The Next Bubble to Burst

Compared to Mayor Mike Henn, I’m a mid-level pencil pusher. 

He was a CFO for two very large public companies; I’m just a Corporate Controller for small private companies. 

He filed quarterly 10-Qs to the Securities and Exchange Commission.  I file quarterly payroll tax returns to the IRS and sales tax returns to the State Board of Equalization. 

He’s the star Quarterback in the NFL, I’m a third-string QB in the Arena Football league.

So when I read that based on the Fiscal Year End 2009 California Public Employees’ Retirement System report, the City of Newport Beach has an unfunded pension liability of $134 million dollars, as well as an unfunded $60 million dollar Other Post-Employment Benefits (OPEB), or Health Insurance et al., liability, I cannot help but wonder: Why isn’t Mayor Henn’s head exploding? 

What does all those numbers above mean? 

What it means is that if every City Employee - every Police Officer, or every Fireman (or Fireperson) and Lifeguard - eligible to retire did so today, the City of Newport Beach would be almost $200 million dollars short on paying for their “Well-Deserved” (former Councilman Don Webb’s paraphrased words) post-retirement Pension and Health Insurance benefits for the rest of their lives.

Let me repeat in terms that even a Third Stringer like me can understand.

The City of Newport Beach is $200 million short to pay for the Pension and Health Insurance for all of its present and future retired employees.

And that is based on the June 30, 2009 report by CalPERS, released in December 2009, which leads me to a couple of questions.

First, when did the City of Newport Beach know that its pension liability jumped up 44% from the year before, to $134 million dollars?

And, second, is the City going to do something more than just have the Public Safety Employees, whose contracts expire in December, contribute more than just 3.5% (while the City contributes the remaining 96.5%) to their pensions?

With question #1, one cannot help but wonder, after an election season where Pension Liability was a huge topic, where Council candidate Ed Reno brought up privatizing more City Functions (Trash Service as an example), where the size of government was questioned, did the City wait until after the November 2010 elections, 11 months AFTER the CalPERS report was released, to drop this little tidbit of information?

If we, the voters, would have found out that the City was $200 million dollars in the hole to pay for the bloated, yet “deserved,” pensions and health insurance of its employees, would the election results have been different?

Perhaps. 

But couple this with the $128 million dollar loan to build the City Hall/Civic Center, and the City of Newport Beach faces a debt of more than $328 million dollars, which will choke even the most robust bank accounts, even the most robust companies.

Is being $328 million dollars in debt a good thing to be during these tough economic times?

So how far will the City go to alleviate this problem?  And how much will the Public Employee Unions concede to prevent this fiscal bubble from inevitably bursting?

Contributing 3.5% to 8% to their own pensions will not work.  Having them raise their retirement age from 50 to 55 won’t do anything, either. 

Only having employees go from the traditional CalPERS system to a “defined-contribution” program similar to a 401k, as Mayor Henn suggests, would help, but instead of hoping that it could be done “well down the road,” it needs to be done immediately.

Doing it “well down the road” would be like ordering more lifeboats for the Titanic long after the ship has sunk.

Will the Public Employees, Firefighters, Lifeguards, Police Officers, and Trash guys be willing to dump their juicy pensions for a normal 401k plan like you and I have? 

And what will Mayor Henn and the rest of the Newport Beach City Council do if they won’t and “concede” to just contributing 9% to their pensions?

Here’s what I would love to see happen.

- The City Council draws a line in the sand and says that being $328 million ($128 million for the City Hall/Civic Center and $200 million in unfunded Pension and OPEB liabilities) in debt is enough.

- The City Council immediately implements a “Defined-Contribution” program similar to a 401k, and raises the retirement ages to 60 years old.

- If the Unions don’t agree, then let the layoffs begin.

Yes, I repeat, let the layoffs begin. 

Just like in Colton, CA, and in Camden, NJ.

You read that right: the City Council needs to start acting like Fiscal Conservatives (like many claim to be) and take the necessary actions to ensure that the next bubble that bursts isn’t Newport Beach’s. 

And Mayor Henn needs to step up to the plate to keep the Newport Beach ship from sinking.

Comments

[Jim Mosher]

It may be of interest to know that for the last 15 years or so the Newport Beach Council people themselves have been "acquiescing" to receiving from taxpayers around $17,000 per year each of "employment" benefits, including health, vision, and dental insurance and payments on their behalf to the state employee's retirement system mentioned by Jack Wu, even though Charter Sections 402-A&B require them to serve with "no compensation for their services as such" -- only reimbursement for day-to-day out-of-pocket expenses incidental to their service. Should we expect better leadership in the effort to cut benefit excesses?

[Laura Curran]

Jack: The discussion of pensions is appreciated; however, it seems that more information would useful to have the whole picture.

Can you please clarify the pension math, i.e. what is the Pension Contribution based on, and much would an employee making $100K contribute annually?

Scenario 1) Do Public Safety Employees contribute 3.5% of their salaries to the Pension Fund, and the City contributes 96.5% of each member's annual salary?
Example: An employee making $100K, would contribute $3,500, and the City would contribute $96,500.

Scenario 2) Do Public Safety Employees contribute 3.5% of the Pension Contribution, and the City contributes the remaining 96.5%, and what is the basis for calculating the pension contribution?
Example: A Public Safety Employee makes $100K. The Pension contribution is set at a % of annual salary. For example, if the contribution is 20% of salary, it would equal $20,000. The PSE contributes $700, and the City contributes $19,300.

Also, do Public Safety Employees contribute to Social Security?

Thank you Laura Curran

[CDM resident]

Jack,

It appears the question of the year is whether the city knew its unfunded CALPERS liability was not $40 million but $134 million (plus $60 million of OPEB) when it made its disclosure filing in November 2010 to float the $135 million of Build America Bonds for the new city hall. That disclosure is a mastery of understatement concerning the city's true liability exposure.

We need an independent audit of the city books now more than ever. We also need to bail out of CALPERS - it's a conflicted, out of control risk we cannot sustain. And, we need a truly independent city manager who does not share the same CALPERS conflicts of interest with the city's employees.

Just Wondering .........