Feb 5 2014

OPINION: Further Comments on Piedmont Authorized Pension Bonds

The following letter was sent to Councilmember Jeff Wieler and received by PCA on February 5.  On February 4 Piedmont voters had given overwhelming approval of Measure A, the restructuring of Piedmont’s CalPERS side fund pension obligation. See previously published letters on the PCA Opinion page.
Councilman Wieler:
It is unfortunate that you took umbrage to my remarks but surely you recognize that my comments are merely an observation and reflective of how the City (City Council and staff) conducted its pension bond election. A critique, if you will – you are a public agency after all and clearly not immune from  public criticism, regardless where it comes from.
For clarification, my interest is purely academic. As I said previously, I don’t have a dog in this fight and the outcome of the election is of no consequence to me personally. My interest is in the structure and application of public entities’ pension bonds, judicial validation, elections and voting, etc., and not the City of Piedmont per se.
With that said, please allow me to respond to your February 4th e-mail, while limiting my comments to the relevant and pertinent issues you raise, and in the order you present them.
1.)  A majority vote. This issue was previously and thoroughly addressed. Although the City’s Charter (Section 4.14) speaks to a majority vote it also expressly provides that the proposition must be in full compliance with the State Constitution and other State laws. Article XVI, Section 18, providing the 2/3 vote requirement goes back to the birth of California in 1850 as noted in my January 21st letter. Added to this, Constitutional provisions “trump” City Charters. Also, you note that – “The two thirds requirement generally apply to taxes.” Simply not true!  The Constitutional language itself and the abundance of published cases clearly attest to what the 2/3 vote is applicable to.
Lawfully, since a 2/3 vote is Constitutionally required, and the Constitution trumps the Charter,  a “majority” vote is of no consequence or effect. Your contention that the proposition could then be judicially validated has no basis in law. In this instance (by law) a majority vote provides no authority whatsoever. Regarding judicial validation, the Charter is controlling, it clearly restricts the procedure to voter approval: “No bonded indebtedness…may be created unless authorized … by the electors…”.  While the Charter requires voter approval, the Constitution stipulates the 2/3 percentage governing that approval, as provided by the Charter, (“…unless in full compliance with the provisions of the State Constitution…”).
As was originally reported by your BAFP Committee on May 29th last year, the Charter does not allow for judicial validation of any type – The Charter clearly requires voter approval and by law voter approval is definitively a 2/3’s vote. There simply is no approval if less that 2/3 is acquired. It is exceedingly simple – the Charter vote requirement precludes judicial validation. The City clearly may not go to court seeking judicial validation while the City Charter stipulates that bonded indebtedness may only be authorized by an approval of the electorate, and clearly, that approval must be an affirmative  2/3’s .
2.)  The City Charter. As you point out, it is on the WEB and Yes! I have read it. The other sections you note are fairly standard provisions found is most City Charters. Section 2.11, part five empowers the City to not be dependent on State Statutes, in this instance, Government Code Section 53570 et seq.
3.)  Cal PERS. The Unfunded liability of any pension system is ever changing. It is merely a rough calculation of what it will take in the future to satisfy the retirement payments of future retirees. By its very nature it is merely an educated guess (an actuarial assessment). The recent Cal Highway Patrol “miss-calculation” is a prime example where predictions can easily go awry.
The new accounting standards have very little to do with this issue. When Piedmont’s “side funds” were established the fund amounts were established and predicated on particular criteria and factors at that time. You are correct in that a specific dollar amount was established along with an amortization schedule. (See original agreement). And, at the end of the amortization period it (the original amount) will be fully paid – funded by 90%. The difficulty is that, very seldom does the calculation (actuarially established amount) established back in (2004 ???) equal the amounts needed for the same 90% funding in 2021 and 2024 representing the ends of the amortization periods.
The “moving target” occurs during  the 20 year (they are all different) amortization period. While fluctuations occur during that period they are not reflected in the annual payments – in essence they are all saved up to the end where adjustments (major) are then made. Using the home mortgage example, it would resemble a situation where various expenses occur during the amortization period, insurance, home repairs, association fees, property taxes, etc. but all expenses are shoved to the end for payment.
Further, it is erroneously anticipated that the side fund (in years 2021 and 2024) whether paid in advance now or with a completed amortization schedule will be completely adequate to meet all future liabilities without any additional payments from the City. First of all this ignores the fact  that the side fund’s goal is only for 90% and not full funding.
These plans (with side funds) are exactly like the regular Cal PERS pension accounts except these plans are being required to catch up (true-up) their accounts to a more sustainable 90% of full funding. Additionally, everyone pays the 7.5% on what is calculated to be the un-funded liability, not just the “Fund Pools”. But at the same time each plan member’s UAAL annual payment is calculated in consideration of the plan earning that same artificial 7.5% thereby holding down the annual payment amounts. In other words, if a more realistic earnings percentage were used by Cal PERS the employer payments would be considerably more. This is not a mystery – those figures are readily available from Cal PERS.
4.)  I never suggested that Piedmont was speculating on interest rates or engaging in arbitrage. It appears you misunderstood my comments regarding the inherent dangers of engaging in pension bond financing and the slippery slope most encounter.
5.)  Bond Counsel.  There is nothing libelous nor scurrilous about calling it for what it is. Advisors are clearly in it for the fees (and very healthy fees indeed). And of course some have given bad advice. Regarding proof or evidence, I would suggest taking a very close look at the cities now in bankruptcy and those on the verge.
I have no doubt that the measure passed and probably well over the 2/3’s.  However, some of these issues may arise during the Council’s approval of the bond issues and they deserve your attention and understanding.   As a neighbor – the best of luck.
David E. Mix
Editors’ Note:  The opinions expressed are those of the author and not necessarily those of the Piedmont Civic Association.

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