Notes From Babel

California’s Pension Crisis Takes Another Step Toward Populist Revolt as Courts Refuse to Help

with 55 comments

As I pointed out in an op-ed in the Sacramento Bee last year, one of the reasons runaway public employee pensions poses such a different problem is because California’s courts have steadfastly undone voters’ efforts to make it easier.  At least three provisions of the California Constitution, for example, make retroactive pension agreements void ab initio.  Yet, the Second District Court of Appeal out of Los Angeles last week brushed aside each of these important citizen taxpayer protections to side instead with the public employee union.  (Full opinion here.)  As I explain below, California taxpayers have done what they’re supposed to:  they enshrined prohibitions in their state constitution to avoid amassing large public debts.  It is instead our elected officials—such as Jerry Brown, who empowered public employees to unionize—and our judges who have failed our state.  Indeed, despite recently proposing an aggressive budget, Governor Brown still refuses to go after low-hanging fruit when it comes to pension reform.

The Court of Appeal’s recent blow to taxpayers and their constitutional protections thus takes California another step decidedly closer to a populist uprising that will lead us either to another wave of initiative amendments, or to revolt.

Basic Facts in Orange County v. Association of Orange County Deputy Sheriffs

The basic underlying facts of the Orange County pension case are straightforward.  The Orange County Board of Supervisors approved an amended AOCDS contract in December 2001 that increased union members’ pension from a “2% at 50” formula to a “3% at 50” formula.  This allowed members to receive on retirement the product of 3% of their last year’s salary, times their total number of years worked.  Thus, with the stroke of a pen, the County instantly accrued approximately $100 million of additional, unfunded pension liability.  This liability was based on years the union members had already worked, and they were required neither to make additional contributions nor to perform additional work in exchange for their 50% increase in pension benefits for those years.

The two provisions of the California Constitution at issue in the Orange County lawsuit are the prohibition on indebtedness and the prohibition on compensation for work already performed.  However, the Second District Court of Appeal refused to enforce either of these important constitutional limitations.  The court provided scarce rationale for its decision, instead relying on prior cases—which as previously explained, provided even less rationale for their decisions.

To understand the significance and the deliberateness of the court’s refusal to apply the law, a brief history of the three constitutional provisions will be helpful.

History and Purpose of California’s Prohibition on Debt and Retroactive Compensation

First, the debt limitation at article XVI, section 18 prohibits any state or local government from “incur[ring] any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the voters of the public entity voting at an election to be held for that purpose.”  This basic restriction was included in the original state constitution in 1879 in consideration of the turnpike, canal, and railroad boom of the 1820s and ‘30s, the Panic of 1837, and the subsequent surge of tax increases adopted to pay state debts accrued during the boom.  Prior to 1840, no states had adopted constitutional debt limitations and, as a result, dangerous debts accumulated during the transportation boom of the first half of that century.  In New York, which had accumulated the highest debt in the nation (due in large part to financing the Erie Canal), the chair of the Constitutional Convention of 1846 warned: “unless some check was placed upon this dangerous power to contract debt, representative government could not long endure.”

The debt limitation was Californians’ response to the demonstrated problems facing local governance.  Nor were they alone.  Between 1840 and 1855, 19 states enacted constitutional debt limitations.  In New York, which had accumulated the highest debt in the nation (due in large part to financing the Erie Canal), the chair of the Constitutional Convention of 1846 warned: “unless some check was placed upon this dangerous power to contract debt, representative government could not long endure.”  Thus, to prevent another destructive cycle of hasty overinvestment—followed by decades of indebtedness—Californians have, from the moment of statehood, forced their municipalities to operate within their financial means.  As the California Supreme Court acknowledged in the 1896 case of McBean v. City of Fresno,

[T]he framers had in mind the great and ever-growing evil to which the municipalities of the state were subjected by the creation of a debt in one year, which debt was not, and was not expected to be, paid out of the revenues of that year, but was carried on into succeeding years, increasing like a rolling snowball as it went, until the burden of it became almost unbearable upon the taxpayers. It was to prevent this abuse that the constitutional provision was enacted.

Following a debate on whether and how much to cap municipal debt—e.g., at 2% or 5%—the idea of caps were ultimately abandoned in favor of submitting large public works proposals to the people for a two-thirds vote, along with a “sinking fund” for paying back the principal sum within twenty years of contracting the debt.

Second, the limitation on “extra compensation” at article XI, section 10 prohibits any local government from “grant[ing] extra compensation or extra allowance to a public officer, public employee, or contractor after service has been rendered or a contract has been entered into and performed in whole or in part . . . .”  Like the debt limitation, this prohibition also appeared in the 1879 Constitution in response to concerns about government officials exploiting their connections and influence to obtain increased compensation beyond the terms of their original contracts.  During the debates during the constitutional convention, it was expressed “[t]he trouble is not in regard to the salaries which the officers receive according to law, but as to the compensation which they receive outside of the law… [by] surreptitious methods.”  As another delegate explained:

what the people of San Francisco do want is not so much a reduction of salaries, but they want to know exactly what salary the officers are to receive. The trouble is not in regard to the salaries which the officers receive according to law, but as to the compensation which they receive outside of the law … it is this, uncertain amounts that come from commissions and other surreptitious methods whereby men get money for services not rendered. It is against these that the people rise up and cry out, and not against the regular, square, honest compensation of officers.

Later case law would cramp the constitutional ban on extra compensation by allowing charter cities to escape the ban.  Not amused, Californians in 1970 reaffirmed the prohibition by enacting the current article XI, section 10, explicitly applying the ban to all local governments and reversing prior cases holding otherwise.

The Court of Appeal’s Opinion

Though the language and purpose of these two constitutional provisions are straightforward, the court declined to enforce either of them.  The reasons provided, however, are far from satisfying.

With respect to the constitutional prohibition against incurring indebtedness, the court drew a distinction between “debt or liability,” on the one hand, and what the court refers to as “unfunded actuarial accrued liability”—better known as the $100 million of unfunded pension liability accrued the moment the County signed the 3% at 50 plan in 2001.  “Unfunded actuarial accrued liability,” the court held, is not a “debt.”  Instead, it is “an actuarial estimate projecting the impact of a change in a benefit plan.”

The County anticipated that linguistic machinations might be employed to escape the Constitution’s effect, and so offered that the definition of “indebtedness” as defined by the California Supreme Court “encompasses ‘obligations which are yet to become due as [well as] those which are already matured.’”  The court casually dismissed this authority, however, stating “[t]his unexceptional statement does not control our case.”  Instead, the court held that “[a]n unfunded liability such as a UAAL is not created at the time of the award of enhanced benefits, but occurs over years ‘and may have been avoided entirely if, for example, the retirement fund experienced better than expected investment returns….’”  Of course, this may be said about any debt that has not yet come due, as it may be discharged through accord and satisfaction, novation, forgiveness, etc.  To say this makes it other than a debt robs the word of any concretes to which it could ever apply, and nominates it for removal from our lexicon altogether.

Incidentally, yesterday I attended the annual Federalist Society Western Conference at the Reagan Library, where pension reform and this case were discussed.  When a panelist read the above quoted language from the decision making the empty distinction between “debt” and “an actuarial estimate projecting the impact of a change in a benefit plan,” the crowd of lawyers could not restrain a very loud groan.

With respect to the constitutional prohibition against extra compensation, the court was less creative.  California courts have elsewhere availed themselves of a Nuremberg Defense by citing other opinions that, without explanation, elevated pension rights to a class by itself.  However, even these cases did not stand for the proposition that Section 10—the prohibition against retroactive compensation—does not apply to pensions.  Yet, the court drew this inference anyway.

With some relief, the court explained it did not carry the burden to explain its conclusion that pensions, and only pensions, are entitled to exclusion from the important constitutional prohibition against extra compensation.  Instead, the court explained that “[i]f this creates an anomaly in the law, it is one sanctioned by the California Supreme Court.”  But this is not true.  While it is an anomaly, it was not sanctioned by the Supreme Court with respect to Section 10’s prohibition against extra compensation.  More importantly, that Supreme Court case, Miller v. California, only explains that pensions are simply another form of compensation for work previously done.  It does not lend any rationale to support to the proposition that extra pension may be paid by for work previously done.

Simply put, the court did not offer any analysis to explain its refusal to enforce the Constitution.  It merely cited other cases that conferred special status on pensions—also without any analysis for doing so.  Referring to prior cases in lieu of providing a rationale is an increasingly abused practice among judges, particularly in cases like the one here, in which those prior cases are equally empty of reason.  It is a problem Jonathan Swift described this way in Gulliver’s Travels:

It is a maxim among these lawyers that whatever has been done before, may legally be done again: and therefore they take special care to record all the decisions formerly made against common justice, and the general reason of mankind.  These, under the name of precedents, they produce as authorities to justify the most iniquitous opinions; and the judges never fail of directing accordingly.

The recent opinion in Orange County v. AOCDS is only the most recent installment in a line of pension cases that offer scant appeal to common justice and general reason, and instead seek to justify themselves merely by making reference to one another.

In closing, it is worth noting that the opinion was handed down just seven days after oral arguments on January 19.  Though I have not been able to find the transcript on the web, I am informed that the AOCDS attorney who presented oral argument before the court—herself a former court of appeal justice—pleaded with the panel something to the effect of “this case concerns pension plans just like yours and mine.”  This raises potential ethical issues and suggests the justices may have been required to recuse themselves, particularly if they are likewise beneficiaries of retroactive pensions.

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55 Responses

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  1. Failure of these Plans …. meaning that promised pensions actually paid to participants will be VERY significantly lowered …. is SOOOOOO justified and appropriate.

    The Private Sector Taxpayers who have been so finally raped by greedy Civil Servants MUST find a way to renege on these promises.

    Tough Love

    January 31, 2011 at 10:58 am

    • No, TL, these plans are legal and will be paid as promised in the contract. You should focus your unhappiness on the market environment that caused our most recent financial breakdown, not on the people who have worked long and hard to provide the services or civilization and now find you attempting to remove the security they have left for their old age.

      SkippingDog

      January 31, 2011 at 11:11 am

      • Skippy, Keep dreaming ……. Payments will continue for a few more years ….likely being reduced in stages as your elected officials STILL resist the necessary reductions.

        THANK GOODNESS the Republicans control the House Of Reps. … and won’t stick it to the taxpayers by allowing these ridiculously EXCESSIVE promises to actually be paid via a Federal bailout.

        And whose unhappy ? Financially very secure … and I actually EARNED it … nobody handed it to me via backdoor (you kiss my A** and I’ll kiss yours) deals.

        Tough Love

        January 31, 2011 at 11:35 am

        • By what mechanism will this occur?

          Charles

          January 31, 2011 at 12:01 pm

    • Skippy-your pension is getting a haircut, deal with it bud.

      Rex The Wonder Dog!

      January 31, 2011 at 12:22 pm

  2. Charles, Not really a “mechanism”, but I believe the impetus will actually come from the Unions.

    Remember, the Unions are beholden to those paying dues (not retirees, who no longer pay), and current dues-paying members will soon come to realize that THEIR contributions aren’t going to be available to pay for THEIR retirement because the funds are being drained to pay full benefits (even though their exists a HUGE unfunded liability … when properly measured) for those ALREADY retired.

    At SOME point they’re gonna say that this is BS, that the retirees are getting way more than their fair share (and what they paid-for) aand “negotiate” with the city for a retiree haircut.

    The “mechanism” will be easily figured out once the demand for change is in place.

    Tough Love

    January 31, 2011 at 12:46 pm

    • Your comment illustrates precisely why retirees have far greater legal protection than active union members do. Courts have long recognized that it’s easy to sell out people who are no longer active in the union, or in the company or government organization for that matter, and have placed many additional protections for such retirees.

      SkippingDog

      January 31, 2011 at 4:21 pm

      • Of course the Courts will weigh in but when the money is clearly insufficient to pay everyone 100% it’s likely the cuts will be spread around.

        If the retirees get court protection, I could see the current workers separating their Plan from the retirees … to keep their money and hasten the failure for the retiree group.

        I’ve always felt the current workers (especially the younger ones) would wise up one day and cut the retirees loose to fend for themselves. The older-current workers have mixed issue … hoping to make it to the finish line before the crash … but still knowing that the end-game may really not provide much protection after all.

        It all come down to insufficient funds, and if you think the taxpayer’s are going make you whole, I’ve got a bridge I’d like to sell you.

        Tough Love

        January 31, 2011 at 4:46 pm

        • Taxpayers will bear the financial responsibility for the pension agreements they already have, just as they must do for other government programs and initiatives with which they may personally disagree.

          We seldom get to choose where each of our tax dollars goes, and pensions are no different from military spending or welfare in that regard.

          The other way taxpayers will continue to subsidize government retirees is through healthcare insurance. Even if insurance is removed as a post employment benefit, there will be a push to place retirees into Medicaid, if their pension is low enough, or into one of the new insurance exchange programs. When stories start to circulate about our old first-grade teachers being unable to afford any medical coverage, even the Republicans won’t have the political leverage to repeal that system.

          SkippingDog

          January 31, 2011 at 4:52 pm

    • California won’t be the first state to go into crisis mode – it will be Illinois, NJ, or Rhode Island. When that happens, there will be much kicking, screaming, and general unhappiness, but the outstanding debt will eventually be federalized to avoid a bond market crash.

      The financial interests have alway been who really runs our country, and they will not allow a bond crash to occur. Not because they care about any of the non-government retirees who must rely on the markets for their income, but because they won’t allow the government they’ve bought and paid for to undermine their own financial interests.

      My pension is very well funded, so I’m not worried at all about my own situation. Long before any haircuts are handed out to elderly retired teachers, police officers, and fire fighters, those who hold municipal bonds will have had their heads shaved. It simply isn’t going to happen.

      SkippingDog

      January 31, 2011 at 4:22 pm

      • I’m betting on the Republican’s to find a way to protect the Bond market while throwing the Unions workers under the bus.

        Quoting … “Long before any haircuts are handed out to elderly retired teachers, police officers, and fire fighters, those who hold municipal bonds will have had their heads shaved”

        That’s the Democratic perspective … With Republican’s gaining power, you’ve got that backwards.

        Tough Love

        January 31, 2011 at 4:52 pm

        • Can’t do a state or municipal bankruptcy without exposing bondholders.

          SkippingDog

          January 31, 2011 at 4:55 pm

        • You’re also forgetting the first principle of every retirement fund – investment in stocks, bonds, and other equities. The pension funds have large portions of their assets in bonds, including municipal bonds, so if you exempt bonds from the equation, pension funds remain solvent as well.

          SkippingDog

          January 31, 2011 at 4:58 pm

  3. Apparently Rex and TL still haven’t figured out that they’re on the wrong side of the law again. California won’t be the first state to go into crisis mode – it will be Illinois, NJ, or Rhode Island. When that happens, there will be much kicking, screaming, and general unhappiness, but the outstanding debt will eventually be federalized to avoid a bond market crash.

    The financial interests have alway been who really runs our country, and they will not allow a bond crash to occur. Not because they care about any of the non-government retirees who must rely on the markets for their income, but because they won’t allow the government they’ve bought and paid for to undermine their own financial interests.

    My pension is very well funded, so I’m not worried at all about my own situation. Long before any haircuts are handed out to elderly retired teachers, police officers, and fire fighters, those who hold municipal bonds will have had their heads shaved. It simply isn’t going to happen.

    SkippingDog

    January 31, 2011 at 4:14 pm

    • Is there an echo in you comment ?

      Anyway, with respect to …”California won’t be the first state to go into crisis mode – it will be Illinois, NJ, or Rhode Island. ” … you’re probably correct (although Hawaii is in the Sh**hole as well).

      I’ll bet Illinois goes down first.

      Tough Love

      January 31, 2011 at 4:55 pm

      • No, I accidentally reposted and there’s no “delete” option on this blog.

        SkippingDog

        January 31, 2011 at 4:56 pm

  4. Skippy, You said …. “You’re also forgetting the first principle of every retirement fund – investment in stocks, bonds, and other equities. The pension funds have large portions of their assets in bonds, including municipal bonds, so if you exempt bonds from the equation, pension funds remain solvent as well.”

    We may disagree, but your comments are rarely as off the mark as this one .. First, Municipal Bonds are a minor element of Pension Fund assets as they make no sense for Pension Plans as such Plans don’t pay taxes, and (2) the issue is not solvency of the pension funds as to current assets (bonds, stocks, etc.). It’s that the assets are perhaps 50% inadequate to mature the liabilities and there no source to make up this shortfall… the market can’t recover this big a shortfall (even with the significant gains of the past 6 months), and as I said earlier, taxpayers won’t pay…. push too far and the businesses/citizens WITH the resources to pay won’t, they just move out of State.

    Tough Love

    January 31, 2011 at 5:15 pm

    • You are correct about municipal bonds and their tax exempt status, so that means the individual bond holders would get slammed and the pension funds would continue on with life.

      Therefore, existing pension obligations are even more safe than a private retirement account loaded with tax free municipal bonds.

      P.S. I was incorrectly including Muni’s in domestic debt instruments. Those are US Treasuries and high quality corporate bonds.

      SkippingDog

      January 31, 2011 at 5:55 pm

  5. The whole thing is a house of cards, these pension funds are counting on 8% annual return which is not going to happen. I think that skippy better start saving his money because somewhere down the line his pension fund will run out of money and there will be no way for the government to squeeze it out of tax payers (who if smart will be long gone). Eventually this will probably turn out to be like what happened to the United Pilots who got pennies on the dollar, sucks but at least it will be something, those looking for a social security payout will be even more disappointed.

    gunner451

    January 31, 2011 at 6:48 pm

    • Social Security is in dismal shape (primarily BECAUSE the trust fund is a mirage). But (and that’s a BIG BUT), because the benefits are quite modest, on a pay-as-you-go basis, SS revenue is sufficient to pay 75% of SS benefits …. meaning even W/O the Trust Fund. That’s SS’s WORST-CASE scenario.

      Modest tweaking (benefits reductions, age push-back, increase in the wage base or FICA %s) can easily fix SS’s problems.

      The REALLY REALLY big nut on the Federal level is Medicare …. absolutely hopeless … under ALL scenarios. This one could kill the country…. if the greedy Civil Servants don’t do it first.

      Tough Love

      January 31, 2011 at 7:03 pm

    • You really have bought into the doom and gloom scenario, haven’t you? Public pensions may be modified for new hires, and perhaps even modified going forward for current employees, but they’ll still be paid.

      Count on it.

      SkippingDog

      January 31, 2011 at 9:22 pm

  6. Skippy …”Therefore, existing pension obligations are even more safe than a private retirement account loaded with tax free municipal bonds.”

    Nobody with an adviser or self-directing with half a brain puts Municipals in ta tax-preferenced retirement account. You would be sacrificing yield for a tax-deduction you ALREADY have … by being IN a Retirement account.

    Sounds like you need a lesson in finance.
    **************************************

    And yes, Pensions would continue on with life …. but still with only 50% of the assets needed to mature the existing liabilities.
    ******************************************
    P.S. you should stick to law-enforcement issues … as you know squat about finance.

    Tough Love

    January 31, 2011 at 6:50 pm

    • People buy their own Municipal bond accounts ( and individual bonds as well ) to finance their retirements. Not all or even most of them are in IRA’s or 401’s or 403’s or bond funds, etc.

      I actually own some.

      As to not understanding finance, I must ask you what your credentials might be. You seem to primarily rely on nonsense like that pushed by Mish Shedlock and Larry Kudlow, the original pump and dump specialists.

      Do you really think all of the large financial firms are going to just stand around and watch the ongoing revenue stream produced by pension funds just go away without a fight? Given the pro-business movement of the Democrats and the fully business owned Republican parties, do you really think anyone in government is really going to push for things like state bankruptcy or encourage municipal bankruptcy? Not even Ryan would suggest such a thing.

      SkippingDog

      January 31, 2011 at 9:31 pm

      • Skippy,

        Actually I believe Mish make a great deal of sense. It’s east to why you don’t like him … as he really objects to Civil Servant greed.

        Let’s just say I know more about finance that you know about law enforcement.

        You still don’t understand, the assets are what they are. They’re not “going away” … they’re just 50% insufficient to mature the associate liabilities.

        The push for bankruptcy won’t change the asset side. The GOAL would be a haircut to the liabilities (e.g. a reduction in promised BENEFITS) reducing them by 50% to equal the existing assets. Zero impact on the bankers and their management fees … you just get a well-deserved haircut.

        Tough Love

        January 31, 2011 at 9:43 pm

        • If you truly believe Mish makes a lot of sense, then you don’t remotely know as much about finance as I do about law enforcement. He’s been telling us to buy gold and hoard food for at least the last 5 years. That’s not investment advice; it’s prophesy.

          I can’t speak to pension law in NJ, but I do know CA pension law to a degree that might surprise even you. Like it or not the pension obligations will continue to be folded into the cost of government. People can choose whether to pay for as many of the additional government services they may want, but the first cut of every tax dollar will go to pension payments and debt service.

          Since government pension programs are exempt from ERISA, they also aren’t subject to PBGC control or payment restrictions.

          Look at the numbers represented in the CalPERS report I posted. Then remember that everyone of those members has a spouse, kids, relatives, and others who count on their income and ask yourself how many of those people there are and what interests they’ll be voting for.

          SkippingDog

          January 31, 2011 at 10:04 pm

    • Go back to pages 94-97 and then tell me none of those firms are going to fight to keep the business coming. In the event they fail, do you really think the economic damage will be limited to retiree pensions?

      https://www.calpers.ca.gov/mss-publication/pdf/xC9FZ3lYuQf3O_2010%20CalPERS%20CAFR_0%206_FINAL.pdf

      SkippingDog

      January 31, 2011 at 9:36 pm

  7. Apparently Rex and TL still haven’t figured out that they’re on the wrong side of the law again.
    ====
    Wrong-again.

    If the money so not there you won’t get your unearned pension, simple math. You cannot FORCE taxes to pay pensions, Brown is trying to do that right now and he is having trouble even getting the tax increases on the ballot-much less raised-after they were all defeated just 6 months ago (Pros 1A-1E).

    Skippy, the jig is up

    Rex The Wonder Dog!

    January 31, 2011 at 8:18 pm

    • No, nobody will FORCE taxes to pay for pensions. People will FORCE taxes to pay for schools, parks, roads, and other stuff they want. The pensions are just part of the whole expense, just like salaries and health insurance.

      SkippingDog

      January 31, 2011 at 9:20 pm

      • Skippy, You seem to think every expense but pensions can continue to be stripped and then taxes must be raised when there is nothing left to cut.

        But there still will be one left … the pensions …. and it’s clear the taxpayers will demand that BEFORE taxes get raised.

        Tough Love

        January 31, 2011 at 9:48 pm

        • No, I think pension payments are merely overhead just like bond debt payments. People don’t get to decide they don’t like a certain payment, anymore than they can decide to ignore environmental or labor laws in their city or state.

          We remain a nation of laws, and the law requires that pension obligations be paid. Public pensions are a property right, just as surely as a piece of real estate or a bank account or a car is for the public employee. Unless you think it would be acceptable to seize one of those assets just because you don’t like your tax rate, you can’t seriously contemplate attempting to seize part or all of a vested pension.

          SkippingDog

          January 31, 2011 at 10:36 pm

  8. And yes, Pensions would continue on with life …. but still with only 50% of the assets needed to mature the existing liabilities.
    ******************************************
    P.S. you should stick to law-enforcement issues … as you know squat about finance.
    =============
    The thing about cops is they are like the white belt in your karate class-they learn a front snap or a roundhouse kick and a few blocks and they think they are black belts, same with cops, they learn a small amount of law in the academy or on the job and they think they are F.Lee Baily, Gerry Spence or John Keker.

    Rex The Wonder Dog!

    January 31, 2011 at 8:22 pm

    • Wrong again, Rex. You really are pretty amusing, but ill informed in so many ways.

      SkippingDog

      January 31, 2011 at 9:19 pm

  9. Skippy said …”If you truly believe Mish makes a lot of sense, then you don’t remotely know as much about finance as I do about law enforcement. He’s been telling us to buy gold and hoard food for at least the last 5 years.”

    Skippy, sounds like you believe gold has been a poor investment over the past 5 years. Have you been living under a rock? Gold was $530 beginning of Jan ’06. It’s now $1,340 !

    Tough Love

    January 31, 2011 at 10:18 pm

    • Gold is the investment of fear. I lived through the gold bug of the late 70’s and early 80’s and saw many people lose their shirts when that fear period ended. The same people Mish is hawking gold to will take the hit this time as well, particularly those stashing bullion and eagles under their beds.

      Having a small part of your portfolio in a precious metals fund is probably a safe gamble, the same as a REIT fund, but it most surely is much more of a gamble than an S&P index fund or something similar.

      SkippingDog

      January 31, 2011 at 10:28 pm

      • I’m sure John Paulson doesn’t share your concern, as a good part of the $5 Billion (yup, wit a”B”) he made in 2010 was betting on Gold.

        The equity make has overrun itself … for the short term, a leveraged inverse S&P 500 EFT would be a better bet.

        Tough Love

        January 31, 2011 at 10:47 pm

        • Yah Yah I know it’s ETF … sticky fingers .

          Tough Love

          January 31, 2011 at 10:48 pm

    • P.S. How’s your dried food and emergency seed bank going?

      SkippingDog

      January 31, 2011 at 10:30 pm

      • Off topic, but thew really is a way cool world seed back in the Scandinavian permafrost. Protection in case of a global calamity. Interesting reading.

        Tough Love

        January 31, 2011 at 10:51 pm

        • I’ve read about it and it is pretty interesting. Who knows when we’ll decide to press the red buttons and start over with a much cleaner slate and fewer people?

          Paulson is certainly a smart guy, but hedge funds invest in a lot of different things and can afford to take hits on bad choices that would break an individual investor. It’s also good to remember that Paulson is one of the really big sharks, so you have to ask yourself how much he’s really telling the rest of the world about his activities and how safe you feel climbing into the water with him.

          SkippingDog

          January 31, 2011 at 11:04 pm

  10. Well Skippy, maybe those red buttons will come from Iran (sure, they’re just enriching the U238 for reactor uel), or perhaps a natural disaster like the Yellowstone Caldera will get us … you know it’s overdue to blow. Now that’s gonna be hard to hide from.

    Tough Love

    January 31, 2011 at 11:33 pm

    • All true, but maybe it would be an overall improvement in the human condition.

      In any event, I’ll share my seeds with you when the time comes….

      SkippingDog

      February 1, 2011 at 12:04 am

      • Likewise. Goodnight .

        Tough Love

        February 1, 2011 at 12:05 am

  11. […] pension increases. As I’ve previously written, public employee unions have been successful in negotiating up to a 50% baseline pension […]

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  13. […] make retroactive compensation, gifts, and debt obligations without a referendum void ab initio.  I’ve written at length about those limitations under California’s […]

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  18. CALIFORNIA LAWSUIT EXPOSES ORANGE COUNTY FINANCIAL CRISIS

    Orange County RINOs file lawsuit they cannot win to hide their true incompetence. Welcome to the OC.

    The ballooning Orange County financial crisis continued to spiral out of control as the State of California filed a law suit to force return of $73.5 million of property tax revenue the County skimmed from local schools and community colleges last November. At the time, it seemed bazaar that the supposed “Most Conservative County in America” would increase spending by $145.8 million, then grab the school’s cash and cancel planned layoffs of 490 union workers.

    The new lawsuit has caused increased scrutiny of other dicey actions by the County. The biggest shock comes from the recent Orange County 2010-11 Audited Financial Report, which states the County failed to be in accounting compliance due to a $30,146,000 shortfall in cash Reserves:

    “The County General Fund maintains a Reserve for Contingencies which was established
    through the Strategic Financial Plan (SFP) process. The target amount for this reserve is
    15% of ongoing annual general purpose revenues (excludes fund balance available and
    one-time amounts and transfers), or $91,446. This compares to the Government Finance
    Officers Association (GFOA) guidelines for funding contingencies at 15% or higher. The
    June 30, 2011 balance is $61,300, approximately $30,146 below the revised target”

    The Reserves would have been even more out of compliance, if the County had not skimmed cash from budget spending reduction by the former County Treasurer and other County Departments to plug some of the depleted County Reserves. According to the Orange County Executive Office’s Key Budget message in the County of Orange FY 2011-12 Proposed Budget:

    The County increased General Fund Reserves by $17.2 million. The increase was primarily associated with the transfer of reserves of unallocated Fund Balance Available (FBA)

    Unallocated Fund Balance Available is generally referred to as day to day check-book-cash. The County knows the Treasurer has the right to recover his costs from investing the school, county and others deposits. Since the schools are more than 50% of the Treasurer’s deposits, they were entitled to more than 50% of the multi-million dollar budget savings achieved during the former Treasurer’s term. The County must have been so desperate to not report an even worse audited financial statement, they skimmed all the budget savings and transferred it to County Reserves.

    It also appears that last July the Orange County Employee’s Retirement System pension plan delayed lowering their annual expected rate of return assumption by ¼% to ¾% until this coming July 2012, which conveniently falls after the June elections. Given that each ¼% reduction in expected return require unfunded pension liabilities to rise by $750 million; the current $3.75 billion underfunding of the pension is about to skyrocket to a $4.5 to $6 billion liability!

    The lawsuit against the County was filed by the California Department of Finance and the State Associations of Community Colleges in Orange County Superior Court, just across the street from the County offices. The suit alleges the county has taken “the extraordinary step of flouting the law and illegally redirecting property tax revenue payments from schools and community colleges to the county’s own general fund.” The plaintiffs are demanding the court order the Defendant County to return the money to its rightful owners.
    The real issue in the litigation is that the State took away some favored subsidies for Orange County and the County retaliated by taking school money hostage to force the State to revive the subsidies. According to the Sacramento Bee, the Orange County spokesman, Howard Sutter, pretended to be surprised the State would try to help schools recover their $73.5 million:

    “While the county has been proactive in discussing this issue with legislators and school
    officials, the Department of Finance and Attorney General’s office have made no contact
    with the county regarding this matter. The county is disappointed the state has now
    resorted to filing a lawsuit. We are evaluating the merits of their suit and cannot comment
    on its specifics at this time until we have had time to completely review their claims.”
    For the last six months Orange County has used the schools’ and community college’s cash to bolster their backstop their dwindling cash and reserves. The local schools have tried to avoid the ruinous cost of litigation by accepting a guarantee from the County that at some point in the future, the County would lend them money at no interest cost. But with the State and the Community Colleges both suing the County, there is a high probability that the Court is going to require the $73.5 million be transferred from the County to a bank trust account for safe-keeping.

    Orange County’s payroll is $65 million every two weeks. The loss of the schools’ money, higher pension costs and restrictions against skimming County accounts present real risks to Orange County’s cash position. Litigation will eventually require document discovery and depositions? It will be fascinating to see how Orange County tries to spin their precarious financial position.

    Chriss Street

    April 7, 2012 at 4:50 pm

  19. […] sector unions are also in on the action. In the state of California, no fewer than three constitutional provisions bar the government from retroactively increasing pensi…. But the courts of this state have refused to enforce any of them, putting pensions in a class by […]

  20. […] sector unions are also in on the action. In the state of California, no fewer than three constitutional provisions bar the government from retroactively increasing pensi…. But the courts of this state have refused to enforce any of them, putting pensions in a class by […]

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  22. […] on the job will receive 90% of his salary during retirement (3 x 30 years).  More on this subject here.)  Since the maximum retirement benefits are 90 percent, working past 30 years is basically […]

  23. […] pension increases. As I’ve previously written, public employee unions have been successful in negotiating up to a 50% baseline pension […]


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