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.