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Did CalPERS Fail to Disclose Costs of Historic Bump in Pension Benefits?

How would you feel if someone told you they’d just increased your retirement benefit by 50%, took five years off the age you’d have to be when you could retire and collect this benefit, and then told you there would be almost no additional cost because the stock market was roaring? In California, that’s what happened in December 1999. “You” were “ALL PUBLIC AGENCIES,” and their countless thousands of public employees, and “someone” was the biggest public employee retirement system in the state, CalPERS. Click here to read the agency’s 12/23/1999 analysis.

Then how would you like it, two years later, after the market had “corrected,” you were told, via a CalPERS board resolution, that an “exception” had been made to generally accepted actuarial accounting standards, and you could choose to value your savings that had been set aside to pay for your retirement benefits at a value 10% greater than the actual market value of those assets at the time? That’s what happened in June 2001. Click here to read that 6/06/2001 letter.

Did CalPERS comply with the law when they did this?

Today, we’re left to wonder whether those actions violated state law. California Government Code Section 7507 requires that an enrolled actuary notify elected officials of the actual costs of any benefit increase.

Here is an excerpt from Section 7507:

The Legislature and local legislative bodies shall secure the services of an enrolled actuary to provide a statement of the actuarial impact upon future annual costs before authorizing increases in public retirement plan benefits. An “enrolled actuary” means an actuary enrolled under subtitle C of Title III of the federal Employee Retirement Income Security Act of 1974 and “future annual costs” shall include, but not be limited to, annual dollar increases or the total dollar increases involved when available.

The California Policy Center recently re-released a policy brief entitled “Did Your Agency Comply with the Law When Increasing Pension Formulas?” That policy brief provides clear instructions to any local elected official or local activist who would like to gather and view for themselves possible evidence of 7507 violations in their city or county.

The stakes are high. Senate Bill 400, enacted in 1999, increased pension benefit formulas by roughly 50 percent for California Highway Patrol officers. Over the next five years or so, nearly every state agency, city, and county in California followed suit, not only for their police and firefighters, but for all public employees regardless of their job description. The ongoing financial impact of this on civic budgets has been severe, and there is no end in sight.

Back in 1999, pension expenses as a percent of total operating budgets in California averaged around 3 percent. Today they average over 11 percent. Depending on how fast agencies are required to pay down the unfunded liabilities on their pension obligations, and depending on how pension investments perform over the next several years, pension expenses as a percent of total operating budgets in California could rise to over 30 percent.

With rare and incremental exceptions, all attempts so far to reform pensions – and so restore financial sustainability and robust services to California’s public agencies – have been thwarted. Reformers continue to challenge these special interests in court, but progress has been slow and expensive, with no rulings of any significance.

Did CalPERS comply with the law when they offered their agency clients the option to greatly increase pension benefits? Did they comply with California Government Code Section 7507?

Using Pacific Grove as an example of CalPERS’ followup, here’s the “Contract Amendment Cost Analysis – Valuation Basis: June 30, 2000,” in which a CalPERS actuary presented to Pacific Grove’s elected officials three distinct values for the assets they had invested with CalPERS, and gave them the liberty to choose which one they’d like to use. The higher the value they chose for their existing assets, the lower the cost from CalPERS to pay for the benefit enhancements they were contemplating.

Option 1: “No increase in actuarial value of pension fund assets.”

Option 2: “Actuarial value of assets increased by twice the increase in the present value of benefits due to this amendment, limited to 100% of market value of assets.”

Option 3: “Actuarial value of assets increased by twice the increase in the present value of benefits due to the amendment, limited to 110% of market value of assets.”

In plain English, the CalPERS actuary is inviting the elected officials to pick from three differing calculations of how much money they’ve already set aside to cover future retirement payments. The difference between “actuarial value of assets” and “market value of assets” is what creates this wiggle room. While the pension fund investments may have a well-defined market value at any point in time, in order to avoid having to continually adjust how much needs to be contributed into the fund by the employers each year, a “smoothing” calculation is applied that takes into account the market values in previous years.

Obviously, based on the above three choices, how assets get “smoothed” is a subjective exercise. Otherwise there would only be one option. So guess which option was chosen by the City of Pacific Grove? Evaluating the table on page 4 of the 6/30/2000 CalPERS cost analysis provides hints.

Option 1: Employer contribution will be 25.1% of payroll.

Option 2: Employer contribution will be 20.0% of payroll.

Option 3: Employer contribution will be 6.2% of payroll.

Pacific Grove selected option 3. Is that any surprise? Consider this absurdity: CalPERS left it up to these elected officials to enact their benefit enhancement, and then told them the cost to do so could vary by over 400 percent. Of course they picked the low payment option.

Did this disclosure comply with California Government Code Section 7507? Despite the presence of disclaimers dutifully included by CalPERS, arguably it did not. CalPERS offered Pacific Grove three alternative valuations for their pension fund investments, and then presented three very different payment requirements depending on which option they chose. The diligent reader will investigate these documents in vain for additional evidence that CalPERS offered Pacific Grove – or any of its other participating agencies – a usable “statement of the actuarial impact upon future annual costs.”

Even the actuary who wrote the analysis for Pacific Grove hedged his bets. In the “Certification” section on page 5, the actuary wrote, “The valuation has been prepared in accordance with generally accepted actuarial practice except that [italics added], under a CalPERS Board resolution, an increased actuarial value of assets may be substituted for the actuarial value of assets that would have been produced by the current and generally accepted actuarial asset smoothing method described in the annual report.”

What CalPERS did was to offer public agencies the option to “smooth” upwards the value of the assets they’d set aside to cover those enhanced retirement benefits they’d awarded during the stock market bubble. They persisted in these tactics to enable agencies that had not yet enhanced their benefits to do so, in order to “compete” with other agencies and retain employees.

Not only were these asset values smoothed, of course. The payments demanded each year by CalPERS were also smoothly increased. Smoothly and inexorably, with no end in sight.

REFERENCES

CalPERS notice to All Public Agencies, 12-23-1999 – “New 3% @ 55 and 3% @ 50 Formulas, and Change in Benefits Cap for Safety Members”
http://calocalelectedofficials.org/wp-content/uploads/CalPERS-December-23-1999-Letter-Regarding-3-at-50-to-Agencies.pdf

CalPERS notice to All Public Agencies, 6/06/2001 – “New CalPERS Board Resolution Concerning Value of Assets Used in Calculation of Cost of Contract Amendments”
http://calocalelectedofficials.org/wp-content/uploads/CalPERS-July-6-2001-Letter-to-Agencies.pdf

CalPERS analysis for City of Pacific Grove – “Contract Amendment Cost Analysis – Valuation Basis: June 30, 2000
http://calocalelectedofficials.org/wp-content/uploads/Pacific-Grove-CalPERS-3-at-50-Cost-Estimate.pdf

CLEO Policy Brief – “Did Your Agency Comply with the Law When Increasing Pension Formulas?”
https://calocalelectedofficials.org/determine-city-county-complied-law-increasing-pension-formulas/

California Senate Bill 400, enacted 1999
http://www.leginfo.ca.gov/pub/99-00/bill/sen/sb_0351-0400/sb_400_bill_19990929_chaptered.html

CLEO Policy Brief – “Coping With the Pension Albatross” – provides links to sources for historical and projected escalation of pension costs as a percent of operating budgets
https://calocalelectedofficials.org/coping-pension-albatross/

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.

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.

*   *   *

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.

Pacific Grove Reformer Alleges Pension Increases Passed Without Due Process

Editor’s Note: Pacific Grove may be one of the smallest cities in California, but it is on the front lines of the battle for pension reform. Facing financially devastating annual billings from CalPERS, citizen activists are uncovering evidence that the pension benefit enhancements passed by Pacific Grove’s city council may not have complied with the law, and even allege willful deceit on the part of some of the council members. John Moore, a retired attorney living in Pacific Grove, recently wrote a letter to the editors of the local newspapers serving the Monterey Peninsula which is posted here. This isn’t the first time Moore has provided explicit and well documented arguments for how citizens in Pacific Grove were hoodwinked by powerful public sector unions, financial special interests, and compliant elected officials who all worked together to further their common agenda. The contents of this letter deserve careful study by editors of the papers responsible for informing the public, not only for the sake of Pacific Grove and its residents, but because there is plenty of evidence to suggest that what allegedly happened in Pacific Grove, abuse of due process by elected officials when approving retroactive pension benefit increases, happened elsewhere in California starting around 1999  For a detailed account of the Pacific Grove pension debacle, read Moore’s eight part series on UnionWatch, “The Fall of Pacific Grove.”

To the editors of the Cedar Street Times and the Monterey Herald; Because you are so blind concerning the deception that was perpetrated on the 2002 Pacific Grove City Council and the people of Pacific Grove, here is a “primer’ on a critical piece of evidence. Make a copy of the one page attachment [scroll down to view] and then follow my simple instructions on this page as I take you through the attachment.

The attachment is a copy of the report of the actuary related to the proposed 2002 pension increase. The city manager had and hid the report from the council and the public in 2002. Its existence was not discovered until May of 2009.

Government code section 7507 mandated that the 2002 pension increase could not be legislated until, the council (not the city) had the full actuary report and the future annual (yearly) costs were made public at a noticed public meeting 10 days before the adoption of the increase. So, follow these numbers on the attachment.

1. Identifies that the actuary has provided cost figures for the years 2002-3 and for 2003-4;

2. Identifies that the city had chosen “Post-Amendment Alternative 3.”

3. Indicated that if the pension increase was adopted before July 1, 2002, the increased rate applied to total fire and police payroll would be 1.516%. That calculation came to a cost of $51,500;

4. Indicated that if the pension increase was adopted July 1 or thereafter, the increased rate would be 23.7%. That calculation came to a new cost of $805,000 per year;

5. Shows that the city manager had chosen the longest (most expensive, back loaded) amortization rate(for losses);

6. This paragraph is critical. It proves that the $51,500 cost was what the actuary called the “initial (not annual)” cost if the increase was adopted by June 30, 2002. The actuary then makes it clear that if the “initial” cost was chosen, the full year 2003-4 would cost $805,000 (an estimate of future yearly cost). the council and the public were not told the 2003-4 cost.

I have attached a second document [scroll down to view] that is further evidence of the intentional deceit practiced on the council and the citizens in the 2002 adoption process.

In line one the city manager said: “The cost to change to this new retirement is significant.” Think about that statement. He is about to inform the council that the cost is $51,500, but he indicates that in his opinion as their expert, that is a “significant” sum. He also knew that the council did not know about the actuary report, which he had analysed and that showed that the cost for the next year would be $805,000. Why would he tell such a massive lie? Answer: To keep the council from asking about the $51,500 quote. And it worked.

In the last line he said: “Each year, CaLPERS re-evaluates the cost to public employers based on current enrollment and standard actuarial assumptions.” Again, as set forth in number 4 of the first attachment, he had the rate for the next year He knew the cost for the next year would exceed $800,000. So his whole purpose of that line was to lead the council to believe that the rate for the next year was unavailable, although he had that cost right in his private work papers. A+ for deceit by the manager.

It is my hope that this information will help assure that your future reporting about the 2002 pension increase adoption is more accurate. This is just a sample of the conduct the current council is defending at all cost.

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.

ATTACHMENT ONE

20140417_Moore-1

 

ATTACHMENT TWO

20140417_Moore-2