Heedless Of Pension Debt Warnings, Upland Solons Disenfranchise Treasurer

By Mark Gutglueck
In a noteworthy effort to disenfranchise Upland’s city treasurer, city officials this week reversed decades of precedent by rechristening the report relating to the most recently available accounting of the city’s financial books from the “treasurer’s report” to the “treasury report.”
That move came as a consequence of City Treasurer Larry Kinley’s insistence that information pertaining to the drain on city finances represented by its ongoing and future pension costs be included in the monthly report on the city’s investment funds. When city officials who compile that report and present it to Kinley as the city treasurer for his review categorically refused to include the pension debt figures, referred to as an unfunded liability, Kinley in turn said he would not sign the report. When earlier this month for the first time Kinley forced the issue and did not endorse the report with his signature, City Manager Rosemary Hoerning instructed acting Administrative Services Director Londa Bock-Helms, who serves as the city’s finance officer. to present the report to the city council on Monday evening not as the treasurer’s report but as the treasury report.
In Upland, what was formerly referred to as the treasurer’s report and which this week for the first time was labeled on the agenda the treasury report is substantially similar to comparable documents prepared in other municipalities. Essentially, it lays out what the city has over its history up until the present salted away in terms of its surpluses garnered from revenue in excess of its expenditures in current and past budgetary cycles, and delineates how and where that money is invested.
Thus. Upland shows investments in the State of California Local Agency Investment Fund, interest-bearing bank account and change funds, ABS Corporate Paydown Securities, money market funds, government agency securities, corporate bonds and U.S. Treasury notes.
Upland’s report further shows “investment” in the Public Agency Retirement System, which is a separate entity from the California Public Employees Retirement System, a fund into which Upland and the lion’s share of California cities, many counties and the state itself provide payments which are then invested. Returns on those investments are then used to pay the pensions of the retired government workers who were employed by those agencies, such as Upland, participating in the system.
The report also catalogs so-called restricted funds with or held by certain fiscal agents, such as bonds issued under the city’s authority by the Lewis Operation Company for its Harvest Development Project, several community facilities district funds, and money available in the fund kept for the successor agency to the city’s now defunct redevelopment agency. It also shows money in the city’s checking account, money on hand in its petty cash coffer, and in its payroll balance account.
Further, the report shows the maturity dates of investments, where that date is relevant to the money becoming available in specified amounts.
Generally speaking, the treasurer’s report, or as it is now called the treasury report, reports on financial numbers that were current two months previous. Thus, the report made this week was for the month of September. The report presented to the council on October 14 was for August. The report presented to the council at its September 9 meeting was for July.
In filing the report, the city’s finance manager/finance officer and, formerly, the city treasurer would certify that the city’s investments are in compliance with the investment policy adopted by the city council, that the city has the ability to meet its financial obligations and pay for its budgeted expenditures for a period of six months going forward, that the value of the city’s funds held in banking institutions are not calculated with regard to any anticipated escalations and de-escalations and are the same as their book value, that the book value for money contained in the state investment pool is the withdrawal value provided by the state treasurer, that the market value of the funds held by the state treasurer equates to the city’s pro rata share of the market value of the entire pool, and that the sources for the market values provided in the report are account statements and the Wall Street Journal Government National Mortgage Association rates on the last trading day of the month.
Kinley had worked for Bank of America for 42 years, the last 15 of which he was a manager in the problem loan administration dealing with borrowers with financial difficulties. After his retirement, Kinley in 2013 by chance heard that Standard and Poor’s Financial Services intended to downgrade the city’s credit rating. Indulging the interest and expertise he had cultivated professionally, he began looking into the situation involving his city, coming across as well an auditor’s opinion from the certified public accounting firm Mayer Hoffman and McCann from 2012 stating that there were serious questions with regard to the city’s solvency to the point that in a short while “it will be unable to continue as a going concern.”
He set about attempting to determine how it was that a public agency ostensibly run by responsible and serious professionals could have expenditures that so grossly outran its income. At the root of the city’s challenge, he was told, was its unfunded pension liability, which reportedly stood somewhere in the range of $30 million to $40 million. Essentially, an unfunded liability is defined as a debt obligation for which sufficient funds to cover the money owed has not been set aside. In the case of the City of Upland’s unfunded pension liability, what was occurring at that time, had previously occurred and would continue into the future was that the city was bringing in enough revenue to cover, for the most part, the cost of its current ongoing operations, but did not have the money to simultaneously pay for the commitments it had made in the past to city employees with regard to their pensions. The roots of the problem extended back into the 1990s when contract negotiations between the city and its employee union had produced an agreement by which the employees agreed to take less in raises than their bargaining units had initially demanded in exchange for the city picking up the cost of the employee contributions to their retirement fund. This had been exacerbated by the city going along with a far more generous benefit package for employees as of Fiscal Year 2001-02, which had built into it a presumption that the California Public Employees Retirement System’s investment portfolio would provide consistent 7.5 percent annual returns. While that deal had been cut in the midst of a bullish market, the subsequent downturn in the economy had unleashed the bears onto Wall Street, and the Dow Jones, Nasdaq and Standard & Poor’s indexes over the next six years following the 2007 recession reached nowhere near the 7.5 percent annual return that the California Public Employees Retirement System needed to sustain itself. Under the terms of the retirement system’s agreement with its members, its participants – cities, counties and the state itself – were required to put up the hard cash needed to make up for the insufficient performance of the stocks in its investment portfolio. Cities such as Upland were at once faced with mushrooming payments to the California Public Employees Retirement System. By 2014, 17 percent of Upland’s general fund was devoted to payments to he California Public Employees Retirement System, entailing either a reduction in services or deficit spending in which the city had to dig into its reserves in order to pay those who were no longer working for the city.
To Kinley, all of this had a much too familiar ring to it. The city had been living beyond its means, just like many of those bank customers he had dealt with when he was in the problem loan department, living beyond their means, borrowing more money to support their inflated lifestyle and lack of fiscal discipline, finding, when they did not have enough money to make their current loan payments or catch up on the ones they had already missed that their only option was declaration of bankruptcy.
It was worse than that, however. He met with then-City Manager Stephen Dunn. Dunn, who had been the city’s finance director before he was elevated to city manager, openly told him that the unfunded pension liability the city was looking at was a bit higher than the $30 million to $40 million figure Kinley had mentioned. Actually, Dunn said, it was at least twice that, in the neighborhood of $80 million. Kinley asked if that was reflected in the city’s accounting system. Dunn paged through the most recent of the city’s audited financial statements but was unable to find it there, either in the body of the 150-page text or in any of its footnotes.
After the meeting, Kinley consulted the website for the California Public Employees Retirement System, with which the city of Upland is contracted to deliver pensions to its employees. Poring through what for many would be arcane financial data, Kinley was able to extrapolate an $88.99 million number, what he calculated was the city’s pension debt at that time. What Kinley found is that as of June 30, 2012, which at that point was the last date for which figures were available, the City of Upland’s unfunded pension liability for its safety [i.e., police and fire department] employees, current and future, calculated on an actuarial value of assets basis was $33,370,136 and calculated on a market value of assets basis was $54,213,809. Kinley further learned that as of June 30, 2012 the city of Upland’s unfunded pension liability for its miscellaneous [i.e., those other than policemen and firefighters] employees, current and future, calculated on an actuarial value of assets was $21,234,203 and calculated on a market value of assets basis was $34,780,257.
In this way, Kinley derived the $88,994,066 figure, using market value actuarial terms.
In his next meeting with Dunn, Kinley asked if the city manager would be in favor of exiting the current retirement plan and substituting a defined contribution plan. Kinley said Dunn said he would entertain that notion, but frankly offered that making such a drastic change would be met with resistance on the part of city employees and would require solid backing by the city’s residents to get the city council. which is largely dependent on endorsements and backing not to mention political contributions from the city’s employee unions in their election campaigns, to go along with the switch.
Kinley thereafter embarked on an information campaign he thought would be the basis for the pension reform the city needed. He delved through the city’s books and financial data, selecting information that he could encapsulate and present in the three minutes provided to the public at city council meetings. These short speeches were intended to alert the city council and the public to the looming pension crisis that was threatening to overwhelm the city, such that in the next year or so, Upland would see 20 percent of its general fund budget devoted to payments to he California Public Employees Retirement System, then a few years later a quarter of its general fund, then one-third, then two-fifths and eventually half of the city’s annual operating budget being consumed with paying pensions to former employees who are no longer working.
In 2014, Dunn was forced by the city council to leave as city manager. Along the way, Kinley was making some headway in getting some attention to be focused on the pension crisis, and he was picking up name recognition doing so.
In 2016, then-City Treasurer Dan Morgan elected to seek a position on the city council. Kinley ran for treasurer. Ironically, vying against him for the spot was Dunn. When the dust cleared after the November 2016 balloting, Kinley had come out on top, with 16,625 votes, or 62.46 percent to Dunn’s 9,992 votes or 37.54 percent.
To Kinley’s dismay, his victory in the race for treasurer did not kickstart the pension reform movement in Upland he had hoped for. When he came into office,
Marty Thouvenell was serving in the fifth month of what would turn out to be an 18-month stint as Upland’s acting city manager. Thouvenell, who was the city’s police chief for fifteen years and a 30-year employee with the police department, is among the city’s highest paid pensioners, and he had a vested interest in the city making no adjustments that will upset its relationship with the California Public Employees Retirement System. Thouvenell held considerable sway over the city council as it was then composed, and it was his opinion that no one was interested in hearing Kinley prattle on about how the sky was falling and City Hall would be buried under an avalanche of pension debt. He told Kinley as much.
Summoning up as much dignity as he could in the face of the council’s and city staff’s disregard for him, Kinley would make occasional appearances at Upland’s city council meetings. But his status as the city’s elected treasurer softened no soap with Thouvenell or the city council, and if he wanted to sound his dire warnings about the unfunded pension liability at those forums, he was not given a platform to do so as city treasurer, but had to present a speaker card to the city clerk and make his presentation from the podium provided to members of the public. If his message did not contain itself to the three minutes allotted to public speakers, Mayor Debbie Stone, who had heard as much about the city’s unfunded pension liability as she could stand, would shut off the microphone.
As city treasurer, Kinley did register one victory with regard to his crusade on the unfunded pension liability issue, a meaningful one. In accordance with his constant lobbying and advocacy, and the application of his authority in his elected position, he arranged to have not only a reference to the unfunded pension liability made in the city’s comprehensive annual financial report, but a projection of where that liability stood as of June 30, the end of the fiscal year, based upon actuarials composed of the pensions being provided to the city’s retirees, their ages and current average life expectancy.
While getting the city to recognize at some level that its unfunded pension liability is a serious issue represented a long stride forward, it simply was not enough, Kinley knew. The city’s comprehensive annual financial report, while important in terms of the internal financial function of the city, remains a relatively obscure document to the public, one which is not likely to be known to the average city resident, let alone consulted even briefly or read in depth. If the city is ever to make a serious inroad on reducing its unfunded pension liability, Kinley recognized, the citizenry must first be made aware of the growing debt and its consequences. From that foundation of knowledge, his hope was that the will to do something about it among the city’s voters and the city council might materialize in sufficient strength for the city to either end its arrangement with the California Public Employees Retirement System, redraft the generous pension formula the city was committed to or require that the city’s employees, rather than the city, fund their participation in the pension system.
One way of vectoring the public’s information to the problem that McKinley came up with was to include in the monthly treasurer’s report he signed a current projection of the city’s unfunded pension liability. The report itself is included in the agenda packet of the council meeting at which it is presented, which is usually the first rather than the second regularly scheduled council meeting of the month.
When Kinley floated that idea while Thouvenell was city manager, it went nowhere. Similarly, when Thouvenell was succeeded as city manager by Bill Manis, a career municipal government employee who is vested in the California Public Employees Retirement System, Kinley’s effort to put the information in the treasurer’s report failed. After Manis’s departure and his succession by Jeannette Vagnozzi, likewise a participant in the California Public Employees Retirement System, Kinley was again rebuffed.
Vagnozzi’s appointment as city manager had come under rather extraordinary circumstances. In the 2018 election cycle, three of the members of the council – Sid Robinson, Gino Filippi and Carol Timm – had been replaced. Robinson had chosen not to run. Filippi and Timm were defeated at the polls by Ricky Felix and Rudy Zuniga, respectively. Zuniga and Felix were set to be sworn in on December 11, but there remained a nearly five week gap between the November 6 Election and their taking office. At that point, on November 26, at the last full council meeting in which Robinson, Filippi and Timm were eligible to participate, they voted, along with Mayor Debbie Stone, to hire Vagnozzi, who had served as assistant city manager, city clerk, risk manager and the head of administrative services under both Thouvenell and Manis and was then serving as interim city manager, on a three-year contract as city manager. Timm’s endorsement of Vagnozzi occurred telephonically, as she was in North Carolina at the time to celebrate Thanksgiving with her parents. Vagnozzi’s hiring was widely seen as an act of revenge by the outgoing members of the council against the incoming council. Vagnozzi lasted only six months in the city manager’s post, and was terminated in May, with only Mayor Stone advocating against the firing. Vagnozzi was replaced, on an interim basis, by longtime Public Works Director Rosemary Hoerning, who has now lasted in the interim city manager position as long as Vagnozzi was in the city manager capacity. There is a fair prospect, although it is not at this point certain, that the city will detract the interim qualifier from Hoerning’s current title and make her the full-fledged city manager.
In what was perhaps his last hurrah, Kinley this fall pressed forward once more with his pitch to provide the public with a recurrent red flag reminder of the unfunded pension liability, seeking again to include the actuarial-based projection of what that monetary obligation is within the monthly treasurer’s report.
“What I wanted to do in the treasury report was add a comment as the treasurer about the city’s pension liability, to see if I could get it in there,” Kinley said. “I wanted to provide both sides of the balance sheet, the net, if you will, which would include not just our assets but our liabilities. The city has not allowed me to do that. On one hand, they want to claim we have $78 million in assets or reserves. But looked at another way we have a future projected deficit of $24 million.”
Kinley elaborated. “We have a projected $112,039,675 unfunded pension liability per the city’s comprehensive annual financial report,” he said. “My thinking on the last report was the city had something like $78 million in assets in individual accounts but we owe $112 million in terms of liability. I want people to understand, or at least be aware, that the city had this $112 million liability. You very seldom or almost never see that mentioned. I wanted to call everyone’s attention to that. They did not like that. They would not let me publish that. They weren’t willing to let me put that in there. I had fought for the right to include that in the comprehensive annual financial report, and they were willing to do it there, but not in the monthly report, the treasurer’s report. So I said, ‘If you are not going to let me provide that information, which I consider to be very relevant to the city’s overall financial picture, I’m not going to sign the report anymore because it is not my report.’”
Kinley said he is isolated on the issue in the city, but that further up the governmental evolutionary chain people are sensitive to what he is concerned about.
“I called the state treasurer’s office to ask if there is something I can do to ensure I am able to fulfill my duties as I see them,” Kinley said. “I was handed over to one of their lawyers. The first question I was asked was ‘Who do your report to?’ I said, “Per the city’s organizational chart, I report to the citizens of Upland. That is the only line going to anyone above me. The lines from me or to me go down to the rest of the city staff.’ The lawyer’s comment was, ‘Therefore, since there is no one in the city with higher authority on financial issues than you, you are independent and you can add the information you deem relevant to the treasurer’s report.’”
Kinley said he took that advice to heart and “I started adding it. Nothing happened. They wouldn’t allow me to add to or edit my own report. I said then, ‘I am not going to sign this. My thinking is I want to keep the citizens of Upland up to date on what the city is doing with their money.’”
Asked if he is an outcast at City Hall, Kinley said, “I don’t know what to say. I’m darn near three years into this term as city treasurer and I have never had a conversation with the mayor. I have never been invited in for a conversation and I’ve never talked to her. What does that tell you? I think I know where she is getting her guidance from.”
Kinley said he thought the attitude of the city council might change in the aftermath of the 2018 election, in which Janice Elliott, who was at severe odds with the previous city council that was faithfully following Thouvenell’s guidance, was retained on the city council to represent the city’s Second District in the first by-district election in the city’s history, and councilmembers Robinson, Filippi and Timm were either defeated or left office with the conclusion of the election cycle. He was also heartened, Kinley said, by the election of Rudy Zuniga in the city’s Fourth District, as he perceived Zuniga to be a reformist candidate, and one who would be more concerned with preserving services for the city’s residents than assuring comfortable retirement benefits for the city’s employees. Yet both Elliott and Zuniga, as members of the city council’s finance subcommittee, backed Hoerning and Londa Bock-Helms, the city’s finance officer, when they resisted allowing Kinley to put the unfunded pension liability into the treasurer’s report.
He had hoped and believed that Elliott and Zuniga would stand with him and the city’s residents against Hoerning and the rest of city staff on the pension debt issue. His hope was misplaced, he said. Outgunned and disappointed, Kinley said he merely made a show of nonviolent protest. “I told them that if they were going to erase my input, I just wouldn’t sign the report. And I didn’t.”
At Monday night’s city council meeting, Hoerning offered a defense for keeping any reference to the unfunded pension liability out of what she steadfastly referred to as the “treasury report,” disregarding the tradition that predated her arrival in Upland as a city employee of referring to it as the “treasurer’s report.”
“The treasury report is required under the city’s investment policy to be provided to the finance and investment committee group on a quarterly basis and submitted to the city council for their review and consideration,” Hoerning said. “The treasury report basically is a report that identifies the city’s assets that are on hand, available cash that’s on hand and how it’s invested. It’s a very detailed report just on investments the city has with its funds as available and that’s included investments anywhere from zero cash on hands to investments that are in instruments for five years.”
Hoerning said the city’s finance committee “discussed different revenue investment strategies and changed percentages of those funds into different term investments. The treasurer wanted to take the treasury report and handwrite a note on that treasury report that pertained to the city’s unfunded liability. That information is contained in the context of an annual financial report and really does not belong on the treasury report because the treasury report is specifically for investment purposes. So, I requested that the treasurer, if he wanted to sign the treasury report, which is prepared by our finance department, he’s welcome to do so, but he’s not entitled to alter the report. On this particular item the investment committee made a determination as to whether that language should be included in the report, and it was determined that it should not be on the report. That information was conveyed to Mr. Kinley, and he’s elected not to sign the report. There is no governmental mandate that requires him to sign that report, so only Londa Helms, our finance manager, is on that report. If he chooses not to sign the reports in the future, I’ve offered to sign those reports as a co-signer with Londa. That’s where we are with that.”
The requirement and authorization for municipalities to carry out quarterly financial reports is contained within California Government Code § 53646. There is nothing in California Government Code § 53646 which expressly forbids a city treasurer from making mention of the city’s unfunded financial liabilities in a statement of investment policy, which California Government Code § 53646 states, “the board [i.e., the city council] shall review and approve at a public meeting.”
Indeed, in subparagraph 3, California Government Code § 53646 reads, “The quarterly report shall include a statement denoting the ability of the local agency to meet its pool’s expenditure requirements for the next six months, or provide an explanation as to why sufficient money shall, or may, not be available.”
It is Kinley’s contention that the city’s unfunded pension liability has the potential for preventing the city from meeting future expenditure requirements.
The degree to which Hoerning is invested in the California Public Employees Retirement System is demonstrated by the calculation of the pension she would receive at present were she to take retirement immediately. The California Public Employees Retirement System formula for someone in the position she holds calls for her highest annual salary times her number of years time the multiplicand of 2.5 percent. As the director of public works in Upland she earned $167,666.41 annually. Thus, Hoerning today is entitled to receive on retirement a pension of $134,133.12 annually for the remainder of her life based upon $167.666.41 X 32 (years) X .025. If Hoerning is extended an offer to move into the city manager’s position and provided with the same compensation package as was provided to Vagnozzi of $205,368 in salary and roughly $25,000 per year in add-ons along with $86,690.97 in benefits, and thereafter manages to remain in place for the requisite one year, she will see her annual pension escalate to $190.053.60, based upon $230,368 X 33 (years) X.025. If she remains longer than that and is given raises in her capacity as city manager, her pension will escalate.
This perhaps explains why Hoerning is so adamantly opposed to allowing Kinley to make any further inroads in his pension reform effort, including posting, on a monthly basis on the city’s website, calculations of the city’s accumulating pension debt.
Kinley said, “One of the things that is really disturbing to me is that the governor of California last year made $195,000. Our city manager and practically every other city manager in the state makes over $200,000. There are over a dozen city managers in California who make over $400,000 in salary and benefits and four who make over $500,000. How do any of those people have more responsibility and more weighing on them than the governor of the entire state? That’s the whole problem with city government. How can these city managers and other senior staff members have a salary higher than what the governor makes with his responsibilities? It is no wonder all of these cities, and certainly our own, have these pension problems.”
Kinley said city employees are driven by greed and their own financial interest rather than dedication to the residents they serve and the taxpayers who are providing them with a more than adequate living wage and benefits that are not available to the vast majority of people working in the private sector. “You know how much money the treasurer of the City of Upland makes?” he asked, speaking of himself in the third person. “$225 a month. I’m trying to earn my pay. I have spent a lot of time trying to report to the residents of this city, who elected me treasurer, what is going on with their money. It is hard to get that information to the taxpayers because the people at City Hall don’t want them to have it. I’m just about to give up trying. Nobody wants to talk about this, and they don’t want me talking about it, either.”
Councilwoman Janice Elliott said she did not believe the monthly treasury reports, as they are now known, are the proper forum for Kinley to be carrying out an information campaign relating to the unfunded pension liability. Moreover, she said, the issue is too complicated for most people to understand, and giving Kinley a platform to deliver his message will likely confuse and misinform city residents, resulting in city staff being pestered inordinately and unproductively with citizen inquiries.
“It is disappointing that the city finance committee was unable to come to an agreement with our treasurer, Larry Kinley, about the disclosure of the unfunded pension liability on the treasurer’s report,” Elliott said. “I do not feel that this estimate of our future pension liability should be included in a report containing only Upland’s financial assets. Because this estimated liability is disclosed on our city’s website in our annual comprehensive financial report, along with a four-page-long footnote of its complex calculations, I felt that an abbreviated one-sentence disclosure would cause material misunderstandings by readers that require staff time to address.”
Elliott said city officials are not ignoring the problem of the city’s pension debt, even if they have yet to come to terms with it or make any progress in reducing it.
“In the last year, Upland has had two workshops addressing the unfunded pension liability, and staff is currently working on a plan to reduce this liability that will be proposed at a meeting in the near future, so we are not ignoring or trying to conceal this important concern,” she insisted.
Kinley’s status as city treasure gives him no bully pulpit from which to propound his position, she said, but the city does provide him with the same opportunity other city residents have to speak their piece.
“Larry Kinley has the opportunity to speak for three minutes at the beginning of every city council meeting when the treasury report is on the agenda to present his thoughts and concerns on the topic of the unfunded pension liability,” she said. “If he is asked not to speak on this topic, I will defend his right to do so.”
The city’s issue with openness concerning its financial affairs goes back to before he was elected treasurer, Kinley said. At that time, he recalled that he had attempted to zero in on a number of the city’s financial issues, but met with dead-ends. The city for a time had a finance director, Scott Williams, who was committed to transparency as far as the city’s finances went, Kinley said, but just as Williams was establishing a toehold in 2016, just prior to Kinley’s election, he was fired.
“As the finance director, Scott was doing a good job, and then they just let him go,” Kinley said, noting that Williams’ sacking came during the extended 18 month period while Marty Thouvenell was serving as the acting city manager.
Kinley said he tried to draw out from Thouvenell his rationale for cashiering Williams and resisting reforms to the city’s pension system. “To every question I’d ask, he’d say, ‘I don’t know’ or ‘I can’t talk about it.’ At one time, when I was running for treasurer, I had a lot of enthusiasm for pension reform, and I had confidence that with the right kind of informational campaign, we could do something about it. But what I see now that I didn’t know then is that the people who are in a position to make the needed changes have a huge stake in leaving things just the way they are. Their positions of power and authority and their ability to resist reform is greater than the determination of those of us who want to fix what is an obviously broken and failing system. They are denying us the means to even inform the city’s residents of what is happening, which is the first step that needs to be taken. I don’t have any patience for this. I’ve had my fill. That’s why you don’t see me participating much anymore.”
Kinley said he regretted being seen as unduly alarmist by large numbers of people who find the complacence of city staff and the members of the city council to be reassuring. Nevertheless, he said, the major leap in the projection of the city’s unfunded pension liability from $99,976,917 at the end of Fiscal Year 2017-18 to $112,039,675 at the end of Fiscal Year 2018-19 as of June 30 should alarm everyone.

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