The issue arose because exuberant promises of high investment returns in 1999 made pension grants look very affordable. The OC Supervisors in 2001 approved the changes, and affirmed them in renewals of the bargaining agreement in 2003, 2005 and 2007. But in 2008, the new OC board looked at the issue as one granting a huge benefit that was not properly funded, a $100 million unfunded grant of deferred compensation for services already provided.
The Appeals Court based its pre-determined opinion protecting government pensions on the confusing and incomplete disclosure rules currently in place. Since the Government Accounting Standards Board (GASB) has not adopted a rule requiring balance sheet disclosure of pension liability, the court said it is not a real liability. Prior to 1994, there was no standard worth mentioning. In 1994, GASB stated that unpaid contributions should appear on the balance sheet as a liability. (Private employers are required to show their underfunding on the balance sheet.) In 2010, GASB proposed a tougher standard that would show the unfunded liability more completely, and require that it be funded during the period employees are working. But the 2010 proposal has not been adopted, and the court just completely ignored it in any event.
Here are some of the other arguments they used.
- Actuaries have many methods of determining pension costs, allocating pensions between past and future service. The method used to post past service liability was just one of several methods to determine future costs, so it is not a real liability.
- The opinion of the Attorney General in 1982 (hmmm.. who was governor then?) was that “The actuarial term ‘unfunded liability’ fails to qualify as a legally enforceable obligation of any kind.”
- Investment results could make the problem go away in the future, citing a San Diego 2010 decision that it “may have been avoided entirely if, for example, the retirement fund experienced better than expected investment returns..”, the most damning of the wishful thinking in the Appellate decision.
- The 1994 GASB rules do not require disclosure of liability unless the annual contributions have not been paid. In California, CALPERS and other public plans have been very effective in forcing the payments to be made, so this argument is that no liability ever existed.
- “Imprudence, however, is not unconstitutional”, probably the most amusing quote from the case, was the court’s way of saying that the public agencies are not allowed to fix their problem once it was created.
Sadly, the taxpayers of OC will have to take their arguments to the people and above the head of the courts who won’t help solve the problems. This is a constitutional issue that the courts are forcing local government into expenses they cannot pay. Expect a proposed constitutional amendment through the petition process.
This also reinforces the reasons we need the same rules for public plan benefits that private plans have, namely that you can stop the pain for the future by freezing or reducing benefits, but you cannot take away what has already been earned. If the courts cannot understand this need for fiscal responsibility, then the governing bodies will have no alternative but to fire existing employees to stop their excessive expenses and only hire new ones at a lower benefit level. That is the unintended consequence of the decision.