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.
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