When the music industry transitioned from records to 8-track tape cassettes, to CDs and now to cloud-based music, did the government step in and add regulations to keep the status quo? No. We all transitioned with the technology and times to allow for growth and innovation. When the Austin City Council decided to set three tiers of outdated regulations for ride-sharing drivers, did Uber and Lyft stay in town? No. And now Austin residents and visitors have lost a great service.
Don’t think it can happen here? In business-friendly Orange County, a city council recently decided to punish its own community medical provider for innovation in meeting patient needs, as it faced new technology costs, service challenges, changing demographics and diminished health care returns in a time of Obamacare.
And now that city has lost its premiere medical center.
San Clemente wanted its own hospital and emergency room. MemorialCare Health Care System was its hospital provider. However, MemorialCare is also a business that must watch its overhead and margins. Further, to its credit, MemorialCare recognized that its older facility was no longer effectively serving the San Clemente community. Patient volume has dropped dramatically, with the 73-bed hospital seeing less than 10 inpatients most days. Emergency services were available in surrounding communities. Research showed that more patients were seeking convenient, cost-effective outpatient services instead of acute care or emergency facilities. An empty facility is not a sustainable business, so exploring other options made sense.
Following community trends, MemorialCare worked to transition into building a modern outpatient medical campus and – to satisfy the city’s request – sought legislation that would have allowed for a satellite stand-alone emergency department, which California law currently (and oddly) doesn’t allow.
Unfortunately, in January, the California Legislature (itself usually behind the times in innovative economic strategies) failed to pass an exception for San Clemente. So in the spirit of “no good deed goes unpunished,” the following week, San Clemente City Council voted to downzone MemorialCare’s property, effectively making it impossible to continue the hospital’s innovative development plans as well as afford continuing operation costs. MemorialCare was forced into closure, an outcome no one wanted.
Had all parties worked together to address the real needs of the people of San Clemente, this could have been avoided. Now MemorialCare has filed a multimillion-dollar lawsuit against the city for an unlawful “taking” of its property and development rights without just compensation. The city faces enormous taxpayer-funded litigation costs. The residents have lost their medical center. And residents’ future medical needs will not be met any time soon – especially with the innovative new center proposed by MemorialCare.
It’s not “the good ol’ days” anymore for effective health care. It won’t ever be. We at Orange County Business Council urge the city and MemorialCare to come back to the bargaining table and reach agreement on a medical services model that works for a 21st century economy and the residents of San Clemente.
Otherwise, dust off that 8-track player.
Lucy Dunn is president and CEO, Orange County Business Council.
So if you don’t live in Irwindale, rejoice: There, even when you look at it through rose-colored glasses, public pension liabilities equal $32,447 for each and every household in the city.
Slap on a skeptic’s glasses, and that load skyrockets to $134,907 per household.
Irwindale carries the heaviest pension load of more than 1,000 California public agencies whose data have been sliced and diced and posted for the world to see by the Stanford Institute for Economic Policy Research.
The heaviest loads in Orange County are in Newport Beach, Brea, Santa Ana, Anaheim and Costa Mesa, ranging from (rose glasses) $5,435 to $6,653 per household, or (skeptic’s) $15,976 to $19,062.
We’ll explain the glasses thing in a minute. But no surprise here: The older cities have had their own in-house police and fire departments for decades, and public safety workers usually get the most expensive pensions.
That comes clear in the incredible lightness of being a newer-fangled city, which contracts out for police and fire services (and thus doesn’t carry that pension load on its books): Aliso Viejo, $32 per household (rose) or $126 (skeptic’s); Laguna Woods, $32 or $121; Rancho Santa Margarita, $72 or $239.
Of course, that load winds up somewhere. In the County of Orange – which provides police services to contract cities via its Sheriff’s Department – each of its 1 million or so households has a load equal to $5,108 (rose) or $14,840 (skeptic’s). That’s on top of whatever each household’s city (and other agency) loads may be.
Stanford’s PensionTracker.org launched last fall, initially listing local agencies, and last week added data for every state. California ranked seventh highest nationwide for debt-per-household when viewed through rose-colored glasses ($15,618); and third-highest in the nation when viewed through skeptic’s glasses ($77,700).
“I was a little surprised that the unfunded amount per household is as high as it is,” said Joe Nation, public policy professor at Stanford and director of the data project.
All told, California’s public pension systems are $281.5 billion short, including pension bond debt. Through Nation’s lens, they’re nearly $1 trillion in the hole – or $946.4 billion.
Nation, a Democrat who served in the Legislature for six years, might be considered a card-carrying progressive. He represented Marin County, where Democrats and decline-to-states constitute nearly 80 percent of registered voters. He authored bills on greenhouse gas labeling for cars, fuel efficiency standards for tires and tax incentives for alternative energy.
Nonetheless, Nation has earned the wrath of public employee unions – a traditional Democratic power base – with his jarring analyses of public pension debt.
Stanford scholars have simply been calculating how deeply in debt pension systems will be if they earn less-rosy-than-anticipated returns on investments.
The rose-colored glasses refer to the shortfalls calculated by officials themselves – what they expect if California’s pension systems earn what officials say they’ll earn, which is currently 7.5 percent or so. Through this “actuarial” lens, they’re $241.4 billion short. That’s a staggering 38 times larger than in 2003, when the shortfall was $6.3 billion. Nation adds in bond debt issued to beef up pension funds, arriving at his $281.5 billion actuarial total.
Nation, and many others, don’t think it’s realistic to expect 7.5 percent returns on investments.
“Buoyed by exceptional economic and business conditions, returns on U.S. and Western European equities and bonds during the past 30 years were considerably higher than the long-run trend,” says the study, released this month. “Some of these conditions are weakening or even reversing.…
“Our analysis suggests that over the next 20 years, total returns including dividends and capital appreciation could be considerably lower than they were in the past three decades. If our analysis is correct, this will have significant repercussions for both institutional and individual investors, pension funds, and governments around the world.”
Total real returns for equities the past 30 years averaged 7.9 percent, McKinsey found. The next 20 years, that may well drop to 4 percent to 5 percent.
Nation, as it turns out, has been exploring that what-if-it’s-less? scenario for years. His Stanford scholars have calculated the “market” hole using returns of 6.2 percent and 4.5 percent, to howls of protest from the giant California Public Employees Retirement System and others who denounced it as alarmist.
The skeptic’s glasses that Nation dons in this new exercise belong, actually, to CalPERS. PensionTracker’s “market” calculations assume a gut-punching 3 percent return – whatCalPERS would use to calculate debt for agencies wanting to exit its system.
‘COOK THE BOOKS’
While Nation has calculated “per-household” debt loads, no one is proposing to bill each individual household for pension debt. It’s just a way to bring the problem down to scale for the average citizen – and one that enrages critics.
“This is another example of opponents of retirement security for teachers, firefighters, school employees and other public workers funded by special interests trying to cook the books under the guise of an academic study,” said Dave Low, chair of Californians for Retirement Security, a coalition of public employee unions.
He’s not necessarily buying the “past performance is no indicator of future results” warnings.
“As any financial expert will tell you, it’s critical to look at the long-term results of any investment, rather than cropping the picture to serve political goals,” Low said. “The fact of the matter is that CalPERS and CalSTRS have consistently met their rates of return over time. No amount of data manipulation can change that.”
CalPERS doesn’t think Nation’s approach is helpful.
“Showing pension liabilities on a termination- or market-value basis is unrealistic when investing for the long-term, as it only accounts for the current value of liabilities in the event of a plan termination,” spokeswoman Amy Morgan said in a statement.
But the pension giant is taking steps to stabilize in light of the economic conditions that the McKinsey study suggests, she said.
In November, it adopted a “funding risk mitigation policy” that will, in years of galloping investment returns, redirect money to help pay down unfunded liability.
“CalPERS remains committed to investing for the long-term and takes a measured and balanced approach to become a fully funded pension system,” she said. “Using our actuarial basis method allows for more rate stability for our employers and lessens the volatility so they can plan for the future. This method not only takes into account investment returns, but it also looks at employee life expectancy, projected retirement date and the projected compensation of the employee.”
ON THE HOOK
If the hole isn’t filled up with meatier investment earnings and heftier contributions from public workers and employers alike, taxpayers will have to fill it directly.
That’s because unfunded pension liabilities are simply what we’ve promised employees for work already performed. And in California, pension promises can never be broken – at least, not outside of federal bankruptcy court.
“For too long, the true cost of public employee pensions has been hidden from the public,” said Chuck Reed, a Democrat and former mayor of San Jose who has been trying to launch a pension reform initiative for years.
“Use of optimistic assumptions about rates of investment returns has obscured the cost and the risk to taxpayers. By using less-optimistic assumptions, PensionTracker shows the rest of the pension debt iceberg lurking beneath the water, waiting to sink the ship of state.”
Reed’s partner in the initiative push, Carl DeMaio, a Republican and former member of the San Diego City Council, said they’re aiming an initiative at the 2018 ballot. They want public agencies to have the freedom to negotiate smaller pension benefits for workers going forward; the benefits workers have already earned would remain untouched.
“At some point, obviously, we’ll have to deal with this,” Nation said. “We’ll either deal with it collectively, constructively and collaboratively, or when it blows up on us.”
I read with great interest the recent opinion piece by Mayor Diane Dixon and Finance Committee member Will O’Neill (“Commentary: Let’s examine refinancing N.B. Civic Center debt,” May 11).
I recall that in 2009, when the concept of a new Civic Center was being debated during my council campaign, the voters were assured that the project would not cost more than $90 million — up from a projected $30 million when first proposed years earlier.
Wrong! The Civic Center turned out to cost $140 million.
I wish that the City Council majority of the time would have reconsidered such a massive government project, and I am reminded of an observation PJ O’Rourke once made: “It is a popular delusion that the government wastes vast amounts of money through inefficiency and sloth. Enormous effort and elaborate planning are required to waste this much money.”
Therefore, I am in agreement with Mrs. Dixon and Mr. O’Neill that what needs to be looked at now is 1) Is there a more favorable financing structure that the city could adopt and save taxpayer money? and 2) How and why were the certificates of participation so punitive to the city and its taxpayers?
The citizens of Newport Beach expect constant and thoughtful leadership and if the proposal to review the financing of the Civic Center determines that better is possible, then why should the residents of Newport Beach have to settle for status quo?
Balboa Island resident ED RENO is a previous candidate for Newport Beach City Council.
A recent proposal for addressing governments’ pressing pension obligations may also point the way for Newport Beach to deal with its Civic Center debt.
Chapman Law School dean and former U.S. Rep. Tom Campbell recently raised an interesting point regarding long-term pension obligations in an opinion piece in the Orange County Register. A Harvard law school graduate, UC Berkeley professor of business, and former California director of finance, Campbell is widely recognized as a national leader in economics.
Campbell’s premise is that with bond interest rates at historic lows, governments have an opportunity to address long-term financial obligations by borrowing at reduced interest rates.
Campbell was discussing pension debt and Newport Beach has significant unfunded pension and retirement benefit obligations that are included in Campbell’s proposal. Additionally, Newport Beach spends approximately $8 million per year paying down the $281 million-plus Civic Center debt, and we are curious whether the same prescription could apply.
Piggybacking on Campbell’s thesis, we believe it’s time to conduct some serious fact-finding to determine whether the market conditions are right to revisit our Civic Center debt obligation.
Now, this is not a discussion of whether the project should have been built. It’s done. Some like it, others don’t. So be it.
Our goal is to ask questions concerning the best financial strategy going forward, not accuse, nor cause emotions to rise. We simply want to know whether the timing is right for an accelerated payoff that ultimately reduces the burden on taxpayers and explore the options, if any.
Newport Beach taxpayers and businesses generate significant annual revenue. As policymakers our job is to prudently allocate these funds with the goal of limiting the burden on all taxpayers. And one thing we have learned about Wall Street is that if the deal is right there is always a buyer.
We support retaining the appropriate professionals to advise the city on these issues:
•When the City Council approved the Preliminary Official Statement on Nov. 9, 2010 to issue the proposed Certificates of Participation to finance the Civic Center project, it included three full paragraphs devoted to permitting prepayment of certain certificates. The COPs were then issued a week later, but the final version deleted those paragraphs and simply stated that the certificates “are not subject to prepayment prior to maturity.” Basically, the City Council waived its rights to prepay or refinance a $280 million debt obligation for a period of 40 years. What happened? And is the prepayment penalty our biggest obstacle to accelerating the payoff?
•Are rates low enough to offset the prepayment penalty?
•The debt was issued as a “certificate of participation,” which is a way for local government to finance projects without requiring a public vote. If we are able to refinance, should the City Council ensure that the issue be put to a public vote?
These are very complex issues that require careful analysis. We don’t have the answers but look forward to the Finance Committee with outside counsel putting in the time to determine if market conditions are right for the accelerated payoff of our $281 million-plus Civic Center debt obligation.
DIANE DIXON is mayor of Newport Beach. WILL O’NEILL is an attorney and member of the Newport Beach Finance Committee.