Interview with John Moorlach
This former OC Treasurer and current Supervisor always tells it like he sees it – good or bad. Here, he talks about OC's former bankruptcy, and why we may be on track for another.
When you think of accountants, the first quality that comes to mind is likely not “passionate.” Same for government officials. But OC Supervisor John Moorlach, a CPA, is nothing if not passionate about Orange County, especially its fiscal survival. He proved that in 1994, when he ran for treasurer with a mission – to stop then-county Treasurer Bob Citron (who died last month at age 87) from leading the county into financial ruin.
But Moorlach went down in defeat, with the entire county calling him Chicken Little. Literally, newspapers ran cartoons of Moorlach as the infamous fowl claiming the sky was going to fall.
Then, it did. On December 6, 1994, Orange County filed the largest municipal bankruptcy in history, claiming a realized loss of $1.6 billion. Citron went to jail, Moorlach became treasurer – and got a license plate that read SKYFELL.
It took years, but under his stewardship, the county became flush again. Kind of.
In 2006, Moorlach ran for and was elected to the Orange County Board of Supervisors because he became passionately concerned that another bankruptcy could be looming in OC’s future, this time because of unfunded liabilities in the form of public employee pension and retirement benefit plans. He’s been fighting to control these costs, but he’s been mostly unsuccessful. “In the last 18 months, the pension liability has gone up from $3.7 billion to $5.4 billion. And it’s going up all the time,” he says.
Of course, there are a lot of other issues on the county’s table at the moment, and Moorlach is just as passionate about all of them. So we asked him about some pressing issues, as well as how it feels to go from Chicken Little to a modern-day Nostradamus.
How tough was it when no one believed you that then-Treasurer Bob Citron’s investment strategy was leading us into financial disaster?
A couple of movies come to mind where the actor is trying to explain to everybody that there really is a volcano that’s going to blow but they call him crazy. When I watch Dante’s Peak, for example, and watch Pierce Brosnan trying to convince everybody, I say to myself, I know that feeling. There were nights when I would stare at the ceiling and think, “How come this is very clear to me and yet the rating agencies and the newspaper reporters and the bond attorneys and the auditors aren’t cluing in? It was pretty tough.
You got the license plate SKYFELL after the sky did indeed fall. Why?
Because by September of ‘94, the OC Register had on top of the fold on their business section an article that said, “OC Sky Did Not Fall.” It was like, let’s bash Moorlach one more time. And less than three months later, the whole thing blew up.
So you felt vindicated?
It was bittersweet. I thought, “Boy, isn’t it great to be right.” And then, immediately, “No, not really, it’s my county.”
Fast-forward to the early 2000s and it was déjà vu, only this time instead of a risky investment portfolio, it was what you see as a ticking time bomb of underfunded public employee benefits and pensions.
Yes. I went through the same drill again trying to explain that now, for some 10 years, what they’re doing with pensions in the public arena is going to create the next bankruptcy. But again, no one would listen forever. It took years, but now the public is sort of on board. So finally, when you talk about pension reform, you barely think about me anymore. But I’ve been screaming about that issue for a decade.
The underfunded liabilities issue was the reason you ran for the Board of Supervisors in 2006. But your first year was tough, with not a few disappointments. Explain what you were trying to do and what your reasoning was.
I tried to rescind pension benefits that were given retroactively. You’re not supposed to pay someone twice for doing the job once. And two, you’re not supposed to create a debt without having two-thirds of your voters agree to it. So when you give something retroactively, that’s like paying someone twice. Two, if you have a fully funded pension and you increase the benefit by 50%, you overnight become two-thirds funded. So now you’ve created this massive debt without getting anyone’s permission.
Why was that done and what’s the problem?
The easy answer is that CalPERS (California Public Employees’ Retirement System), the largest pension system in probably the nation, doesn’t like to do math. They don’t like to say to each worker, “You had a pension formula that went from 1980 to 2000, then it changed from 2000 forward…” They don’t want to go through the computations; they prefer to just say you had the same formula all the way through. It’s easier. So it just became a tradition that anytime a formula was enhanced, CalPERS just took it back to the date of hire. And the legislative council never really checked into it. But if you look at it, you find that it’s illegal [according to the state constitution].
And you sued. So what happened?
When you take it to the superior courts, the judge says, “Wait, I get one of these [pensions]. So why would I want to jeopardize that?” So she ruled against us. And then when we asked her why, because she didn’t have any citations, she said, “I’m looking forward to seeing your brief when you file with the court of appeals.” But when we went to the appellate court the panel said it’s not a debt, it’s an estimate of what you have to pay. Well, if [the government] stopped paying [pensions], let’s see how many employees scream [it’s not an estimate but a guarantee]. So it means you can create new debt exempt from the constitution. It means that the taxpayers are screwed. Ninety-two percent of our general fund money comes from real estate taxes.
Why is that such a problem?
We have no diversity in our portfolio. We have to totally rely on the real estate market. We have to hope that people pay more for homes, that they turn them over faster, and that they are buying a home at a higher price. We also have to hope that inflation gives us the ability to increase property taxes every year by 2%, the maximum allowed under Prop 13. So that means we have a real flat income stream. If you were running a business, you’d want your income to go up at a higher degree than 2%.
Why are we so dependent on real estate taxes?
Prop 57 in 2004 was something that Governor Schwarzenegger proposed to pay off the deficit he inherited. To securitize that debt ($20 billion), he said to counties, “How about [the state] trades you property taxes for sales tax?” And 2004 real estate was going up like a rocket, so we thought that was a brilliant idea. Not so brilliant now. [Editor’s Note: Moorlach was not on the Board of Supervisors then.]
How does all this tie together?
We can’t expect more than 2-4% in property tax revenue unless we get a lot of new building. So what we have to communicate to our workforce is that your total compensation has gone up 16% over the last five years. They come back and say, we didn’t get raises. We say, yeah you did. We’re paying more for your medical insurance and we’re paying more to fund your pension. That’s part of your total compensation. So if total compensation goes up in the future because of medical insurance, which is expected to go up about 40% over the next five years, we won’t be able to give raises. In fact, we may have to give pay cuts so that our total compensations stay within the increase that we’re seeing in property tax revenues. It’s going to really limit what we can do for our overall package to our salary employees. And that’s not a fun message to send to your workforce. But it is reality.
So what’s the answer, in your opinion?
If we could say to our employees, why don’t you go back to your old pension formula? Let go of this big plan that’s given us this massive unfunded liability and go back to the old plan. It would immediately remove a major debt; it would reduce our contributions to the plan; and it would give us money to give pay raises. Because I fully know that if you don’t give pay raises to your employees, you’re telling them you don’t appreciate them. But that’s not the case. We appreciate our employees, but because of the tax system, we’re really hemmed in.
How likely is that deal?
Right now the chances are very remote. But every year, from here on out, as employees see no pay raises and still higher costs for pensions, and therefore maybe layoffs or pay cuts, they may start [asking for] a choice, an alternative. Because some of us, like young parents, would rather pay for childcare and a mortgage than a pension plan.
Moving on to potentially greener pastures, Supervisor Todd Spitzer recently voiced some concerns about the progress of the Great Park. Your thoughts?
First, we tend to be a little parochial as supervisors; we don’t poke around in other districts. But we all have opinions. South County united around the effort to stop El Toro Marine Base from becoming an international airport. After doing that, South County watched the city of Irvine control the park and didn’t really include a whole lot of other South County [input]. There wasn’t a broad-based board or a lot of involvement from the cities south of the El Toro Y. And they watched them spend $200 million, for what, a balloon? So instead of giving a couple of individuals their own little fiefdom, with not much to show for it, maybe it needs a fresh look. And I think Todd Spitzer is saying, “I fought really hard to stop the airport and I’m back, and in the interim, what have you done? You spent a whole lot of money with nothing to show for it.” So I think his concern is valid.
You were on point when it came to dealing with forcing out County CEO Tom Mauk because of his mishandling of the Carlos Bustamante case, in which the former OC Public Works manager was arrested and charged with sexually assaulting women employees. Tell us about that.
We all knew Carlos and it was shocking. Then we found out his dismissal was not handled properly, so we had to sit down with the CEO and ask why he withheld information from us. He said, “You can pay off my severance and I’ll leave.” That was frustrating.
Most people would say that if someone didn’t do their job properly and had to resign in questionable circumstances, they should not get almost a year’s pay – $270,000 – in a severance package.
It’s hard to take when many are struggling or laid off in this economy. Here’s how it worked. [Mauk] didn’t technically resign. He was asked to leave. And his contract says that if you let me go, I get a severance package. And I’m not an attorney, but the terms of the contract were written in such a way that we really didn’t have any wiggle room to not pay it. So it [became about] negotiating an amount that’s a little lower and working something out or going to court and losing and paying more. We didn’t want to go through that drill. So we paid a mutually agreed-to amount. It wasn’t everything that the contract called for, but it was enough that he got something and we got rid of him. Does that make it right? I don’t know. In life, a lot of this is what I’d call legalized embezzlement. And you just have to live with it. Sometimes it’s cheaper to pay something now than to pay double later.
Governor Jerry Brown ruffled a lot of feathers when, because of a federal bill limiting state prison capacity, he sent many prisoners to county jails. How did that impact us in 2012?
We’ve taken about 2,000 inmates. That puts a massive amount of stress on your probation department, on your sheriff and jails, on your DA, and on your public defender. And because we have healthcare [for inmates], when you put these prisoners in our jails, we have to take care of them. Some of these people even need liver transplants, so we’re getting massive medical bills. This has had a major impact. You add to that the fight with the state to get the funding to accommodate this realignment and it’s a major problem.
You came out strongly against the recent bid to have the famous surfing spot and area of Trestles added to the National Register of Historic Places. Why?
I am a California historical landmark enthusiast. I have visited almost every one of them. I understand the national landmarks and understand the national registry. And I understand when people are monkeying around. And I’d say it’s a cute idea to make Trestles a national registry recipient because you’re trying to stop the toll road from extending to the 5 freeway. I get the game. But residents in South County need a redundant road. They need a second road out of there. And to try to play games with the extension of the 241 to the 5, I’m having a little trouble with that. If you’re going to start building a niche for beaches that are good surfing areas, then Trestles is not the only one in this country. We have Half Moon Bay, Santa Cruz, the North Shore in Hawaii. So I’m questioning the sincerity of [trying to add] Trestles, because until 1971, you legally couldn’t even go out there.
Some paint you as a straight talker, some as impolitic or even antagonistic? Fair?
I don’t think I’ve been antagonistic with anybody. And I have not intentionally tried to make enemies; I’ve just tried to be realistic. You can’t make good decisions without knowing what reality is. And I don’t know if you could go through my some-18 years of public life and see where I’ve lied to you. I have always tried to give people the truth, even if they didn’t like it. I don’t use hyperbole, and I don’t exaggerate. I’m an accountant and I’m going to tell it to you like it is. How you react to it is your business. So if I’ve made enemies, it wasn’t intentional. It was just me trying to be a good skipper. It was me saying, “Hey, there’s a rock ahead. Let’s get out of the way.”