O.C. Treasurer Warns County of Pension Risk

John M.W. Moorlach made his political name in 1994 when he repeatedly pointed out the vulnerability of Orange County’s investment pool while campaigning for county treasurer.

Although Moorlach lost that race to the incumbent, his forecast proved accurate. The county declared bankruptcy in December 1994, his opponent was criminally indicted and Moorlach was named his replacement.

Now, a decade later and still the county treasurer, Moorlach is sounding the voice of caution again, this time focusing on the county’s pension system and plans to increase retirement benefits for county employees.

The union that represents most of Orange County’s 17,000 workers has negotiated a tentative three-year contract that would allow employees to retire sooner and with bigger pensions.

County and union officials say workers would pick up the cost of the improved pension by making increased payments into the retirement system, paying more for medical benefits and forgoing pay raises.

Nick Berardino, the union’s general manager, has described the contract as beneficial for workers and the county. And county financial officers say they have reviewed the proposed agreement and are comfortable with it.

But Moorlach said he has serious reservations about the deal and he has been sharing his concerns with members of the Board of Supervisors, who are scheduled to vote on the new contract Aug. 24.

Moorlach said he is concerned that the proposal to have employees pay for the increased retirement pay is based on an assumption that the pension fund’s investments -- primarily stocks, bonds and real estate -- will return 7.5% on average over the next 30 years. If the fund, now at $5 billion, fails to meet those expectations, then the county would have to make up the difference, Moorlach said.

“Somebody is going to have to guarantee it, and it’s going to be the taxpayers,” Moorlach said. “For a county that was so badly burned to get this close to that kind of fire again is a little unnerving to me.”

He suggested that it might be wiser for the county to allow employees to start accruing increased benefits now rather than immediately making the benefits available to all current employees. By one estimate, at least 800 employees -- nearly 5% of the county work force -- would retire the day the new benefits became available.

“What’s forcing us to be so generous?” Moorlach asked.The head of the county’s retirement system said the fund would have good years and bad but it’s reasonable to assume that the fund will earn a 7.5% return on average during the next 30 years.

“I think it’s a very reasonable number. We’re in the conservative end,” said Keith Bozarth, chief executive of the Orange County Retirement System, a county agency. The fund returned a little more than 20% last year during a positive year on Wall Street.

Moorlach said he will attend the Aug. 24 board meeting and will urge the board to consider rejecting the deal. Each year, the county contributes to the pension system to cover the anticipated pension expenses of county employees.

The proposed increase in pension benefits adds $300 million in anticipated liability to the pension system, enough that even a 1% shortfall in earnings could create an enormous burden for the county, Moorlach said.

In a worst-case scenario, the county could be forced to raise taxes to make good on its promises to workers, Moorlach said.

“You’ll probably see something on the ballot, ‘We’re going to cut our sheriff and fire services in half unless you pay for this parcel tax,’ obfuscating what the real issue is,” Moorlach said.

If the board were to follow Moorlach’s guidance, it could throw the county’s labor situation into chaos.

The union’s contract expired July 1 and union members would be upset if the board rejected a deal that county negotiators offered them, Berardino said. The board is also considering similar deals with several smaller unions.

“The county [labor negotiators] made a proposal to us and we accepted that proposal. If the county were to now renege on its offer, they would be in bad faith. I don’t believe we or any other union in the county could go back to the bargaining table and deal in good faith again,” Berardino said.

Moorlach’s words carry some weight in the county.

A decade ago, he cautioned that then-Treasurer Robert L. Citron’s strategy of borrowing and investing put the county at financial risk -- months before more than $1.6 billion in investment losses caused the county to declare bankruptcy.

“John is very outspoken, but he’s pretty smart. So, yes, we do listen to him and should be,” said Supervisor Chuck Smith. “This [pension] thing bothers me.... Is it really going to be no cost to the county?”

Smith said he would not hesitate to vote against the contract if he thought it was a bad deal for the county. He said he was not concerned that union leadership does not want the board to reject the contract.

“So, we’re supposed to be a rubber stamp for our negotiator? They would like that, wouldn’t they?” he said.

Berardino is not as impressed by Moorlach’s comments. Noting that the county treasurer has expressed interest in running for supervisor in 2006, Berardino suggested that his concern may simply be an attempt to generate publicity.

“It’s unfortunate that in this circumstance that perhaps Mr. Moorlach’s political aspirations are interfering with an objective analysis,” Berardino said.

Moorlach’s duties as treasurer include managing the county’s investments and overseeing collection of property taxes, not offering guidance in labor negotiations. But he said he still pays close attention to the county’s finances.

“As a member of the county team, my concern [that] is the county does not suffer from inappropriate financial decisions,” Moorlach said. “Why give away everything in one fell swoop and then leave it to another board or two or three down the road to figure out how to fix it?”