Orange Crush

by Thomas Brom

Dr. Freud may have a point about cigars, but sometimes a lawsuit is more than just a lawsuit. Such is the case with Orange County's timely challenge to an estimated $187 million pension upgrade for its deputy sheriffs, which a prior board of supervisors approved in 2001. This election season public employee pensions are a white-hot issue, and Orange County's case - currently before the Second District Court of Appeal - has attracted amicus briefs like sand flies on a beached whale.

The tale begins in 1994, when county treasurer Robert Citron couldn't unwind his bad bets on currency derivatives and forced the county into bankruptcy. Citron was replaced by John Moorlach, a fiscal conservative who was later elected supervisor. By the time Moorlach ran for the county board in 2006, he had some powerful allies, including the Fullerton Association of Concerned Taxpayers (FACT) and the Pacific Legal Foundation (PLF), a conservative public interest firm in Sacramento.

PLF has a track record of successful challenges to government spending in California. In 2007 PLF attorneys, representing FACT, won a decision from the Third District Court of Appeal invalidating a $550 million statewide pension bond under the California Constitution (State ex rel. Pension Obligation Bond Comm. v. All Persons Interested, 152 Cal. App. 4th 1386 (2007)). "If we hadn't won that case, I believe California would be issuing pension bonds today," says Jack Dean, FACT's president and editor of the PensionTsunami.com website.

With FACT and PLF supporting him, Moorlach persuaded the Orange County board to challenge the constitutionality of the deputies' retroactive benefit. "We always knew the unions would oppose us, so we had to wait," Moorlach says. He hired Mario Mainero, a visiting professor at Chapman University School of Law, as his chief of staff.

"Based on my research," Mainero says, "I concluded that the county had exceeded its debt limit ... without obtaining voter approval, and had violated the prohibition of 'extra payments.' ... Once you see that the state constitution has been violated here, it's clear this isn't a political lawsuit."

Moorlach and Mainero shopped the proposed suit around - and were advised against filing by several law firms. But the timing seemed right: California taxpayers were by then reeling from the housing bust, double-digit unemployment, and a state budget crisis. And unfunded pension liabilities were made more visible by a recent Government Accounting Standards Board rule (GASB 45) that requires employers to report actuarial liabilities for promised benefits. So in early 2008, Orange County sued the deputy sheriffs' union and the Orange County Employees' Retirement System (OCERS), challenging the constitutionality of the board's prior action (County of Orange v. Ass'n of Orange County Deputy Sheriffs, No. BC 389758 (Orange Super Ct. filed Feb. 1, 2008)).

"The County is now saying, 'We violated the law, and someone should stop us!' " says Harvey L. Leiderman, a partner at Reed Smith in San Francisco who represents OCERS. "But if you telescope the costs of any multiyear labor contract into a single year, no public entity could meet its budget, [and the] County could-n't enter contracts."

Tom Umberg, a partner in the Costa Mesa office of Manatt, Phelps & Phillips who represents the deputy sheriffs, says the formula increase isn't "retroactive," since benefit plans routinely are based on total years of service, among other things. And he calls the county's attempt to "telescope" long-term pension liabilities into single-year indebtedness "the whole canard" in the suit. "The lawsuit is asking the court to take an activist role by addressing social policy, and to interfere with contract rights between well-represented parties," he says.

In February 2009 Los Angeles Superior Court Judge Helen I. Bendix dismissed the suit on the pleadings, calling the county's interpretation "unprecedented even in other jurisdictions that have considered the issue under their balanced budget constitutional provisions."

Bendix also cited a 1982 state AG's opinion stating that, "The actuarial term 'unfunded liability' fails to qualify as a legally enforceable obligation of any kind." Then-Attorney General George Deukmejian likened it to "a projection made by actuaries based upon assumptions regarding future events." (Opinion 82-405 at 571).

"It's sophistry to claim that a pension increase is not a liability," Mainero responds. "If the deputy sheriffs believe that, I assume they also believe the County has no legal obligation to contribute to their pensions next year."

Orange County appealed, and by late July a half-dozen amici had filed briefs (County of Orange v. Ass'n of Orange County Deputy Sheriffs, No. B218660 (Cal. Ct. App., 2nd Dist., Div. 1)). The CalPERS brief - which Moorlach called a "friend-of-the-unions" submission - invoked fiscal Armageddon: "If this Court adopts the County's unprecedented claim that permitting enhanced pension benefits based on prior years of public service is unconstitutional, statutory schemes spanning 97 years will be rendered invalid, and the bargained-for pension benefits of at least 947,000 state and local public employees and their families could be adversely affected," wrote Deputy Attorney General Hiren Patel.

The PLF focused its brief on case law analyzing the debt-limit provisions, which it believes were ignored. "We looked at the constitutional precedents," says staff attorney Harold Johnson. "Is the liability legally binding? Is it long term? And is it noncontingent? All three factors are present here."

But Miriam A. Vogel, a senior of counsel in the Los Angeles office of Morrison & Foerster who represents the deputy sheriffs on appeal, contends that the County Employees Retirement Law of 1937 expressly authorizes counties to apply a new retirement formula to prior years of service (Cal. Gov. Code, § 31678.2(a).) "If you haven't got the facts or the law, you pound the table," Vogel says in an interview. "Well, this is a political table-pounding."

But if County of Orange is just so much grandstanding, how can cities and counties manage unfunded pension liabilities? "The County can't undo existing constitutional and contractual law," says Joseph L. Wyatt Jr., Vogel's co-counsel for the deputy sheriffs at MoFo. "But the appellant's briefs fairly reek of politics. Both political parties in California are now contemplating big changes for new employees."

In 2005 Gov. Schwarzenegger withdrew a proposed statewide initiative to shift defined benefit plans for public employees to defined contribution, or 401(k), plans, where employees bear all the investment risk. Public sector unions remain adamant in defense of defined benefits, but such plans are in the crosshairs in this fall's elections.

"Certainly, there is a widespread movement to diminish wages and benefits across the public sector," says Umberg at Manatt. With this lawsuit, he says, "I believe Orange County taxpayers are funding a political campaign."

---