Part 1 of 7:  Pacific Grove is a quiet town of 15,000 residents located on the northern tip of the Monterey peninsula, with the larger resort town of Monterey to the east, and Pebble Beach to the west. With windswept white sand beaches, defiant stands of cypress growing out of surf splashed rocks, and one of the finest collections of Victorian mansions on the west coast, Pacific Grove is an enchanting place. But Pacific Grove is going broke, and the story of how the city got to the edge of financial disaster is a story of corruption and power, hidden from public scrutiny or independent expert analysis. It is a story about public sector unions, powerful financial interests, and complicit city management, working together to fleece taxpayers and enrich themselves, heedless of rising debt or the inevitable ruinous consequences. And what is happening in Pacific Grove is representative of what is happening in every city and county in California. In 2008, retired attorney and Pacific Grove resident John Moore learned, for the first time, that the City of Pacific Grove had issued 19 million dollars of pension bonds in 2006, but had still managed to grant the police union a million dollar per year raise (30%) in 2007. Curious about how a city with an 11-12 million dollar a year budget could become indebted in such a large sum, he made several Public Record Act requests. What he learned and what followed is described in “The Fall Of Pacific Grove,” which Moore wrote and published over a six month period in 2013 in “The Pine Cone,” a local Monterey County newspaper. John’s work will be published here in seven installments over the next two months. Because the story is ongoing, Moore intends to provide additional updates to UnionWatch readers at the conclusion of this series.
– Editor

How Pension Enhancements Created Unmanageable Debt

How deep is the Pacific Grove financial hole? It is bottomless! Pacific Grove is not alone. For example, Moody’s, the credit rating agency, has placed neighboring Monterey on its “Watch List.”

California Govt. code 7507, enacted in 1977, mandated that to increase a pension, the city council must have received the analysis of an actuary detailing the cost per year for the new benefit. Also, the cost of the new benefit had to be disclosed to the public. But in 2002, the city manager withheld that report. He informed the council that the estimated cost per year to increase the pension benefit formula to “3.0% at 50” was $51,500 per year. The report said it was in excess of $800,000. There was no money to pay for the $800,000-per-year obligation, but believing it would only cost $51,500, the council adopted the increase. The increase also violated the debt limit set forth in the California Constitution (Article XVI, Sec. 18).

Every neutral attorney who has reviewed the adoption agrees that it was illegally adopted, but the city has purchased three legal opinions that say ignoring the code was okay. This dispute is what the current Citizens Initiative is about—repealing the 2002 pension increase. In 2013, over 1,100 voters qualified an initiative repealing the 2002 pension increase for the ballot, but the city has spent over $200,000 on a lawsuit to keep the initiative off the ballot. A court hearing is scheduled for January 21, 2014.

The financial demise of Pacific Grove caused by the adoption of the pension increase was immediate. Within two years, Pacific Grove missed a $600,000 pension payment. By the third year it had accumulated a $19 million pension deficit. It issued pension bonds in that sum at a cost of about $1.6 million per year.

In 2007, the police unions and the city manager convinced five members of the council to grant the police unions a million-dollar-per-year raise. The city manager left; the fire department ran to Monterey; the museum was given to friends of the city council majority. After hiring another pro-union city manager, the mayor and two members of the council left. Over half of the city employees have been fired, but the budget is larger. Recently, the children of Pacific Grove were sent begging to get the local swimming pool restored at a cost of about $300,000 (one pension bond payment could have repaired the pool six times). But thanks to the generosity of the public, the pool has been restored. All public services are cut-rate. Fees have been raised dramatically. In 2008, the citizens passed a tax increase based on the representation that library and other services would be restored. But the revenue from that increase just pays for the yearly pension bond payment.

Pacific Grove now has a new unfunded pension deficit of about $45 million, in addition to the $20 million in pension bonds. The deficit grows at 7.5% per year (about $3.2 million compounding).

Do I believe there is a way out? Based on hundreds of research hours and consultation with numerous attorneys, accountants, economists, teachers, a mathematician, and citizens, the answer is yes.

I support unions, as long as there is representation on the other side. In Pacific Grove, the unions, city manager, city attorney, and city council majority are all on the same side.

How Local Officials Fought Reform

In Pacific Grove, the council majority, the city manager, the city attorney, and the employee unions work in concert to protect the compensation packages, including pensions, that have financially destroyed the city.

In 2010, a group of citizens qualified an initiative for the ballot that limited the city’s contribution for pensions to 10% of salaries. The council adopted the initiative as its own, and the police unions sued. Over my objections, the council allowed the city attorney to supervise the defense of the case. In my view his pro-union bias and opposition to the initiative indicated a disqualifying bias and a tendency to allow the city to lose the case.

In the lawsuit, the police unions claimed they had an “in perpetuity vested pension right” that could never be diminished. Prior to circulation of the initiative, I did extensive research to determine whether the City Charter, or the City Council, had ever granted such a right. I reviewed the initial 1927 Charter, all amendments thereto, all ordinances affecting compensation, and all agreements with the unions. No such vested right had ever been granted. In fact, the 1955 Charter prohibited the grant of a vested pension right, except by a vote of the people, which never happened. In 1957, the council joined CalPERS under a provision of the Charter that allowed the council to adopt a pension as long as the liability of the City was limited to paying premiums.

On November 21, 2011, while the lawsuit was pending, the California Supreme Court ruled that vested contract rights could be implied “if there is no legislative prohibition against such arrangements.” Clearly, the Pacific Grove 1955 Charter requiring a vote of the people was such a prohibition. I assumed the lawyers defending the City in the lawsuit would contact the author of the initiative and me to discuss our due diligence in creating the initiative. But it became clear to me that the city attorney did not want the attorneys interviewing us. In my experience, the failure to interview the witness who researched and drafted the initiative that is under attack is inexplicable.

In the trial, the City did not require the unions to prove a vested pension right. It conceded that the unions had such a right. No witnesses were called. I was there, and I had made numerous requests of the attorneys to allow me to present the evidence that demolished the allegation claiming a vested right. But no, my research did not see the light of day. So the judge simply adopted the raw assertion of the unions, together with the lack of a defense, and ruled that the police unions had vested pension rights. An investigation by a neutral party is in order. And it needs to occur immediately to prevent this travesty of justice.

Read the entire series:

The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
 – Part 1, January 7, 2014

The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
 – Part 2, January 14, 2014

The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
 – Part 3, January 21, 2014

The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
 – Part 4, January 28, 2014

The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
 – Part 5, February 3, 2014

The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
 – Part 6, February 11, 2014

The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
 – Part 7, February 18, 2014

The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
 – Conclusion, February 24, 2014

About the Author:  John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34749) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.

7 Responses to The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform

  1. J. D. Miller CPA says:

    I’m a CPA in Vallejo.

    In 2009, Barry Dolowich, CPA, a member of the Economic Advisory Committee invited me to come down to meet with the Committee to share with them the reasons for Vallejo’s bankruptcy.

    Barry also asked me to come to the City Council meeting that same evening to share my views on Pacific Grove’s then very precarious budget position. The Council was looking for additional budget cuts to cover budget deficits that were likely to continue growing into the future.

    Many citizens who were there that evening may remember the simple line graph that I drew to illustrate how soon Pacific Grove would likely have to consider bankruptcy if they didn’t act to avert it. I recommended that the Council consider hiring a bankruptcy attorney not to prepare to file for bankruptcy but to explore possible strategies to avoid bankruptcy while continuing to provide the services that the taxpayers of Pacific Grove were paying taxes to receive.

    Mayor Cort was adamant that there would be no discussion of bankruptcy while he was Mayor.

    As Pacific Grove and Vallejo have discovered, you can’t pay for the unsustainable pensions that City employees expect and believe they have guaranteed to them without substantially increasing taxes every year and accepting significantly fewer City services.

    A few years before I spoke to the City Council, Pacific Grove had cut the size of its City staff in half and entered into a contract with neighboring Monterey for fire protection services to balance their budget. Those actions only put off the ultimate consequences of these unsustainable pension costs.

    Unless there is an agreement with the City employees of Pacific Grove, current City employees should not plan to retire with the pensions that they expect. Those pensions cannot be paid for while paying for the costs of the services that the taxpayers of Pacific Grove expect.

  2. The people of Pacific Grove should erect a statue of John Moore.

    The same thing that happened in Pacific Grove happened in Sonoma County. The County leaders retroactively increased pensions without telling anyone or presenting its costs to the public.

    The retroactive increases in Sonoma County also went to the Board of Supervisors, senior county managers and retirement board members so they have all been handsomely rewarded for breaking the law.

    Sonoma County now has the worst roads in the state because pension costs are consuming 36% of the General Fund. In addition, we will be passing on to our kids pension and retiree health insurance unfunded liabilities of $1.3 billion.

    There are no checks and balances left in government any more when it comes to employee compensation. That has to change.

    To learn more about Sonoma County’s pension crisis you can visit our website at http://www.newsonoma.org

  3. Victora Hammersmith Williams says:

    Former and disgraced Mayor Dan Cort (formerly of Stockton) shares a huge responsibility for Pacific Grove’s financial disaster. As Mayor he hand picked and appointed a Budget and Finance Advisory Committee to look at the City’s finances. Councilwoman Susan Nilmeier was Chair.

    After a long series of meetings and research the Budget and Finance Advisory Committee unanimously recommended the City bring in a bankruptcy expert from Vallejo to explain the city’s precarious financial situation and potential solutions.

    Well, did Mayor Cort follow this unanimously recommendation by his hand-picked advisors?

    No. He fought against it.

    He went so far as to actively have the subject removed from every City Council agenda so his own committee couldn’t even report on their research.

    This was back when the city could have exited from Cal-Pers for about $4 million to $9 million dollars. That amount has now grown to about $45 – 90 million.

    Thanks Dan Cort.

    Since you’re a millionaire, why don’t you just write the city a check for the amount you cost us?

    Cort’s book “Downtown Turnaround” has an appropriate title, but not the way Cort dreams of. In Pacific Grove Mayor Cort has thrown away our town to the financial monsters – when he could have helped save it.

    What a colossal coward.

  4. Scott L. says:

    This can has been kicked down the road for years. I second the sentiment that John Moore should be thanked for fighting this fight for over 5 years. Sadly, his insightful commentary and urgent calls for action have fallen upon deaf ears for years. City employees and representatives who should be demanding that others listen to Mr. Moore (in order to try to save the City of Pacific Grove) have instead wasted time, energy, and resources trying to discredit and silence him.

    What the people of Pacific Grove must accept is that today, bankruptcy is not one option, it is the only option.

    The corrupt collection of CalPERS reps, greedy City employees, and inept politicians are to blame. Future generations of Pacific Grove residents will continue to pay for their failures.

    I suggest Mr. Moore surround himself with a coalition of capable candidates and take over as Mayor. Work with competent attorneys to minimize the costs to the City, and get started cleaning up. The City has ignored you for years and we all see where that got us.

    JOHN MOORE FOR MAYOR!

    Thank you again, Mr. Moore for continuing to fight the fight.

  5. Grumpy Guy says:

    Honestly? There is no hope for California. The Democrats are sucking it dry, then will set the various angry minority factions against each other as the elite of the Party pull out, and move like locusts to a new state to destroy it. We should have hung them all ten years ago. Now, the damage is done.

    “The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money.” –

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