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With city officials projecting that Newport Beach’s payments to the state’s public employees pension fund could be up to $16 million more next fiscal year, the city Finance Committee heard a lengthy presentation Thursday about the city’s unfunded pension obligations.
Officials also noted there could be little or no increase, depending on the direction of the City Council, which budgeted about $31 million of its $278-million budget toward pensions in the 2016-17 fiscal year.
How much the city will choose to spend on bringing down its pension debt in fiscal 2017-18 — which begins July 1 — is still being determined, but city officials say it could have the effect of halting some coveted capital projects, including a new library and fire station in Corona del Mar.
During a council meeting Tuesday, City Manager Dave Kiff recommended that the city hold off on finalizing expenditures for the estimated $8-million library and fire station — nicknamed the “fibrary” — and other endeavors until the pension question is fully addressed.
Kiff said he didn’t think it was responsible to spend such funds “when we have such an uncertain debt ahead of us.”
Newport’s unfunded pension liability recently was pegged at $315 million.
Kiff repeated his recommendation Thursday, adding that finding $10 million to $16 million to cut from the 2017-18 budget while maintaining a high standard for city services has been very difficult.
Councilman Will O’Neill said during the Finance Committee meeting that he agrees with most of Kiff’s recommendations but doesn’t want the CdM “fibrary” delayed for five years, as Kiff suggested. O’Neill recommended breaking ground in as little as three years.
Councilwoman Diane Dixon said a dropoff in funds coming into city coffers from developments is expected in coming years.
Though developments aren’t always popular, she said, developer fees have funded many city parks and other amenities that Newport residents have come to appreciate and expect.
A former Newport Beach deputy police chief’s parting pension deal may be worth hundreds of thousands of dollars over the course of his lifetime — and serves as just a small local example of how the state’s pension system continually puts the needs of public employees over California taxpayers.
Local government watchdogs brought to my attention the case of David McGill, who has been deputy police chief for the city for close to — but not quite — five years. He came to Newport Beach in 2012 after “retiring” from the Los Angeles Police Department.
According to Transparent California, McGill earned $204,000 in regular pay and a total compensation package of $341,000 at the Newport Beach job, while collecting a pension of nearly $75,000 from Los Angeles, which offers a less generous pension formula than Newport Beach.
That’s typical by modern California “public-safety” pension standards. But it gets more interesting. McGill was passed over for the Newport Beach police chief job last year and then accepted the position of police chief in the small, trendy town of Sedona, Arizona. He was sworn in Jan. 11, yet continues to receive a paycheck from Newport Beach.
City Manager Dave Kiff allowed him to use his vacation time to carry him through the first week of February, which gives him the magical five years with the city. That’s the time needed to be vested in the California Public Employees’ Retirement System and to receive a lifetime pension. Given McGill’s base salary average of $193,000 over his last three years and Newport’s pension formula, this would add up to a pension of around $29,000 a year.
Newport Beach is a charter city, and the city manager gets to make this call. On Wednesday, Kiff told me it was only fair, given McGill had enough vacation time — and did some part-time work for the department — to carry him past the deadline. Kiff said it’s rare for an employee to have taken a new job, but have enough vacation time to take him to vesting. “In Newport Beach, especially in Dave’s position, he has significantly paid toward his pension costs,” Kiff added.
In a follow-up conversation Thursday, Kiff added new information: Because of “reciprocity” between the two police agencies, it turns out McGill was eligible for full vesting even without using his vacation time, so the vacation carry-over makes little difference to local taxpayers. But it’s clear the city would have allowed him to do this, reciprocity or not.
Just to be clear, there are no allegations of wrongdoing. The situation simply is illustrative of our pension system.
Police unions sometimes claim that officers die a few years after retirement, but research from CalPERS debunks that myth. If a current male officer is 55, then CalPERS’ numbers suggest he is likely to live to be 81.4 years old. Women officers live longer. McGill is 53, so if he lives to 81, that means this one minor pension situation will cost the system a bundle.
In many California cities, the taxpayer picks up not only the employer’s cost for the officer — but the employee’s cost. Newport Beach admirably requires a decent contribution from its employees, although it has followed the model of other cities by boosting salaries to cover the extra contribution costs.
“If true this is unacceptable and precisely what our new City Council is working to fix,” Newport Beach Mayor Kevin Muldoon said regarding the situation.
The City Council now has a conservative majority, which is more likely to focus on such spending matters. But the problem is rooted in the state Capitol, where unions have long ruled the roost. Public-safety workers can retire in most jurisdictions with the “3 percent at 50” formula that provides 90 percent of their final years’ pay at age 50 after 30 years, plus “enhancements.”
Because they retire so young, police often take jobs in new departments and start piling up pensions. But as pension funding levels fall, localities must pay higher contribution rates and cut services or raise taxes. Meanwhile, a new study from the California Policy Center in Tustin finds average compensation for a California public employee is twice that for an average private-sector employee.
Kiff, in fact, strongly agrees that legislators need to pass far more of the pension system, even though he said he was trying to assure the fairest outcome for an individual. I understand how the Newport Beach situation is fair to the employee. But isn’t it time to consider what’s fair to taxpayers?
Steven Greenhut is Western region director for the R Street Institute. He was a Register editorial writer from 1998-2009. Write to him at firstname.lastname@example.org.
By Scott Peotter, Newport Beach City Councilman
During our last council meeting, it was out with the old and in with the new. The three outgoing councilmembers, Keith Curry, Ed Selich, and Tony Petros, stepped down and Brad Avery, Jeff Herdman and Will O’Neill were sworn in.
At the meeting, the outgoing councilmembers were slapping themselves on the back and congratulating themselves as we politicians usually do. Taking credit for good things and leaving the next council with the failures, trying to preserve their “legacies.” People thanking them for their service, which is significant.
But what exactly is the Curry legacy? I was thinking that legacy would be debt and spending, and “Creepy Looking White Bunnies.”
From $5M to $650M in debt in ten years. When Curry took office in 2006 the only debt was the remainder of the $9M library bond and no unfunded pension liabilities. During the Curry Council years, they borrowed $128M of “non-callable” certificates of participation (COPs) that you cannot repay early or refinance even though lower rates would have saved the city $40M. Total owed with interest: almost $300M.
Curry then used this borrowed money to buy Creepy Looking White Bunnies, the $150M Taj-Ma-City-Hall and $40M Marina Park.
Before Curry, there were no unfunded pension liabilities, now we owe $350M. Unfunded pension liabilities are one of those things that you hear about all the time these days, without really understanding what it really means. In this case, a previous council to the Curry council retroactively raised public employee pensions (guaranteed payments regardless as to what the market does). Then the returns that the California Public Employee Retirement System (CalPERS) made were 0.6 percent instead of the forecasted 7.5 percent. So, the taxpayers must make up the difference, in the case of Newport, we owe CalPERS almost $350M.
John Adams, our second president, was one of the most famous of our founding fathers. Right up there next to Jefferson, Washington and Franklin. But when Adams was President he signed The Sedition Act into law. Unfortunately, many people think of this when they think of Adams, and it has somewhat tarnished his stellar image as the co-author of the Declaration of Independence and the author of the Constitution of Massachusetts (the oldest surviving constitution in existence today).
What was the Sedition Act? The Sedition Act made it illegal to “write, print, utter, or publish . . . any false, scandalous and malicious writing” against the government. Many people that disagreed with Adams were thrown in jail because of this law. It was later repealed by Jefferson when he became President.
Curry’s Sedition Acts:
Limited Our Rights to Protest: The Curry Council passed an Anti-Targeted Residential Picketing Ordinance that prohibits protestors from protesting within 300 feet of a private residence.
Censor: Then Curry tried to censor a fellow councilman (me) because he disagreed with what I said in my political newsletter when I stood up for traditional marriage by criticizing the Supreme Court’s ruling on same sex marriage. Failed.
Incumbent Protection Political Reforms: The next “Sedition” was a so-called Political Reform Initiative that would have restricted citizens’ rights to contribute to certain types of committees that were all legal but none of which supported Curry or his acolytes. It also would limit when candidates could raise money (which would give self-funding candidates an advantage). Failed.
Makes Political Signs Illegal: Now just last month, Curry proposed making posting of political signs that he disagrees with illegal. He complained about the “Vote for Ameri” signs that were posted in Farsi claiming that they were illegal (they were not) and that they should be prosecuted to the fullest extent of the law. The Council Refused to consider it. Failed.
So you decide: Which is the more prominent Legacy? Curry’s Sedition Acts (desire to have government stop or limit speech he doesn’t agree with), or Curry’s $650M in debt and expensive boondoggles of the White Bunnies, Taj-Ma-City-Hall and Marina Park?
There are three open seats available on the Newport Beach City Council this year, with Councilman Tony Petros choosing not to seek re-election in District 2 and Councilmen Ed Selich and Keith Curry being termed out of office in Districts 5 and 7, respectively.
In District 2, we found much to like about Shelley Henderson — very reasonable views on property rights and development, her support for the Measure MM supermajority requirement for any future tax increases and an impressive background — but her lack of participation in candidate forums causes us to wonder about her commitment to the job.
Brad Avery’s attitudes on development are too anti-growth and heavy-handed for our taste, but he is sound on fiscal issues, criticizing the old council for running up too much debt and calling for spending restraint, particularly in the wake of the Civic Center project boondoggle.
In District 5, we liked some of what Mike Glenn has to offer, but we give the nod to Lee Lowrey. Lowrey co-founded a real estate investment and management company and serves as chairman of the Atlas Political Action Committee, which advocates for free markets, limited government, lower taxes and individual liberty.
“Property rights are very, very important to me,” Lowrey told us, adding that proposed developments need to stick to the General Plan and the planning process. Furthermore, some city regulations are “a little bit out of whack,” he said. Lowrey also wants to cut the budget, pursue pension reform and improve infrastructure, such as making needed seawall repairs.
In the hotly contested District 7 race, we were impressed by attorney Will O’Neill’s knowledge of the city’s finances, informed by his position on the Finance Committee. “If you don’t understand the budget, you don’t understand the policy,” he explained to us.
O’Neill also supported the Banning Ranch development and is committed to pension reform and continuing to pay down pension liabilities at an accelerated rate, though his endorsement by the city’s police and fire unions gives us some pause, particularly given that Newport Beach already has the highest per-household unfunded pension liability ($6,653) in the county, according to a May Register report. O’Neill said that in talks with the unions he simply laid out the numbers, explained how increasing pension costs would crowd out other city services, and made them no promises. He seems sincere, so we will take him at his word, and hold him to it.
We also gave very serious consideration to endorsing Fred Ameri in this race because of his strong understanding of business and land use issues in the city.
The Editorial Board recommends votes for Brad Avery, Lee Lowrey and Will O’Neill on Nov. 8.
With Newport Beach’s unfunded employee pension liability expected to soar to to $315 million in 2017, city leaders are walking a tightrope in their efforts to pay down the debt while maintaining a high quality of life for residents.
The city’s Finance Committee on Thursday reviewed a staff proposal to ramp up annual and discretionary payments to the California Public Employees Retirement System to help pay off the city’s growing unfunded pension obligations.
The city’s unfunded liability, which reached $276 million in 2015, is projected to climb to $315 million in 2017, according to a city staff report. The unfunded pension liability is the difference between the amount the city owes in retirement benefits and the money it has set aside to fund them.
Each year, city staff looks for ways to more quickly pay down the city’s unfunded liability compared to what the state recommends. In the coming months, the Finance Committee will be tasked with making a recommendation to the City Council about how much Newport should contribute to the liability in the next budget.
“This is our biggest nut to crack,” said Finance Committee member Patti Gorczyca.
The challenge lies in that the city is responsible for paying down the liability, but the amount of debt fluctuates annually based on CalPERS investments, making it difficult for city leaders to get their arms around the issue, officials have said.
The California Public Employees Retirement System is expected to receive a 7.5% annual return on its pension investments. However, in 2015 the investment earned 2.4%, which resulted in Newport’s liability growing from $252 million in 2014 to $276 million.
In 2016, the investment fund again performed poorly, earning a 0.6% return, which officials say will further increase the city’s unfunded liability to more than $300 million.
Staff on Thursday suggested the city begin paying on the 2016 investment loss during the 2017-18 fiscal year and pay down the two-year losses over a 20-year period rather than a 30-year schedule in an effort to save money on interest.
Staff also recommended the city make one-time payments to pay down the debt faster and consider budgeting for higher annual payments into the system in years they can afford it.
If approved, the proposal would require the city to pay $5 million more to the state agency in the first year, but would result in a $69 million savings over 30 years, according to city staff.
Several committee members on Thursday emphasized that the city needs to balance paying off its unfunded liability with maintaining quality of life services that residents expect.
Councilman Keith Curry, who also sits on the Finance Committee, said Thursday that major reforms to the CalPERS program are needed at the state level to help local municipalities get a handle on the issue.
“Chasing the unfunded liability number is a fool’s errand,” he said. “The real issue we need to focus on is our affordability. I don’t think this is a solvable problem at the municipal level.”
Rising unfunded pension liabilities isn’t a new issue for Newport Beach.
City leaders have taken steps to mitigate rising pensions costs over the past several years, including establishing lower benefit formulas for new hires, having employees pay more of the pension costs and reducing staff by nearly 100 employees.
The City Council approved a fresh start payment plan in 2014, which increased the amount of the city’s annual payments to the fund, allowing them to get caught up after 19 years. In theory, the move allowed the city to pay the pension costs in a more timely fashion with less money going to pay off interest.
Finance Committee member and City Council candidate Will O’Neill said while the city has taken proactive steps, there is more work that needs to be done.
“More money toward this issue necessarily means less money is available for services to our residents,” he said. “We risk our fiscal house going up in flames if we take our eyes off this front burner issue.”
Under California state law, a city proposal to impose, extend or increase a tax for general government purposes must be approved by two-thirds of the city council before the measure can be submitted to voters.
But there are two kinds of cities in California: a “general law” city is governed under state law, and a “charter city” is governed by a charter — a kind of local constitution — that’s written by the city council or an elected charter commission, and then approved by the voters. Charter cities have supreme authority over their own municipal affairs. A charter provision trumps a state law on the same topic, with a few exceptions carved out by the courts.
One of those exceptions is the two-thirds requirement for city council approval of general tax measures before they can be placed on the ballot. The courts ruled that city charters could require a simple majority vote instead.
Now two charter cities have put measures on the ballot to amend their city charters to give local taxpayers a little more protection from tax increases. The measures would require a two-thirds vote of the city council before a city-sponsored measure to impose, extend or increase a tax could be placed on the ballot.
In Anaheim, the charter amendment is Measure U. In Newport Beach, the amendment is Measure MM.
Both measures deserve a yes vote on November 8.
Measure U and Measure MM extend to the residents of these two charter cities the full protection approved by voters in 1986 when they passed Proposition 62, the Howard Jarvis-backed “Voter Approval of Local Taxes” Act. The loophole opened by the courts can be closed by the voters.
The measures, both titled the “Taxpayer Protection Act,” need a simple majority to pass.
Some Newport Beach residents argue that Measure MM should also have required voter approval before the city can incur debt to finance the construction of public improvements. But that’s no reason to oppose it.
The Editorial Board recommends a yes vote on Measure U in Anaheim and Measure MM in Newport Beach.
The majority of the hopefuls for Newport Beach City Council say development and the city’s $276-million unfunded pension liability have risen to the top of the most pressing local challenges leading to the Nov. 8 election.
However, how to best tackle those issues is where the eight candidates vying for three available council seats differ.
Businessman and community activist Mike Glenn, businessman Lee Lowrey and retired educator Jeff Herdman are vying for the District 5 seat, which represents Balboa Island, Harbor Island, the Fashion Island area and a portion of Big Canyon.
Attorney and city Finance Committee member Will O’Neill, attorney Phil Greer and former Planning Commissioner Fred Ameri are running for the District 7 seat, which represents Newport Coast and Newport Ridge.
Harbor Commissioner Brad Avery and law student Shelley Henderson are running for the District 2 seat, which represents Newport Heights and Newport Crest.
Herdman and Greer have taken a hard stance against the types of development that have gone before city leaders for consideration recently. Both have opposed the Museum House project, which proposes to build 100 condominiums in a 25-story tower in Newport Center. Both have won favor with community groups that are wary of citywide development.
“Development has almost gotten out of control in this city,” Greer said. “We’re not following the general plan; we’re spot zoning and it impacts our lives. I think we’ve reached a tipping point.”
Ameri has advocated for traffic mitigation to be a mandatory part of any development proposal.
Glenn has promoted himself as a champion for property rights.
Lowrey and O’Neill have not taken firm positions on specific projects but instead have vowed, if elected, to research and consider each project on its own merits.
O’Neill, Lowrey and Henderson have said that paying down the unfunded pension liability is their top issue.
Avery, who has spent several years on the city’s Harbor Commission, said improving water quality, dredging and infrastructure repair in the harbor rank high on his list of goals.
Regardless of who is elected, the introduction of three new council members will mark a significant change for the City Council. The results of the election will shape the vision for the city for at least the next decade, said Councilman Ed Selich, who represents District 5 and is termed out this year.
Councilman Keith Curry, who represents District 7, also is termed out, and Councilman Tony Petros, who represents District 2, is not seeking a second four-year term.
Typically, council members with longer tenure show newer members the ropes. But this year, with four current council members clocking two years of experience and three new members coming aboard, the group could face a learning curve, Selich said.
“This time around it’s a group of rookies, and it’s going to be a lot of work for them,” Selich said. “They’re going to have to determine how to deal with the pension situation and the development issues folks are concerned about.”
O’Neill said that while an entire council with less than a full term of experience may be uncommon in the city, it points to the importance of electing people with experience on city boards, commissions and committees.
“With Councilman Curry leaving the council this year, it’ll be particularly important to have someone on the council who has served on the Finance Committee and understands those critical issues,” O’Neill said.
In 2014, voters elected four council newcomers — Diane Dixon, Kevin Muldoon, Marshall “Duffy” Duffield and Scott Peotter. All were managed by campaign consultant Dave Ellis and ran on a slate known as “Team Newport.” Duffield knocked out incumbent Mayor Rush Hill in District 3.
The Team Newport members pushed for fiscal reform at City Hall, calling attention to the debt the city had incurred while building the new Civic Center complex. They also were critical of the previous council’s decision to increase fees for residential docks and swiftly moved to reduce the fees once they took their seats.
This year’s election, unlike in 2014, has not seen a traditional slate of candidates or many issues that have polarized residents, candidates said. However, Greer, Ameri and Herdman have expressed concerns that Avery, O’Neill and Lowrey, who hired Ellis as their campaign consultant, could create a voting bloc with members of Team Newport.
“All Team Newport has to do is elect one more candidate and they can exercise block voting,” Herdman said. “I’m disappointed with the possibility of that. Past councils each have had individual thinkers, and that’s missing from our council now.”
However, O’Neill and Avery said they find the notion of someone pulling strings behind the scenes and telling them how to vote highly unlikely.
Once people are elected, they often find like-minded members of the council, which can result in similar votes, Avery said.
“I can’t imagine getting a phone call telling me how to vote,” he said. “If it ever happened, I would say ‘Thank you for your comment’ and cast my vote in the best interest of the city.”
A tourism study published this month indicates that Newport Harbor generates $202.4 million annually in economic impact to Newport Beach, making it one of the city’s most significant economic anchors.
The nine-month study by Tourism Economics, an international tourism analysis firm, reached the figure after examining spending habits, wages, taxes, the impact of visitors from out-of-town jobs, and the value of resident and business activity within the harbor.
Gary Sherwin, president and CEO of Newport Beach & Co. — the city’s marketing arm, which commissioned the study — said while the community has always recognized the importance of Newport Harbor as an asset, there has never been a study that provided a dollar figure.
Though the coastline typically draws the most visitors each year, the shopping-, dining- and water-related recreational activities on the harbor make it an economic driver for the city, according to Sherwin.
“The harbor is the jewel of our tourism economy and the epicenter for so much of what defines the Newport Beach experience,” Sherwin said. “We sell Newport Beach as more than a place. It’s an aspirational lifestyle and that’s what brings people here. They want a slice of our life.”
Through sales and property taxes, as well as the Tide and Submerged Land Fund from residents, visitors and businesses on or directly surrounding the harbor area, the harbor generates $46 million in annual tax revenue to the city. Harbor visitors also directly spend an additional $156.4 million in the city each year, the study determined.
Activities and business on the harbor generate $348.1 million in economic benefits to Orange County as a whole, according to the study.
“Two main components of the harbor’s economic significance include out-of-town visitors who spend money at local establishments during their trip to the harbor and the residential and businesses activity within the harbor that ripples throughout the countywide economy,” the study states.
Newport Beach & Co. commissioned the study at the suggestion of City Councilmen Scott Peotter and Marshall “Duffy” Duffield, who inquired about the economic value of the harbor earlier this year after reviewing harbor improvements the city will be tasked with funding in the next several decades.
The most expensive of them will likely be the repair or replacement of the sea walls, estimated to cost between $14 million for short-term fixes to $68 million for a long-term rebuild, according to a city staff presentation last year.
The city will also be tasked with dredging, as needed, to maintain and improve water quality.
“That’s going to be on our nickle in the future, and we have to do it in a way that’s economically affordable,” Duffield said.
Duffield said the city’s Tidelands Fund — used for expenses related to the harbor and beaches — cannot fully support all the necessary improvements to the harbor in the coming years. He said it’s unfair to put the burden solely on the backs of commercial businesses, mooring holders and homeowners who live around the harbor.
The study, he said, will hopefully reinforce Newport Harbor’s benefit to the entire city, so that all residents realize the need to fund harbor improvement projects.
“To try and quantify more directly what these figures are is really important to our future with regard to capital improvement projects in our harbor,” Duffield said.
The California Fair Political Practices Commission next week is expected to fine Newport Beach City Council candidate Jeff Herdman $200 for failing to submit a mandatory form before soliciting and accepting campaign donations.
Bob McCaffrey, a Balboa Island resident, filed a complaint with the commission in November alleging that Herdman violated the state Political Reform Act by not filing a candidate intention statement, also known as Form 501, before soliciting campaign donations.
In his complaint, McCaffrey pointed to an Oct. 27 email from Little Balboa Island resident Ken Yonkers to neighbors in which Yonkers appeared to be helping get the word out about Herdman’s campaign and gave direction on how to donate funds.
“Jeff communicated with me that he has met with his campaign manager and his campaign is off and running,” Yonkers wrote in the email. “He is in need of some funds now.”
Herdman filed Form 501 with the Newport Beach city clerk’s office on Nov. 5, according to city records.
Herdman, a retired educator, is seeking the District 5 council seat representing Balboa Island and the Fashion Island area. Businessman Lee Lowrey and businessman and activist Mike Glenn also are vying for the seat. McCaffrey said he is supporting Lowrey in the election.
According to the Fair Political Practices Commission’s Oct. 20 meeting agenda, senior commission counsel Angela Brereton and special investigator Jay Martin concluded during an agency investigation over the past several months that Herdman solicited and received contributions before filing his Form 501, a violation of state government code 85200.
The investigators recommended a $200 fine.
Herdman said Monday that he was notified of the findings about two weeks ago and mailed a $200 check to the commission. The five-member body could vote against fining him during its meeting, but typically, the commission upholds staff’s recommendations, according to a commission spokesman.
Herdman said he was under the impression that he wasn’t required to file Form 501 until he had raised $1,999 and that he was under that threshold when he submitted his paperwork.
“I was misled about that, but I’m not going to lay blame on anyone,” he said. “As far as I’m concerned, it’s minor and obviously was not intentional.”
Herdman could contest the findings through an administrative hearing but said he would not pursue it.
“I don’t have time to contest it,” he said. “I’m putting all my effort into campaigning.”