Remember Bell, California? Back in 2010 the Los Angeles Times reported that Bell city officials were receiving unusually large salaries, perhaps the highest in the United States. For example, Robert Rizzo, the City manager, had received $787,637. By September of that year, as reported on CNN, the California Attorney General filed charges against eight former and current city officials. The public was outraged.
Not generally known however was the process whereby the City of Bell employees managed to pay themselves so much money. Earlier that summer the Los Angeles Times covered this part of the story, reporting “The highly paid members of the Bell City Council were able to exempt themselves from state salary limits by placing a city charter on the ballot in a little-noticed special election that attracted fewer than 400 voters.”
This use of barely legal maneuvers to extract ridiculously generous salaries and benefits from taxpayers is not restricted to Bell, however. The Bell Syndrome existed before any of us had ever heard of Bell, and even now, in this sanitizing age of transparency, it lingers, continuing to infect our public institutions.
Two cases of the Bell Syndrome are featured in an investigative report just published on UnionWatch entitled “The Pension Scandals in Sonoma and Marin Counties,” written by John Moore, a retired attorney living in Pacific Grove.
Back in the period between 2002 and 2008, Sonoma and Marin counties were, just like virtually every other city and county in California, in the process of granting pension benefit enhancements to their employees. But did they follow due process? Moore writes:
This article deals with pension abuses by two separate CERL agencies, the counties of Sonoma and Marin. Each has its own retirement board. In each county, the civil grand jury found serious procedural violations that were preconditions to the adoption of retirement increases:
Each grand jury report documented the grant of pension increases from 2002 through 2008 without providing the board of supervisors and citizens mandated actuarial reports estimating the “annual” cost of each enhancement.
There are 21 counties in California with independent pension systems. In all, taking into account cities with their own pension systems, along with CalPERS and CalSTRS, there are 81 independent state and local government worker pension systems in California. And most if not all of them adopted pension enhancements between 1999 and 2008, awarding the benefit enhancements retroactively.
Anyone who thinks there aren’t legal grounds on which to question the retroactive pension benefit enhancements that have mired California’s public sector in a swamp of overwhelming debt should carefully read Moore’s article. Improper notice. Poor estimates of “annual costs.” Lack of independent financial review. But the consequences of these improprieties are plain to see.
In Marin County the most recent financial report shows their pension system, as of June 30, 2015, was funded at a ratio of 84.3%. If we were at the bottom of the market instead of on the plateau of a market that has roared for the past seven years, that would be reassuring. But we’re not. Since June 30, 2015, the S&P 500 has risen from 2076 to 2091. That’s less than one percent during a ten month period when – at 7.25% per year – this index should have gained 6.0%. The DJIA for the same period? Up 1.5%. The NASDAQ? Down 2.4%.
On page 27 of Marin County’s most recent pension fund financial report is a table entitled “Sensitivity of the net pension liability to changes in the discount rate.” That table shows the system, as noted, 84.3% funded when assuming – as they do – a “risk-free” rate of return, year after year, of 7.25%. On the same table, the lowest assumption they calculate is at a return of 6.25%, which lowers the funded ratio to 74.4%.
It’s too bad this is all abstruse gobbledygook to most voters and most politicians, because this is real money. Also shown on page 27 of Marin County’s 6/30/2015 financial report is the amount of the unfunded liability for Marin County’s pension system. If those investments keep on earning 7.25% per year, that liability is $387 million. If those investments only earn 6.25% per year, the liability nearly doubles, to $717 million.
Along with asking questions as to the legality of shoving these pension benefit enhancements through county boards of supervisors and city councils with minimal due process or quality independent financial analysis, one may ask how these pension systems get away with claiming 7.25%, or 6.25% for that matter, is a “risk free” rate of return. When is the last time you went to a bank and bought a CD, or went to a brokerage and bought a treasury bill, and saw a return north of 3.0%? So how much would Marin County’s pension liability be if their investments only earned 3.0% per year?
Using formulas developed by Moody’s Investor Services for this purpose, as explained in the California Policy Center study “A Method to Estimate the Pension Contribution and Pension Liability for Your City or County,” if Marin County’s pension system were to earn a risk free 3.0% return per year, their unfunded pension liability – that’s “debt to taxpayers” in plain English – would be $2.1 billion.
Two-point-one-billion. Billion with a “B”.
When pension benefits were enhanced by one local government after another between 1999 and 2008, the means by which they were approved were barely legal, if they were legal at all. The chicanery and insider-dealings that constituted these decision making processes rival the scandal in the City of Bell. The syndrome is the same – financial corruption that enriches the government while disenfranchising and diminishing private citizens. But the sheer scale of the financial consequences of these retroactive pension enhancements, the literally hundreds of billions of debt that these shady machinations imposed on California’s taxpayers – that dwarfs the scandal in Bell like a whale dwarfs a minnow.
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Ed Ring is the president of the California Policy Center.