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). 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:
– Part 1, January 7, 2014
– Part 2, January 14, 2014
– Part 3, January 21, 2014
– Part 4, January 28, 2014
– Part 5, February 3, 2014
– Part 6, February 11, 2014
– Part 7, February 18, 2014
– Conclusion, February 24, 2014