Unfunded Pension Liabilities ‘Crowding Out’ City Budgets in Orange County

March 10, 2021 Updated: March 10, 2021

The significant burden of unfunded pension liabilities is severely affecting municipal budgets throughout Orange County, California, officials say, with some cities faring better than others.

When cities are forced to spend more to cover pension costs, something else has to be cut from local budgets, according to former state Sen. John Moorlach.

“It has impacted them with a problem that’s referred to as ‘crowding out,’” Moorlach told The Epoch Times. “You’re seeing a lot of cities making considerable staffing reductions,” including public safety staff.

Public employee pension fund deficits are one of the most daunting problems faced by local governments. While some cities in Orange County have made substantial efforts to pay down these unfunded liabilities, others have not—and are struggling to remain solvent.

Moorlach, who served on the Orange County Board of Supervisors for eight years and was also formerly the county’s treasurer, is known to public employee labor unions as a tough negotiator. He noted that making staffing cuts to pare city budgets may not be enough.

Huntington Beach, for example, cut its staff by 18 percent, he said—but CalPERS (California Public Employees’ Retirement System) payments still jumped 80 percent. Councilman Erik Peterson told The Epoch Times that Moorlach’s figures seem accurate. Over the past year, he said, more than 50 city employees were given “incentives to retire” to cut spending.

In Orange County, the average public pension debt per household countywide was $31,438 in 2018, according to Pension Tracker’s most recent data. The site was developed by professors at Stanford University to give citizens a good idea of how well their cities are doing at managing public pension debt.

The burden on taxpayers varies by city. In Orange County, the city with the highest debt load is Santa Ana, with a $23,887 average per household; the lowest is Laguna Woods, with an average household debt of $185.

Statewide, the estimated total amount of unfunded pension liabilities in 2018, the most recent year for which data is available, was more than $1 trillion—nearly $82,000 per California household, according to Pension Tracker.

A closer examination of some of Orange County’s cities reveals that many are being proactive to reduce their unfunded liabilities, even as they suffer due to the ongoing COVID-19 pandemic.

Epoch Times Photo
The gates to Disneyland remain closed due to the COVID-19 pandemic in Anaheim, Calif., on Oct. 21, 2020. (John Fredricks/The Epoch Times)

Anaheim

Mike Lyster, a spokesman for the city of Anaheim, told The Epoch Times that despite tough economic times due to the COVID-19 pandemic, his city has options.

“We have an issue with unfunded pension liabilities, like any city of our size and age does, but really, the issue we are facing is a loss of revenue,” Lyster said. “We are a visitor town, and with Disneyland closed … we have seen a significant drop in revenue.”

Anaheim has $2.7 billion in pension obligations, Lyster said, $817 million of which is unfunded—just under $22,000 per household, according to Pension Tracker.

“Our obligations are a priority for us, and we will continue to meet pension obligations that we have,” he said. “Of course, we would like to see more of it funded, but that’s not the worst situation to be in as a city. That’s a pretty good level of pension obligation funding for a city of our size and our age.”

Anaheim is facing a $114 million budget deficit for the 2020–2021 fiscal year ending June 30, and projects a $72 million budget shortfall for the 2021–2022 fiscal year, Lyster said.

Revenue from hotel stays—which makes up 40 percent of the city’s budget revenue in a normal year—is projected to be down about 75 percent, with Disneyland and the Anaheim Convention Centers closed for a year, and no fans attending hockey and baseball games, he said.

“We’re looking at transitional borrowing to help us through this deficit period, because we know further down the road, our city will rebound. We’ve already seen some signs of that. … We know we will get through this. It’s a temporary phenomenon,” he said.

Solutions could mean boosting revenue, borrowing, and spending cuts, he said.

“So those are three levers that you can use to address this budget deficit.” A fourth lever, federal aid, is another possibility, but is out of the city’s hands.

“We, like many cities, are watching the federal relief package that is moving through Congress in Washington, D.C. It could include money for our city, but we don’t bank on that, because it’s something that we don’t directly control.”

A $1.9 trillion federal COVID-19 relief bill has passed both the U.S. House of Representatives and Senate. Once signed by President Joe Biden, the measure is expected to contain financial relief for cities, which proponents say is desperately needed.

However, critics say if money is directed toward unfunded pension liabilities, it would only serve to reward fiscally irresponsible states—including California—and would punish taxpayers in other states that have borrowed and spent more conservatively.

Epoch Times Photo
An aerial view of Irvine, Calif., on June 26, 2020. (John Fredricks/The Epoch Times)

Irvine

Former Mayor Christina Shea told The Epoch Times that one of the main reasons Irvine is known as one of the most fiscally strong cities in the nation is because “we’ve been very prudent about our expenditures and our indebtedness”—and the city has paid down its unfunded pension liabilities.

Shea, who has served several terms on the City Council going back as far as 1992, said she has always been fair but firm in labor negotiations.

“When I came back to the city in 2013, our pension liability had gone up to like $95 million—nothing like many cities today, but it really bothered me. And I sat down with our financial staff and we put together a plan,” Shea said.

The city used some of its reserve funds to pay down unfunded pension liabilities by about $2 million a year.

“From my perspective, it’s more than just negotiating with the unions; it’s really holding the electeds accountable. They’re the ones that approve contracts,” she said.

Shea noted she’s always been “very tough but fair with our unions.”

“The mature person in the room needs to say ‘no’ when the money isn’t there,” she said. “That’s how I’ve always handled our fiscal oversight. I hope our new council adheres to that as well.”

According to Pension Tracker, Irvine fares better than most cities in the county, with an average debt per household of $5,556.

Epoch Times Photo
Boats travel in front of Mama’s restaurant in Newport Beach, Calif., on Sept. 8, 2020. (John Fredricks/The Epoch Times)

Newport Beach

City Council member Kevin Muldoon said he first ran for the Newport Beach City Council in 2014 with a promise to reduce the city’s unfunded pension liability.

“I think that’s basically the platform I ran on. I ran against the debt,” he said.

When he was elected, the city’s unfunded pension debt was $291 million, he said. The city also had an additional $240 million debt for a new civic center it had built.

“Now that I’ve been on council for six years, we pay above and beyond the minimum CalPERS payment every year,” said Muldoon. “We are more aggressively paying down the debt that I inherited than any other city that I’m aware of in the county.”

He added that some of Newport Beach’s neighbors, including Irvine, have also paid down their debts, “but they didn’t have as much [debt] as we did.” Citizens of Newport Beach were paying off “double” the debt, he said, because the city was still paying for the civic center.

“When I was elected, I believe it was the highest per capita in the county, or close,” Muldoon stated. Now, “we’re on track,” he said, because the city has “sped up payments.”

“We have one of the most aggressive early payment of unfunded pension liability debt of any city in Orange County that I’m aware of,” he said.

“Unfortunately, we can’t pay off the civic center early. There are prepayment penalties. So that’s why we’re on a 15-year aggressive plan for the pensions—because we can pay that down sooner.”

Epoch Times Photo
Two people walk into the newly opened Yorba Linda Library and Cultural Arts Center complex in Yorba Linda, Calif., on Nov. 30, 2020. (John Fredricks/The Epoch Times)

Yorba Linda

Mayor Peggy Huang told The Epoch Times that Yorba Linda has made paying down its unfunded pension liability a priority to avoid the consequences.

“Oh my gosh, they’ve already bankrupted cities,” she said. “I mean, how could they not be bankrupting cities?”

About five years ago, Yorba Linda implemented a policy to pay down the unfunded liabilities, Huang said. Though cities have 30 years to pay off CalPERS liabilities, Yorba Linda is on a 20-year plan.

“Plus, when we do have extra money, we do send in an extra check,” she said.

“We accelerate our payments because we make that the priority for our city. After we take care of that bill, then we pay for everything else,” she said. “Yorba Linda is in a little bit better situation … but I do feel the pain of many of our cities, especially our neighbor city, Anaheim.”

She said cities with more fiscally conservative policies have done a better job of paying down unfunded liabilities.

“All your Republican-controlled cities have done that,” she said.

According to Pension Tracker, Yorba Linda has unfunded pension liabilities of about $2,713 per household, among the lowest in the county.

But Anaheim’s Lyster said it’s unfair to compare the average household debts among cities of different sizes.

“That’s one way to slice and dice it,” he said, but in some ways, comparing Anaheim to Yorba Linda is like comparing “apples to oranges.”

For example, Anaheim pays for its own police force, while smaller cities such as Yorba Linda contract out police and fire services to the county. Anaheim’s population is about 350,000, compared to Yorba Linda’s 68,000.

Other Orange County cities with high average household debt loads for public pensions include Brea, with $22,762 per household; Costa Mesa, with $18,872; Orange, with $17,839; and Garden Grove, with $16,799.

Huntington Beach, Fountain Valley, Los Alamitos, and Fullerton all have averages above $15,000 per household.

On the lower end, Dana Point had $1,655 in average pension debt per household; Laguna Hills, $1,511; and Laguna Niguel, $1,231. Lake Forest, Rancho Santa Margarita, and Aliso Viejo all were under $1,000 per household.

Epoch Times Photo
Former state Sen. John Moorlach speaks in opposition to a measure that would increase California’s minimum wage in Sacramento, Calif., on March 31, 2016. (AP Photo/Rich Pedroncelli)

An Expensive Mistake

Moorlach traces the pension crisis to 1999, when former Gov. Gray Davis signed Senate Bill 400 (SB 400) into law. He said the bill granted a 50 percent pension increase to employees of the California Highway Patrol (CHP), creating a domino effect in most other state agencies. The legislation was passed during the dot.com bubble, when the market was generating annual returns on investment up to 25 percent.

“We had about two to three years [when] stocks were trading at well over 60 times earnings per share, historically way over the norm,” Moorlach said. “We were trading up the price of stocks for companies that didn’t even have income just because they were going to be the next internet wonder. And everybody thought that the stock market would go up 20 to 30 percent every year.”

The bubble burst in 2000—but not before the formula to determine CHP pensions was changed. CHP pensions were previously calculated by multiplying 2 percent of each worker’s salary by the number of years worked. SB 400 boosted that to 3 percent.

The increase has proven over time to be unsustainable.

“Let’s say you got hired at age 25 and you worked till age 50 … You’ve got 25 years in and you’re making $100,000 [before] retirement. So you get 2 percent of that, times 25 years. You’re going to get $50,000 a year for the rest of your life if you retire at 50.” But, if that percentage is increased to 3 percent, the same retiree would get $75,000 per year, post-retirement, for the rest of his or her life.

CalPERS has never recovered, Moorlach said.

CalPERS, which has more than 2 million members, is the largest public pension fund in the United States. Others include the 976,045-member California State Teachers’ Retirement System (CalSTRS), and more than 30 more public employee pension funds listed on the California Association of Public Retirement Systems (CalAPRS) website.

An unfunded liability is the difference in the amount of money a pension fund has on hand and what has been promised to retirees. The deficit is caused when investments don’t deliver on the expected rate of return.

“There are three parts of pensions … what the employee pays, what the city pays, and then CalPERS is supposed to make so much to make the pension whole,” said Councilman Peterson of Huntington Beach. “And then if they don’t make what they say they’re going to make, we get a bill, which goes into our unfunded liability.”

Moorlach added that another reason the costs of public employee pensions keep rising is because unfunded liabilities are “being paid at a rate of 7 percent, because that is the investment return assumption that CalPERS is making.

“Traditionally, you would have 40 percent of your portfolio in fixed income bonds, and 60 percent in equities in the stock market. You just have to hope that the stock market outperforms a lot more than 7 percent,” he explained.

“It’s very difficult for CalPERS to achieve 7 percent. They may do it this year if the stock market holds up through June 30. But on the fixed income side or the bond market, a 10-year Treasury [bond] pays what, 1 percent or less?”

In July, CalPERS reported a 4.7 percent return on investments for the 2019–2020 fiscal year. According to the report, CalPERS was 70.8 percent funded as of June 30, 2020.

“The main retirement provider for state and local employees—and also probably the largest pension system in the U.S., if not the world—has now found itself two-thirds funded. It’s still at about 70 percent, 20 years later,” he said.

“It’s never been able to catch up.”

Chris Karr contributed to this report.