Back in 1994, most Orange County residents were unaware of the risky investment strategies of the late Orange County Treasurer-Tax Collector Robert Citron until they heard about the county’s declaration of bankruptcy. And by then, it was too late.
Is history repeating itself in Orange County’s northernmost city? Sadly, the answer may be “yes.”
Incorporated in 1925, La Habra is a quintessential bedroom community situated in Orange County’s northwest corner. With no freeways touching the city, no amusement parks, car dealerships, large shopping malls, etc., La Habra’s 62,000 residents enjoy a quiet quality of life.
Like any other older, established municipality, the City of La Habra has a growing number of retired employees, all depending on their pensions through the California Public Employee Retirement System (CALPERS).
CALPERS receives funding from member agencies like La Habra, and in exchange it pays the retirees. Any cash-on-hand is invested in hopes of lessening the pension burden on taxpayers.
Using actuarial tables, CALPERS determines whether their member agencies’ pension obligations are over or under funded. In 2021, La Habra’s pension obligation was underfunded to the tune of $72 million – for which CALPERS charged the city about 7% as the cost of carrying this “unfunded pension liability”.
Enter the idea of a Pension Obligation Bond (POB). A POB would allow La Habra to fully fund its pension obligation by selling $72 million worth of bonds at an interest rate lower than the 7% it is paying to CALPERS. Voila! The savings accrues to the benefit of the taxpayer.
A great deal, right? Maybe.
While it’s true CALPERS stops charging La Habra 7% for carrying the unfunded pension liability, it’s also true La Habra taxpayers now owe the bondholders $72 million.
Furthermore, the bond proceeds go into CALPERS’ investment portfolio, which of course is subject to market risk. Should that portfolio take a hit, La Habra will have a new unfunded liability for which CALPERS will again charge 7% – in addition to what the city now owes bondholders for the $72 million POB.
For this and other reasons, the Government Finance Officers Association (GFAO) has consistently advised against issuing POBs.
Despite warnings from the GFAO and the Orange County Taxpayers Association (OC TAX), on November 15, 2021 the La Habra City Council voted 4-1 (I was the lone “no” vote) to authorize the sale of a $72 million POB.
The bond sale proceeds were sent to CALPERS at the end of January 2022. Since then, financial markets have been buffeted by the war in Ukraine, rising inflation and interest rates and economic recession. The $72 million La Habra put into CALPER’S portfolio is now a smaller number.
On top of its POB losses, La Habra is facing a blockbuster lawsuit. A home builder proposed re-developing the Westridge golf course into a community of approximately 450 homes with 40 acres of parks. In October of 2020 there were 3 votes on the La Habra City Council to deny their project.
During public hearings of this type, city councils act in a “quasi-judicial” capacity, meaning councilmembers must approach the matter with an open mind and not be biased for or against the applicant.
The Fair Political Practices Commission (FPPC) guidance to City Councilmembers reads in part “…having the official who may have exhibited bias disqualify himself or herself avoids legal issues. If the problem is not addressed though, the agency’s decision will be at risk of being overturned by the courts. The agency will have to conduct new proceedings free of the influence of the biased decision-maker. If the violation rises to the level of a denial of due process under constitutional law, the affected individuals may seek damages, costs and attorney’s fees.”
Did this builder have a fair public hearing with unbiased decision-makers in October of 2020? The answer is obviously no.
One of the councilmembers, Jose Medrano, had publicly and repeatedly stated his opposition to the project for years prior to the public hearing. For example, in 2018 he posted a video on Facebook, surrounded by project opponents, in which he declared “…one of the proposed projects that they have going here in La Habra is the Westridge project that we don’t want built. We want to save our open spaces of course. We love our golf course…we want to put a halt to some of the residential construction that they are proposing”.
During a September 2018 candidate forum, Medrano was asked “Do you support rezoning the Westridge golf course for 420 homes?” He answered, “No, I do not. Absolutely do not…I say no to that”.
The builder is now suing the city for $100 million. To put that in perspective, the city’s entire General Fund this year is only $55 million.
The third fiscal storm cloud on the city’s horizon is the looming sunset of the city’s 0.5% Transaction and Use Tax, which was approved by voters in 2008 and expires in 2028. Revenue from this tax – which functions like a sales tax – constitutes 13% of La Habra’s General Fund. If La Habra voters choose not to renew it, city revenues will take a huge hit when the tax expires in 2029.
In short, the POB losses, the $100 million lawsuit, and sunsetting of the sales tax could combine in a perfect storm of financial calamity for La Habra city government. As someone who lives in and loves La Habra, this could be painful to watch.
Tim Shaw served on the La Habra City Council from 2008 until 2021, and was Mayor of La Habra in 2012 and 2018
