The hopes a growing contingent of Upland residents intent on municipal retiree pension reform were dashed this week when a forum that was originally touted as a strategy session on how the city could come to terms with the fiscal crisis brought on by the city’s too-generous stipends to its former employees was commandeered and dominated by four entities with a financial interest in preserving the city’s existing relationship with the public employees’ retirement system at the heart of the problem.
By the end of the workshop held on Tuesday afternoon, Upland’s city manager, assistant city manager and two consultants had diverted the city council’s focus from reducing the amount of money the city is paying to its pensioners to borrowing money through a bond issuing scheme to continue to provide those inflated benefits.
Upland, which was in such severe financial straits in 2012 that its auditor at that time expressed doubts about it being able “to continue as a going concern,” has, with the recovering national, state and local economy of the last few years, come to the point where it is no longer teetering on the brink of bankruptcy’s abyss. Nevertheless, hefty  salaries and benefits that city officials provided to city employees throughout the first decade of the current century persist and their drain on the public treasury continues to haunt the city in the third decade of the Third Millennium.
The City of Upland is a participant in the California Public Employees’ Retirement System. In the 2001/2002 time frame, Upland’s municipal officials, reacting to assurances from California Public Employees’ Retirement System analysts and advisors that the state pension system’s coffers were superfunded, granted employees far more liberal retirement benefits than they had previously received. Because the pension fund was heavily invested in the stock market at that time and the market was in the midst of what is referred to as the dotcom bubble, the pension fund stood at 140 percent of what it needed to meet its obligations at that time.
Based on this confidence, which was later shattered when technology stocks plunged in value and ultimately led to the 2007-to-2014 economic downturn commonly referred to as the Great Recession, many elected municipal officials throughout the Golden State, including those in Upland, caved into the demands by employee unions that they share the wealth and not only up city employees’ salaries but their benefits including pensions.
John Pomierski was elected Upland Mayor in November 2000, and dominated Upland politics for the next decade. In short order, Pomierski, who had been backed by deep-pocketed developmental interests, used his power of beguilement and manipulation along with his forceful personality to take command of the city even beyond that normally accorded to the mayor, giving others involved in the operation of the municipality the option of going along with him or being disenfranchised. With the exception of Ray Musser, Pomierski ultimately forged an alliance with all of the city council’s members, including Tom Thomas, whom he had bested in the 2000 mayoral race. His team included Michael Libutti and Ken Willis, first elected to the council in 1998 and 2000, respectively. When Libutti, a prosecutor in the San Bernardino County District Attorney’s Office, was elevated to the Superior Court in 1982, he was replaced by Brendan Brandt. Pomierski formed a political bond with Brandt as well.
Early on, Pomierski was shaking down those with interests in the decision-making process at City Hall, and pocketing bribes. Despite widespread whispering about what was going on, Pomierski held his political coalition together. Developmental interests had united behind Pomierski because of his readiness and ability to force, cajole or simply invite the other members of the Upland City Council, who collectively held the city’s ultimate land use authority, to accommodate those developers’ efforts to obtain building entitlements. Pomierski served as a conduit of political donations originating with those developmental interests to other politicians. This formed the basis of and strengthened the bonds of Pomierski’s coalition.
After the 2004 election in which Pomierski was reelected mayor over a strong challenge by his lone rival on the city council, Ray Musser, the level to which Pomierski was engaged in corruptions of his office was growing too intense to ignore. In March 2005, then-City Manager Mike Milhiser departed, followed a few short weeks later by then-Police Chief Marty Thouvenell, both of whom were concerned about the destruction remaining affiliated with Pomierski might have on their reputations. Pomierski then induced the city council to hire his hand-picked replacement for Milhiser, Robb Quincey, and he elevated a captain in the police department, Steve Adams, to police chief, moves intended to facilitate his depredations and insulate him from any accountability.
Thereafter there were no restrictions of any effect on Pomierski. He obtained the city council’s acquiescence in conferring upon Quincey a contract which provided him with a guarantee that he would receive the same percentage increase in his salary and benefits that were provided to the members of the police department. Thereafter, he arranged to have Quincey designated to represent the city in its negotiations with the police officers’ union. During the slightly more than five-and-a-half years that he served as city manager, Quincey was provided with eight raises that boosted his combined salary and benefits from less than $260,000 per year to $425,000 per year, making him the second-highest paid city manager in California. Meanwhile, the members of the police department saw their salaries and benefits escalate significantly, such that their silence and investigative inactivity with regard to Pomierski’s activities was secured. Because he had concerns that the occasional knowledge about his bribetaking and other illegal activities that existed among city staff might not contain itself, Pomierski made arrangements to increase employee salaries generally at City Hall and had the city go to a four-day work week, which bought the acquiescence of city employees in what he was doing. Pomierski experienced no obstruction from anyone at City Hall in the graftfest he was involved in, and it was only after the FBI and U.S. Attorney’s Office took notice and a federal grand jury indicted him in 2011 that the gravy train he was riding screeched to a halt. In 2012, Quincey, was arrested and charged by the San Bernardino County District Attorney’s Office with three felonies consisting of unlawful misappropriation of public money, gaining personal benefit from an official contract, and giving false testimony under oath. Quincey’s lawyer would later work out with prosecutors a plea deal for him on a reduced charge.
Despite Pomierski’s personal downfall, the generosity toward city employees that had been a key ingredient in his recipe for self-enrichment persists a decade after his political demise. Even while Pomierski was in office, that generosity with taxpayer money had the effect of escalating dramatically the city’s pension costs, and when financial challenges descended upon the city while he was still mayor in 2007, it precipitated a pension debt situation the city is still staggering under.
The economic downturn of 2007 and the ensuing seven-year financial slump devastated the California Public Employees’ Retirement System’s fiscal position. To the advantage of the system itself and all of the public employees participating in it, however, a provision in the contractual arrangements between the California Public Employees’ Retirement System (CalPERS) and the cities participating in it requires that when CalPERS does not meet its investment goals, the difference is made up by the governmental entities that are the system’s constituents. That advantage to California’s governmental employees simultaneously redounded to the detriment of the cities and other governmental entities that are its participants in CalPERS.
The full implication of that one-sided guarantee was not fully recognized until the Great Recession took hold, at which point cities and counties participating in the California Public Employees’ Retirement System were called upon to make substantial payments beyond what they normally made to CalPERS. Those disbursements were made out of those counties’ and cities’ operating funds, often referred to in individual cases as that particular county’s or city’s general fund. This meant that money that otherwise was used for basic operations such as paying salaries, purchasing and carrying out maintenance on city vehicles, fueling those vehicles, providing care and upkeep of city parks, trimming trees, creating or renewing infrastructure such as paving roads, maintaining sidewalks, curbs, gutters and culverts, water and sewer lines, providing services and the like was in short supply. That translated into layoffs and resultant manpower shortages and service reductions, along with delays in constructing new infrastructure, the deterioration of existing infrastructure and the deferring of purchasing new equipment and vehicles and the neglect of maintenance and servicing to city assets.
The difference between the total amount of benefits owed to all of a city’s current employees & retirees and the value of the financial assets devoted to that city’s pension plan is referred to as an unfunded liability.
As of June 2012, the City of Upland had an $88,994,066 unfunded pension liability. That debt had reached $99,976,917 as of June 30, 2019, and then climbed more steeply thereafter, hitting $112,039,675 as of mid-fiscal year 2019-20 and $120,920,721 as of June 30, 2020. Unofficial documentation available to the Sentinel suggests that as of this month, Upland’s unfunded pension liability has climbed to $130,185,277.
At present, $8,996,364 of the city’s current annual $43,559,950.78 general fund budget is utilized in paying off its pension debt, such that 20.65 percent of the city’s operating costs are devoted to paying those who are no longer actively working for the city.
Projections are that by 3032, with more and more of the city’s current employees joining the rolls of the city’s retirees drawing pensions at ever higher and higher rates, the city will be expending close to 50 percent of its operating budget on paying pensions to former city employees, resulting in the city drastically reducing the municipal services it provides.
A significant factor in the pension debt crisis consists of the very generous terms contained in the formulas for those pensions. Generally speaking, employees are eligible to retire at the age 55 or 60 and begin to draw a yearly pension equal to two percent of their highest annual pay, including salary and overtime, multiplied by the number of years they were employed in the public sector in California. Thus, a city employee who retires at the age of 55 who was paid $100,000 per year who had been employed with the city for 30 years would be eligible to draw an annual pension of $60,000 per year [$100,000 X .02 X 30] for the remainder of his/her life. Upon that former employee’s death, his or her spouse/widow/widower would be eligible to continue to draw a pension equal to half that amount, $30,000, for the rest of her/his life. The higher one goes up the municipal employment totem pole in Upland, the more generous the formula. Senior administrative employees such as the city manager are eligible to draw a pension equal to his/her highest annual salary and add-on or overtime pay during that year times two-and-a-half percent times the number of years that person was employed in the public sector in California. Thus, a city manager paid $250,000 per year who retires at 60 after a 35-year career as a public employee in California would receive an annual pension of $218,750 [$250,000 X .025 X 35] for the rest of his/her life, with his/her surviving spouse eligible to collect $109,375 yearly for the remainder of his/her life.
In the case of police officers, they are eligible to retire at the age of 50 and receive a pension of three percent times their highest level of pay multiplied by the number of years they have worked as government employees in California.
Within certain circles involving Upland residents who are tuned in to the circumstance of their city’s looming pension crisis, there has been serious discussion over what steps could be taken to diffuse the situation or to in some fashion ameliorate it to reduce the onerous burden of the city’s escalating pension costs and the resultant impact on ongoing and future municipal operations and thereby the quality of life in the City of Gracious Living. The options for achieving this cost reduction are limited, given the reality of the contractual obligations the city took on in committing to participate in the California Public Employees’ Retirement System.
One potential solution or partial solution to the dilemma consists of altering future employee contracts to reduce the level of benefits guaranteed to city personnel going forward. Another consists of maintaining the level of benefits as they are but shifting the cost of participating in the California Public Employees’ Retirement System from the city to the employees themselves, meaning those employees – through payments deducted from their wages – and not the city and its taxpayers will cover the cost of making annual payments the city is currently making to CalPERS. A contemplated solution is capping pension amounts at what might be considered to be a reasonable maximum – perhaps $100,000 annually, for example – that would still provide the means for retirees to live in dignity without breaking the public treasury. Another option would be for the city to pull out of CalPERS altogether, paying off its debt to the state retirement system, and instituting a municipal employee 403 (B) retirement system for those city workers which they pay for themselves, perhaps with some modest city contribution, similar to 401 (K) programs available in the private sector. Another option would be for the city to utilize the legal leverage available to it and uniformly revoke the past salary and benefit increases provided to city employees under the Pomierski regime and as part of the negotiations engaged in by Quincey, based on the statutory principle that any contractual arrangement entered into by a public agency as a consequence of a conflict of interest is rendered null and void and is therefore unenforceable.
It is calculated that use of one or a combination of some or all of those options to substantially reduce the City of Upland’s pension costs could in relatively short order deflate the city’s unfunded pension liability to somewhere between one-half or two-thirds of what it is presently, rendering the city’s finances into a far more manageable state, eliminating the future prospect of bankruptcy and heading off the impingement on city services that are threatening to drop the City of Gracious Living to Third World standards. Among that circle of Upland residents, there was hope that under the guidance of Greg Bradley, who was elected Upland treasurer in November 2020, the city would develop the collective will of its citizenry and political leadership to explore those options.
This week, on March 2, the city council held an afternoon workshop/special meeting to discuss management of the city’s pension costs and the accruing and growing pension fund liability.
Much to the chagrin of those anticipating a change in the city’s approach to its pension funding dilemma, the workshop confined itself to essentially preserving the CalPERS status quo and exploring a debt financing solution that, if used, will defer the city’s pension costs to a future generation of Uplanders and potentially be of near term financial benefit to those advising the city.
The upshot of Tuesday afternoon’s meeting was that the city should eschew any effort toward pension reform and instead reach for the nostrum of pension obligation bonds.
Governments issue pension obligation bonds, known by the acronym POBs, and use the proceeds of the sale of the bonds to cover their pension debt. The bond purchasers are then paid back by the city a certain percentage of the bond value over a given period, typically 30 to 40 years. This strategy is based on the hope, or gamble, that the pension funds’ investment returns will prove to be higher than municipal bond interest. Many governments have used pension obligation bonds successfully in reducing their pension liability, but POBs have also contributed to major municipal bankruptcies. Pension obligation bonds have inherent risks, which can and have proven devastating. One potential disadvantage consists of the possibility that investment returns in the underlying pension fund, in the case of Upland the California Public Employees’ Retirement System, will fall short of the bond interest. Pension obligation bonds are credit negative and impact a city’s debt capacity, potentially using up borrowing capability that could be used for other purposes. Moreover, pension obligation bonds are complex instruments that carry considerable risk, as they may incorporate the use of guaranteed investment contracts, swaps, and/or derivatives, which must be intensively scrutinized, as such embedded products and variables can introduce counterparty risk, credit risk and interest rate risk. The Government Finance Officers Association has issued a general caveat against them, stating it “recommends that state and local governments do not issue pension obligation bonds.”
Those in favor of pension obligation bonds maintain that the potential downsides of pension obligation bonds can be reduced, mitigated or virtually eliminated through caution and appropriate legal frameworks.
City of Upland officials first became intrigued with pension obligation bonds last year when financial advisor Suzanne Harrell gave them a sales job. Harrell’s firm, Harrell & Company, stood to profit if the city resolved to issue the bonds and used her company in doing so. Out of concern that the city might not have been getting the straight scoop from Harrell because of her financial stake in the city’s eventual decision, city officials sought out other experts to orient them with regard to this relatively obscure means of financing. For this week’s discussion, the city turned to two others, Julio Morales, a managing director with Urban Futures, and Ira Summer, an actuary who is well versed in public pension statistics.
As it turned out, both Morales and Summer and their companies, have a potential financial interest in the city issuing pension obligation bonds as well. Since under most likely scenarios, the issuance of POBs consists of maintaining the status quo between the city and CalPERs, neither Morales nor Summer engaged in any serious or meaningful discussion of the city’s parallel options, such as ending its relationship with the California Public Employees’ Retirement System beyond precluding the concept by advising that it was undoable or prohibitively expensive. Nor did Morales or Summers engage in a dialogue relating to switching the burden of defraying pension costs to the city’s employees or altering the terms of the city’s employee benefit packages either through negotiation or on the basis of the illegality of the circumstances by which those benefits were derived, offered and accepted.
Morales acknowledged that in the current economic circumstance, over the last several years pension funds dependent upon stock market and other investment returns have been about 75 percent funded.
Morales shot down the concept of the city moving out of its contractual arrangement with the California Public Employees’ Retirement System and switching to a 403 (B) program, saying that CalPERS would not allow employees in its system to withdraw. He further said that CalPERS would not allow a city that currently has its employees in the California Public Employees’ Retirement System to hire new employees who were not automatically enrolled in the retirement system. Without making any citation to his authority for saying so, Morales indicated that doing so would be a violation of California law.
Morales said it was not impossible for the City of Upland to leave CalPERS, but that it would cost more than paying off its current unfunded liability, which he put in the neighborhood of $120 million. Rather, he said, Upland could not buy its way out of the California Public Employees’ Retirement System for anything less than $490 million.
While Morales did not advertise pension obligation bonds as a silver bullet that would slay the pension debt vampire, he continually offered them as a key component of a multi-element solution to the unfunded pension liability challenge.
And though he acknowledged that the issuance of POBs would create new debt that would result in a bill to pay down that debt, he said payment of that bill would “avert a worse bill,” such that the city and its council would find itself and themselves “in a better position than you would have been.”
Admitting the city could take the approach of having its employees pay more of their pension costs, Morales said the best that would do is have some impact “around the margins” of the mounting debt issue. He repeated a mantra to the effect that it is futile for the city to try to get out of its relationship with CalPERS or strive to lessen its actual payments into the system, but should instead seek to use bonds to reduce the cost of financing its pension debt. Doing so at this point, he explained, would escalate the savings the city is to potentially reap, given the historically low interest rates in the financial marketplace at present.
He referenced the “California Rule,” a legal precedent that bars public employers from revoking any benefits given to public employees in the past without compensating them with an offsetting improvement in benefits going forward.
“You cannot undo these formulas,” Morales intoned in talking about the pensions that public employees are guaranteed through CalPERS.
Assistant City Manager Steven Parker paid perfunctory homage to the concepts of reforming the city’s employee benefit and pension cost situation, but did not delve too deeply into the subject and dwelt more with regard to other cost saving efforts the city could make to improve its overall financial position.
Parker said the city at present is purposed to establish a pension fund stabilization element/plan into the city’s upcoming 2021-22 budget, and he mentioned bargaining with city employees in upcoming contract negotiation to take on more of the pension cost. He touted outsourcing moves the city had made in the past, such as those of the fire department, library and animal control service division, which had frozen in place the city’s pension costs for those employees moved off the municipal payroll. His statements raised the specter, obliquely rather than overtly, of the shuttering of the police department in favor of contracting law enforcement services out to the county sheriff’s department. He did not make direct reference to the police department, though for many that implication was obvious as the police department represents the major expense within the city’s general fund budget.
Parker said the California League of Cities has suggested the issuance of pension obligation bonds as a possible way of stabilizing pension costs.
Also participating in the forum was Ira Summer, a specialized consulting pension fund accountant who works in the arena of public pension administration and financing. Parker introduced Summer as being a principal or officer with an outfit, Dove Invest. The Sentinel, after conducting an exhausting search, could find no reference to Dove Invest. Summer is shown as a “consulting actuary and president with Public Pension Professionals.” Precisely what Summer’s angle with regard to Upland’s potential issuance of pension obligation bonds was unclear.
As part of the forum, the council heard comments. The only comment provided was that by Lois Sicking Dieter, a former mayoral candidate. She expressed skepticism about the efficacy of issuing public obligation bonds, likening their use to “using a credit card to pay off another credit card.”
At one point in the proceedings, Summer belittled Sicking Dieter’s analogy.
Also participating in a very limited role was Greg Bradley, as treasurer, who was in some measure responsible for pushing the subject matter of the unfunded pension liability into Tuesday’s workshop. Other than a preliminary statement, his participation was light, and his engagement in the proceedings was similar to that of the city council, which generally observed the presentation that was made mostly by Morales and guided by Parker. Morales, Summer and Parker entertained a few questions from the council, which emanated primarily from Councilwoman Janice Elliott, who has training as a certified public accountant.
The general upshot of the presentation was that public pension obligation bonds would save the city money. The council ultimately complied with Morales’ suggestion that it make a preliminary application for the issuance of the bonds without actually committing to do the issuance, to cut down on any delay should the council ultimately decide to use the POB option. Timely action now, he said, would help to ensure the bonds could be issued while interest rates remain low, giving the city the full advantage of that market condition.
Also participating, to a very limited degree, was City Manager Rosemary Hoerning, who told the city council that pension obligation bonds were “a nice tool to have in your back pocket.” Hoerning’s major input came toward the end of the meeting, during which she took on responsibility for gearing up for the potential issuance of the bonds.
For many, the degree to which Morales, Summer, Parker and Hoerning came across as discouraging pension reform and stampeding the council toward issuance of the bonds was troubling from the standpoint of the real or potential personal financial stake the four have in the city forsaking pension reform and issuing the bonds.
Urban Futures has long been involved in an advisory or consultancy role in Upland municipal operations. A major portion of the firm’s work consists of advising the city with regard to and then making the arrangements for debt refinancing. In doing so, Urban Futures stands to gain fees pursuant to the ancillary services it provides relating to the refinancing. Given the financial stake Urban Futures has in these refinancings, questions have arisen about the integrity of that advice.
Moreover, in this circumstance, Urban Futures, or at least some of its employees, have an interest in discouraging any options that might pertain to Upland exiting the California Public Employees’ Retirement System.
Steve Dukett from 2018 until 2019 served as Upland’s contract development services manager after having served, more than a decade prior to that, as an Upland municipal employee, in the post of development services manager. Dukett is one of three managing partners with Urban Futures. In addition to his work for Urban Futures, Dukett draws a significant amount of his personal income from CalPERS. Dukett served stints as the redevelopment or development director with the cities of Redlands, Upland, Hesperia, Ontario, Lancaster and San Bernardino. He was briefly, in the late 1990s, the interim city manager in Hesperia. His employment in Upland took place during the reign of then-Mayor John Pomierski. At present he pulls a $173,071.80 public pension consisting of $119.863.44 per year provided to him by the California Public Employees’ Retirement System based on his 29.43 years with various municipal entities, as well as $53,208.36 from the retirement system Los Angeles County has for its public employees based on the 12.42 years he worked there, including within the county administrative office.
Parker did not clarify how Urban Futures and Summer will be involved in the issuance of the pension obligation bonds, should that eventuality come to pass.
Parker emphasized that at present the city is utilizing both Urban Futures and Summer for advisory and informational services, but he pointedly did not rule out that they might have roles related to the bond issuances.
Both Hoerning as city manager and Parker as assistant city manager are to be beneficiaries – major beneficiaries – of the CalPERS system. Hoerning is on a trajectory to receive upon her retirement a pension through the California Public Employees’ Retirement System somewhere in the neighborhood of $205,000 to $210,000 per year. If Parker, as is anticipated, ultimately accedes to a city manager position in either Upland or elsewhere, he is likewise on track to receive a public pension equal to or greater than that of Hoerning.
-Mark Gutglueck