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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.