Daniel Weintraub: Orange County considers taking back pension hike

Ever since the Legislature, former Gov. Gray Davis and local governments across California boosted pensions for public employees amid the stock market boom early in this decade, critics have been looking for ways to reduce the cost of those benefits to the taxpayers.

A rollback has always been unlikely, given the influence of public employee unions on the political process. But almost everyone seemed to agree that any changes that did occur could apply to new employees only.

Current employees and retirees who had been given higher pensions, and then made life-changing decisions based on those payments, were considered safe.

Until now.

The Orange County Board of Supervisors voted late last month to consider taking back a pension increase granted to public safety employees in 2001 -- on the grounds that a portion of that increase represented an unconstitutional debt and an illegal gift of public funds. The reduction would affect sheriff's deputies and other safety employees who are still working, and hundreds who already have retired.

If the board follows up next month and actually votes to cut the benefits, the case will be watched around the state, and probably across the country. Hundreds of other public agencies in California did the same thing that Orange County did. If it turns out that their actions were illegal, those agencies might have no choice but to undo them.

At issue are retroactive pension hikes that cities and counties gave to public employees at the same time that they increased benefits generally.

The broader benefit increases are not in question here because they were financed by future contributions to the retirement funds from employees and the taxpayers, and investment earnings on those contributions.

But the retroactive benefit increases were a windfall, especially to workers who had already put in a long career and were ready to retire.

In Orange County's case, the county increased pension benefits by 50 percent for public safety employees in 2001. Under the former system, a sheriff's deputy who retired after 25 years with the county would get a pension equal to 50 percent of his pay. After the change, that same deputy gets a retirement check equivalent to 75 percent of his final salary.

For a deputy earning $70,000 a year at retirement, the change meant the difference between a pension of $35,000 a year and one totaling $52,500 a year.

Deputies can retire at age 50, which means they can draw on their pensions for decades. Over the projected lifetime of such a retiree, the benefit boost would mean the county has to invest an extra half-million dollars in the pension fund to cover the cost. And all of that money would come from the taxpayers.

John Moorlach, the Orange County supervisor who is pushing the board to consider repealing the benefits, said the county might not have a choice -- if the retroactive portion of the benefit increase is found to be illegal.

"You really can't encumber your municipality with a debt you can't pay in the year you create it," he said. "Otherwise, you have to go to your voters and get a two-thirds approval." On top of that, he added, the retroactive benefits represented an illegal gift of public funds to the employees who are receiving them.

"You didn't vest, you didn't work for it," Moorlach said of those employees. "You agreed to work for a salary and a pension package. You worked all those years and at the end they said, 'Hey, we're going to give you a new formula.' If you give it retroactively, it's like a bonus. You can't give bonuses. You can pay someone only what they agreed to be compensated."

Moorlach isn't seeking to take back any money already paid out to those retirees. But he would have the county end the portion of the higher payments that was based on years of service an employee accrued before the benefit increase was granted. As an alternative, current and future employees in the same labor group, in this case deputy sheriffs, could agree to pay a higher contribution rate to cover the cost of their brethren's benefits.

Public employee labor unions oppose the change and argue that Moorlach's legal analysis is flawed. That's not a surprise. But they have been joined by Sheriff Mike Carona and District Attorney Tony Rackaukus, who argue that the course on which the board has embarked would be unduly harsh.

Moorlach, however, has been a one-man early warning system before. In 1994, as a private citizen, he complained that Orange County's treasurer had invested too much of the county's money in risky securities. He was roundly ignored by the county establishment, but he turned out to be right. A few months later, the investment fund collapsed and the county was bankrupt.

If Moorlach is right on the pension issue, not just Orange County but counties and cities all over California -- and their retirees -- are going to be in for a rude shock.

About the writer:

• The Bee's Daniel Weintraub can be reached at (916) 321-1914 or at dweintraub@sacbee.com. Readers can see his blog about health care at www.sacbee.com/healthcare.