seaside police chief at a cost of about $160,000 per year. The police unions want to merge with the Seaside police department on terms similar to the 2008 merger of the Pacific Grove fire department with the City of Monterey. Under the Monterey merger model, the Pacific Grove officers became employees of Monterey, and Pacific Grove reimburses Monterey for its share of the costs for salaries, pensions, medical insurance, workers comp, etc.

That model destroys any hope for Pacific Grove to manage its pension deficit (about a $45 million deficit and a $38 million pension bond liability), because Pacific Grove would pay out over 2.5 million per year to safety retirees and nothing as an annual contribution to the “safety” plan.

I believe the police unions will prevail politically and merge with the Seaside police department. CalPERS has announced a 50% annual contribution increase over five years to offset growing pension deficits. So within five years, Pacific Grove will reimburse Monterey and Seaside about $1.5 million per year. $500,000 of that sum is designed by CalPERS to offset pension deficits. Monterey and Seaside will get full credit against its pension deficits by the reimbursement of pension costs for its plans, but Pacific Grove will get none.

Each dollar contributed to CalPERS must grow to four dollars over a 25-year period in order to fund benefits. Because of the merger, there would be no growth in the Pacific Grove safety plan from the dollars that reimburse Monterey and Seaside for pension costs. So over time the deficit of the safety plan will grow enormously. The “safety” pension fund will be rapidly depleted. Then Pacific Grove must pay for safety retirements by an annual payment. Because the safety unions rule Pacific Grove city finances, the city council as presently constituted will not bring its fire department home, and it will farm out its police department. There was and is no cash flow planning for either the fire or the police service contracts. Why? Because it is inconsistent with plundering. The unions simply demand raises and benefit increases on the theory that they are entitled to them.

Read the entire series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

 

The Fall of Pacific Grove – CalPERS Begins Calling Deficits "Side Funds," Raises Annual Contributions

Part 3 of 7:

By 2005 Pension Costs Were Crippling the City

In 1999, CalPERS represented to the state legislature that a 50% increase in pension benefits for safety unions would not result in increased costs. It based its opinion on its investment prowess.

But by 2002, the tech bubble broke, and CalPERS began suffering significant investment losses. Its response was to persuade the legislature to authorize the largest rate increase in CalPERS history. The method used was to have each employer (city, county, et al.) set up a “side fund” in the amount of its pension deficit and to pay it off at 7.75% interest and principal over 26 years. Payment was back loaded but still substantial. Prior to “side funds,” employers paid nothing to reduce the deficits.

CalPERS announced its intention to create “side funds” in late 2001, prior to the Pacific Grove adoption of the 50% pension increase for safety on June 5, 2002, but did not include any reference to it in the mandatory actuary report (the report that the Pacific Grove city manager concealed from the council). It was an additional cost per year of over a million dollars, commencing in 2004.

In summary, when the 2002 Pacific Grove city council adopted the 50% pension increase for safety: (1) it was told that the cost per year was $51,500, when the hidden actuary report indicated that it was over $800,000 per year; (2) it was not told that the benefit extended to time previously served by Pacific Grove safety officers (one chief received 24 years of free credit); and, (3) it was not told that in just two years there would be an additional cost exceeding a million dollars per year.

By 2005, Pacific Grove was and is totally under water financially It now has a new unfunded deficit of about $45 million dollars, and pays about $1.6 million a year for pension bonds. Over 20% of its budget is used to pay for pensions — 8% to 10% is the norm. CalPERS has announced a 50% rate increase in the next few years. The $45 million pension deficit grows at the investment rate of 7.50% per year, or $3.75 million per year compounded. Pacific Grove operates by firing employees, slashing services, ignoring road maintenance, and failing to provide sinking funds for equipment (replacement of a new fire truck, for example). Its beautiful golf course is in a state of shocking unplayability. Evidently Pacific Grove cannot afford to water it.

The response of the union-led city manager and management staff is to promote plans to increase revenue in an attempt to squeeze a few more years out of Pacific Grove. Staff needs to raise revenues by $3.75 million per year to hold the pension deficit to $65 million dollars, including pension bonds. It may even have the gall to propose new taxes.

Union Controlled City Gives Raises and Issues Pension Bonds Exceeding Pension Debt

By 2006, Pacific Grove replaced its city manager and city attorney. The safety unions and the new management team set out to enhance their compensation packages, despite the fact that Pacific Grove was broke. The police unions wanted a large raise (30%), and the fire department wanted to merge with the Monterey fire department — a city notorious for generous employee/management compensation. The issue for new Pacific Grove management was how to convince a council majority that Pacific Grove could pay for the expensive union expectations—especially now that Pacific Grove had an additional million-dollar-a-year pension charge (as described in the last chapter). The answer was to have Pacific Grove issue pension bonds (POB), but defer payment on the bonds for three years.

In 2006, management convinced the council to issue $19 million in POB. The proceeds paid off the side fund, thereby eliminating the million-dollar-per-year payment on the side fund. By deferring interest for three years, it freed up about a million dollars per year for the safety unions’ goals of a raise, and a fire merger with Monterey. Of course after three years, there would be bond payments of about $1.6 million per year. And the three-year deferred interest increased the POB from $19 million to just over $22 million. But the new city manager intended to move on in three years, just as the $1.6 million POB payment commenced. And he did.

In January of 2007, the city manager prepared a mailer to every address in Pacific Grove, indicating that Pacific Grove was hopelessly broke and making it clear that substantial new taxes, together with a severe cutback of non-safety services, was in order. Yet, just three months later, he pushed through a 30% raise for the police unions (over a three-year period). He pointed out that Pacific Grove had (mysteriously?) acquired a million dollar reserve, so it could afford the raise. Five of the council agreed. All of this was accomplished in a closed session. The great financial risk from issuing POB is not just that it kicks the deficit problem down the road without curing the underlying problem, but that CalPERS would then lose a large part of the proceeds in the market. And, of course, in 2008-9, CalPERS lost 28% of its assets and failed to earn 7.75% on a sum equal to its benefit liability, for a total loss of 35.5%.

It is important to understand that the losses sustained by CalPERS were across the board for all different levels of pension plans. About 40% of CalPERS deficits arise from non-safety plans, while safety plans account for the remaining 60%. Politicians claim that setting up new tiers with lower pensions for new hires is pension reform, but it is like getting stabbed twice instead of three times. Over time the city will die, but a bit more slowly.

Read the entire series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses

Part 2 of 7:

City Attorney Kept Sponsors of Initiative from Participating in Defense of Initiative

Part 2 of 7:  In 1927, the City of Pacific Grove adopted a charter that reflects the principles of “home rule” and provides for local control of municipal affairs (California Constitution, Article XI, Section 3[a]). That is why evidence about whether that Charter allowed “vested pension rights” was so important to the lawsuit decided against the city. In my view, because that evidence was not presented to the court, Pacific Grove lost the case.

In the case just decided against Pacific Grove, failure to present evidence regarding “vested pension rights” was not the only issue improperly conceded by the city. Article 25 of the Pacific Grove Charter provides that “The Council shall fix the compensation of all city officers and employees,” and that “The compensation of all officers and employees shall be fixed by ordinance.” My research indicated that the council never enacted an ordinance that granted employees vested pension rights, but I was not allowed to present that evidence to the judge.

But even worse, the police argued that because of Article 25, the citizens of Pacific Grove could not utilize the initiative power set forth in the Pacific Grove Charter to affect compensation, and the city conceded that point. First, the reason for Article 25 is to serve as a limit on the city manager, not the citizens. Second, cases are legion that demonstrate when a charter designates who sets compensation (whether a commission, the council, etc.) the people always have the initiative power to legislate about compensation. Third, in the Pacific Grove case THE COUNCIL ADOPTED THE INITIATIVE, in any event. The city did not raise any of these arguments. Like the “vested rights” issue, the police won this issue by default.

I want to make it clear that I do not blame the judge who decided the case for the decision against Pacific Grove. We have an adversary system of justice. Each side is expected to present the facts and the law in a light most favorable to its contentions. When one side fails to put up a proper defense, there is no way for the judge to know that. And that is especially true when the defendant, in this case Pacific Grove, in effect sides with the police, to allow them to win. In my opinion, that is what happened.

In Pacific Grove, the council, the city manager, the city attorney, and the employee unions act in concert to protect the pensions and salaries that have cut city services to the bone. And, like Detroit, it will get worse, much worse.

How CalPERS Provided Overly Optimistic Projections and Squandered Temporary Surplus

CalPERS administers most of the pension plans for California cities, including Pacific Grove. In my view it has used its enormous power and the willingness of city managers and city attorneys to expedite the insatiable compensation demands of public unions to financially ruin cities like Pacific Grove. In 1999, CalPERS made substantial financial misrepresentations to the state when it adopted the 50% pension increase, (retroactive to hire date) for the CHP, and thereafter for fire and police.

In 2001-2, after a significant loss in the stock market, it authorized, what in my view was a crude “bait and switch,” that could be used by city managers to push through the 50% pension increase for safety unions while misrepresenting (understating) the costs to the city councils and the public. The safety unions were concerned that if cities knew the true cost per year (after the market loss) they would not adopt the costly benefit.

By a letter dated July 6, 2001 to all cities, CalPERS announced Board Resolution 01-03-BD “as a means to temporarily delay the full impact of the cost of benefit improvements on the employer’s contribution rate.” In the case of Pacific Grove, that scheme allowed it to artificially value its pension assets 25.6% higher than actual value for purposes of calculating the adoption cost for the increased pension benefit.

In Pacific Grove in 2002, the city manager, utilizing the phony valuation of assets, informed the council and the public that the cost for the new pension benefit was only $51,500, when without the one-year artificial valuation the cost-per year increase was estimated to be over $800,000. Govt. Code 7507 required that the council receive a report by an actuary describing the actuarial impact of the new increase, including the estimated cost per year, as a mandatory condition for adopting a pension increase. In Pacific Grove, the city manager withheld that report from the council. The concealed report of the actuary described the danger to Pacific Grove by relying on the artificial adoption cost of only $51,500. And, it specifically advised the council to look at the cost for the second year which, based on actual value, was over $800,000 per year and the true estimated annual cost for the new pension benefit.

The critical actuary report was not discovered until mid-2009. Thereafter, six of the 2002 council reviewed the report and indicated that had they known the true cost, they never would have approved the pension increase for the simple reason that there was not any money to pay for it. After the 2003-04 payment of $880,000 for the new pension benefit, Pacific Grove was broke, and based on certification of that fact by the City and all of the unions, CalPERS granted it a deferral of a $600,000 payment.

CalPERS, the City pension plan administrator, revealed true investment naivete when in 1999 and 2000 it had modest surplus investment gains, but instead of saving the gains for loss years, allowed plans like Pacific Grove’s to waive annual contributions. In 2001, CalPERS not only suffered a direct investment loss, but had also failed to require normal contributions for that year. As a result CalPERS failed to increase their assets by anywhere near the required amount, which needed to equal 7.75% of of its total pension liability. The loss in 2001 was very large and explains why the unfunded deficits grew so much. Keep in mind the first round of large pension deficits for Pacific Grove in the sum of 19 million dollars occurred prior to the 2008-9 investment loss of about 30%. So less than a year after CalPERS had represented to the legislature that adopting a 50% increase in pensions for safety unions(with credit for time served) would not result in increased annual contributions, it was under water with a flood still to hit in 2008-9. But did CalPERS do the moral thing by admitting that the 50% increase had been a mistake. To the contrary. its view seems to be “we gotcha taxpayers, live with it.”

Read the entire series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform

Part 1 of 7:  Pacific Grove is a quiet town of 15,000 residents located on the northern tip of the Monterey peninsula, with the larger resort town of Monterey to the east, and Pebble Beach to the west. With windswept white sand beaches, defiant stands of cypress growing out of surf splashed rocks, and one of the finest collections of Victorian mansions on the west coast, Pacific Grove is an enchanting place. But Pacific Grove is going broke, and the story of how the city got to the edge of financial disaster is a story of corruption and power, hidden from public scrutiny or independent expert analysis. It is a story about public sector unions, powerful financial interests, and complicit city management, working together to fleece taxpayers and enrich themselves, heedless of rising debt or the inevitable ruinous consequences. And what is happening in Pacific Grove is representative of what is happening in every city and county in California. In 2008, retired attorney and Pacific Grove resident John Moore learned, for the first time, that the City of Pacific Grove had issued 19 million dollars of pension bonds in 2006, but had still managed to grant the police union a million dollar per year raise (30%) in 2007. Curious about how a city with an 11-12 million dollar a year budget could become indebted in such a large sum, he made several Public Record Act requests. What he learned and what followed is described in “The Fall Of Pacific Grove,” which Moore wrote and published over a six month period in 2013 in “The Pine Cone,” a local Monterey County newspaper. John’s work will be published here in seven installments over the next two months. Because the story is ongoing, Moore intends to provide additional updates to UnionWatch readers at the conclusion of this series.
– Editor

How Pension Enhancements Created Unmanageable Debt

How deep is the Pacific Grove financial hole? It is bottomless! Pacific Grove is not alone. For example, Moody’s, the credit rating agency, has placed neighboring Monterey on its “Watch List.”

California Govt. code 7507, enacted in 1977, mandated that to increase a pension, the city council must have received the analysis of an actuary detailing the cost per year for the new benefit. Also, the cost of the new benefit had to be disclosed to the public. But in 2002, the city manager withheld that report. He informed the council that the estimated cost per year to increase the pension benefit formula to “3.0% at 50” was $51,500 per year. The report said it was in excess of $800,000. There was no money to pay for the $800,000-per-year obligation, but believing it would only cost $51,500, the council adopted the increase. The increase also violated the debt limit set forth in the California Constitution (Article XVI, Sec. 18).

Every neutral attorney who has reviewed the adoption agrees that it was illegally adopted, but the city has purchased three legal opinions that say ignoring the code was okay. This dispute is what the current Citizens Initiative is about—repealing the 2002 pension increase. In 2013, over 1,100 voters qualified an initiative repealing the 2002 pension increase for the ballot, but the city has spent over $200,000 on a lawsuit to keep the initiative off the ballot. A court hearing is scheduled for January 21, 2014.

The financial demise of Pacific Grove caused by the adoption of the pension increase was immediate. Within two years, Pacific Grove missed a $600,000 pension payment. By the third year it had accumulated a $19 million pension deficit. It issued pension bonds in that sum at a cost of about $1.6 million per year.

In 2007, the police unions and the city manager convinced five members of the council to grant the police unions a million-dollar-per-year raise. The city manager left; the fire department ran to Monterey; the museum was given to friends of the city council majority. After hiring another pro-union city manager, the mayor and two members of the council left. Over half of the city employees have been fired, but the budget is larger. Recently, the children of Pacific Grove were sent begging to get the local swimming pool restored at a cost of about $300,000 (one pension bond payment could have repaired the pool six times). But thanks to the generosity of the public, the pool has been restored. All public services are cut-rate. Fees have been raised dramatically. In 2008, the citizens passed a tax increase based on the representation that library and other services would be restored. But the revenue from that increase just pays for the yearly pension bond payment.

Pacific Grove now has a new unfunded pension deficit of about $45 million, in addition to the $20 million in pension bonds. The deficit grows at 7.5% per year (about $3.2 million compounding).

Do I believe there is a way out? Based on hundreds of research hours and consultation with numerous attorneys, accountants, economists, teachers, a mathematician, and citizens, the answer is yes.

I support unions, as long as there is representation on the other side. In Pacific Grove, the unions, city manager, city attorney, and city council majority are all on the same side.

How Local Officials Fought Reform

In Pacific Grove, the council majority, the city manager, the city attorney, and the employee unions work in concert to protect the compensation packages, including pensions, that have financially destroyed the city.

In 2010, a group of citizens qualified an initiative for the ballot that limited the city’s contribution for pensions to 10% of salaries. The council adopted the initiative as its own, and the police unions sued. Over my objections, the council allowed the city attorney to supervise the defense of the case. In my view his pro-union bias and opposition to the initiative indicated a disqualifying bias and a tendency to allow the city to lose the case.

In the lawsuit, the police unions claimed they had an “in perpetuity vested pension right” that could never be diminished. Prior to circulation of the initiative, I did extensive research to determine whether the City Charter, or the City Council, had ever granted such a right. I reviewed the initial 1927 Charter, all amendments thereto, all ordinances affecting compensation, and all agreements with the unions. No such vested right had ever been granted. In fact, the 1955 Charter prohibited the grant of a vested pension right, except by a vote of the people, which never happened. In 1957, the council joined CalPERS under a provision of the Charter that allowed the council to adopt a pension as long as the liability of the City was limited to paying premiums.

On November 21, 2011, while the lawsuit was pending, the California Supreme Court ruled that vested contract rights could be implied “if there is no legislative prohibition against such arrangements.” Clearly, the Pacific Grove 1955 Charter requiring a vote of the people was such a prohibition. I assumed the lawyers defending the City in the lawsuit would contact the author of the initiative and me to discuss our due diligence in creating the initiative. But it became clear to me that the city attorney did not want the attorneys interviewing us. In my experience, the failure to interview the witness who researched and drafted the initiative that is under attack is inexplicable.

In the trial, the City did not require the unions to prove a vested pension right. It conceded that the unions had such a right. No witnesses were called. I was there, and I had made numerous requests of the attorneys to allow me to present the evidence that demolished the allegation claiming a vested right. But no, my research did not see the light of day. So the judge simply adopted the raw assertion of the unions, together with the lack of a defense, and ruled that the police unions had vested pension rights. An investigation by a neutral party is in order. And it needs to occur immediately to prevent this travesty of justice.

Read the entire series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

California Pension Reformers Plan New State Ballot Initiative

A statewide constitutional initiative planned for 2014 would tackle the biggest obstacle to meaningful pension reform: vested benefits. Right now, with certain exceptions, California municipalities may not reduce pension benefits for current employees—unlike in the private sector, where employers can change the terms of employees’ current pension plans, making them less generous. The courts have said that benefit increases, even retroactive ones, constitute binding contracts that must be paid for the life of all current employees. The ballot measure, largely conceptual at this point, would allow cities to change future pension benefits. San Jose voters did that last year, voting to change benefit levels for current employees.

The initiative will probably also include a requirement that all agencies offering defined-benefit plans put them up for a vote. These plans impose debt on the public, so reformers reason that voters should have a say in whether to approve any new plans or change existing ones, as San Jose did. The measure would also likely include limits on pension-spiking and governance reforms for the union-dominated California Public Employees’ Retirement System (CalPERS).

Unions are already challenging San Jose’s June 2012 ballot initiative, as well as a similar measure San Diego voters approved that same month, in court. They understand that these reforms, if allowed to stand, threaten to demolish the status quo. San Jose officials believe that they have a strong chance to prevail because of the way their city charter is written, but not all California municipalities are charter cities. It’s unclear what a favorable court ruling for San Jose would mean for them.

The unions are waging their fight against pension reform in the hope of blunting San Jose’s effects statewide. A Monterey County superior court ruled recently that a pension initiative passed in Pacific Grove is unconstitutional because it rolls back benefits for current employees. Like San Jose, Pacific Grove is a charter city, but each city’s charter is different. The Monterey County judge ruled that Pacific Grove’s charter vests compensation power in the hands of the city council, not voters. The court reaffirmed that “what is vested in the employee is the right to earn a pension on the terms promised to him or her upon employment.” Therefore “no subsequent legislation . . . can take these rights away once given.” The Peace Officers Research Association of California (PORAC)—a union group best known for bankrolling the defenses of police officers accused of wrongdoing—funded the case, knowing that it would have statewide implications. Organizations such as PORAC will be ready when a reform initiative reaches the statewide ballot.

Meantime, CalPERS is worried that municipal bankruptcies elsewhere could undermine the state pension fund’s income stream. In San Bernardino, for example, city officials have stopped making contributions to the fund. Stockton’s bankruptcy is still winding through the courts, but a central question remains whether CalPERS must join other creditors in taking a haircut. To avoid similar debacles during future (practically inevitable) municipal bankruptcies, CalPERS is lobbying for a bill that would make it easier for the state pension fund to put liens on city assets. The city of Vallejo, which has emerged from bankruptcy, is headed into the fiscal morass again because it never embraced the kind of rollbacks that reformers say are necessary.

The now-concluded strike by Bay Area Rapid Transit (BART) workers underscores the ongoing pension struggles local governments face. Union members clearly prefer stopping work to helping pay for their benefits. As the liberal Contra Costa Times editorial board put it: “They’re already the top-paid transit system employees in the region and among the best in the nation. They also have free pensions, health care coverage for their entire family for just $92 a month and the same sweet medical insurance deal when they retire after just five years on the job.” As the editorial points out, BART’s pension and retirement-benefit debt is a whopping $636 million, while the transit system faces a $142 million operating deficit in the coming decade. BART has also piled up billions in deferred maintenance and repair costs. Something’s got to give.

Pensions will remain big news, if the BART strike is any indicator. And reformers have suffered a number of setbacks in recent months. In November, prominent San Diego pension reformer Carl DeMaio lost his bid to become mayor to Bob Filner, a union-friendly Democrat, and Democrats gained supermajorities in both houses of the state legislature, thus assuring the defeat of any pension-reform measure. Even the so-called Democratic moderates who hold increased power in Sacramento are uninterested in further reform. A year ago, mayors of California’s eight largest cities sent a letter to the state senate and assembly leadership arguing, “Cities need clear authority to modify future pension accruals and to give their employees an option to choose a lower-cost benefit.” The legislature never responded.

It remains to be seen whether reformers can generate enough funding to run a viable statewide initiative campaign. Union spokespeople continue to portray them as the tools of Wall Street and right-wing groups. But reformers—many of whom gathered in May in Sacramento to plot strategy—are a remarkably diverse group. And there’s no reason to think that last year’s setbacks will be permanent, despite the unions’ wishful thinking. “Today, we spend $1 out of every $7 on pension and benefit costs for city employees; by 2018, it will be one out of every $4,”observed San Francisco public defender Jeff Adachi, an outspoken liberal Democrat. Conservatives aren’t the only ones concerned about the problem.

Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity and a contributor to City Journal’s new collection, The Beholden State: California’s Lost Promise and How to Recapture It. Write to him atsteven.greenhut@franklincenterhq.org. This article originally appeared in City Journal on July 17, 2013, entitled “Tackling the Pension Problem,” and is republished here with permission.