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Helping Citizens Understand California County Pension Debt and Finances

John G Dickerson

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Understand Unfunded Pension Debt. Hold Officials Accountable. Redirect Local Government Finances.

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First California County Pension Reform Conference May 10, 2014

The first California County Pension Reform Conference was held Saturday, May 10, 2014 in San Rafael focusing on the SF Bay - North Coast Region.

You Decide

Did Mendocino County's Retirement Board
Tell the Truth About Their Role
In Creating Our Huge Debt?

Reform Coalition Letter to County and Retirement Officials

About 300 Mendocino County residents signed the letter below - dated 4/22/14 - to Mendocino County officials, the County's independent Retirement Board in charge of the County's Pension Fund, and major county employee bargaining units (aka "unions").

Reform Our County Coalition

Please read the attached Questions about Mendocino County's Unfunded Pension Debt and Analysis of that Debt (see links to right) produced by the "Reform Our County Coalition - Mendocino". We ask you to confirm or disprove their analysis and conclusions, answer their questions, and - is it true that:

• new rules next year will force our County to report about $200 million of past pension expenses that were never reported to us - and we have much more debt than assets?
over $500 million is expected to be paid to eliminate unfunded pension debt that isn't supposed to exist?
State Controller data shows the County Pension Fund's investment record is among the worst for County Funds?
• we were told about $35 million of retiree health benefits was paid with so-called Pension Fund "excess earnings" but the truth is every dime increased County debt?
every County employee received pension increases even though our County owed $100 million in unfunded pension debt and 1/3 (error - see to right - it was 15%) were retroactive to when they were hired?
• the Retirement Board created most of this debt the People have to pay but it isn't accountable to us?
employees and retirees have no obligation to help pay unfunded pension debt even though 2/3 of the Retirement Board is composed of employees and retirees?

Before we can solve big problems we first have to recognize we have them. Then we need to understand what they are.

Before talking about solutions we need to know what's true and accurate.

Are the attached analysis and findings essentially correct? If they aren't, please relieve our deep concern by proving they’re wrong.

What Was Asked? Why?

The questions in the underlying analysis (see links top of next column) were more detailed. They address a logical series of issues:

How is the County's Pension Fund Supposed to Work?

What Are the Real Numbers? - total unfunded pension debt, debt and pension payments, how much does the County pay, how much do employees and retirees pay, how much total staff costs goes to pensions, etc.

What are the Major Causes of unfunded pension debt - and how much did each create?

• Are there enough examples of deeply flawed financial management to show we need to reform how our County manages Our Public Money?

And ... most important of all - what is the political-moral argument that ONLY THE PEOPLE must pay this huge unfunded pension debt when we did the least to create it - and why should the next generation of county employees have significantly fewer jobs with much lower pay and benefits?

Mendocino County's unfunded pension debt is like a too-high temperature. It's dangerous and must be brought down. But it didn't cause itself. We can't simply treat the symptoms - we must cure the underlying disease.

Credit Where Credit is Due

The last few years have been really hard on County and Retirement officials. The County was forced to layoff a third of its staff and impose a 10% paycut on those who survived. The Retirement Board terminated payments of retiree healthcare which resulted in hundreds of irate and very scared retirees descending on them and the Board of Supervisors.

Many retirees had good reason to feel betrayed.

We've Been Betrayed - Mendocino County Retirees and Health Benefits

Click to see what they had to say to the Supes.

Deeply flawed unaccountable financial management of their Pension Fund - driven by short-term goals and not the long-term sustainability of those benefits and county services - did this to them.

But for the most part today's Board of Supervisors didn't do these things - their predecessors did. The County faced true insolvency. Officials had no choice. They did what had to be done. It's miserable thankless work.

We appreciate both bodies' decision to provide online videos of their meetings - a great advance in transparency and public access.

Clearly the Retirement Board is paying far more attention to important details that were simply overlooked before.

Many good things have happened. But not enough.


Retirement Board's Response

The Questions and Responses

My April 17, 2014 analysis with questions:
7 Page Summary of Analysis
Full Report - 22 pages plus attachments)

I suggest you read the summary - it has all the questions - and if you want more info go to the same section of the full report.

The County's independent Retirement Board that controls the Pension Fund approved a public response (click for copy of Retirement Board Response) on July 16, 2014. In addition, the Retirement Board referred to Mendocino County Supervisor John McCowen's much more extensive response click for copy with my response to McCowen) a month earlier speaking as a member of the Retirement Board.

Neither County officials (Supe McCowen responded as a member of the Retirement Board) nor any employee unions have responded.

The Good

Some of what was said in these responses is very good. None more so than Mr. McCowen's very clearly stated fact all citizens, county employees and retirees need to understand:

The struggle to fully fund the pension obligation, balanced against the continuing need to provide critical public services, is the greatest challenge facing most public employers and their retirement systems, and this is no less true in Mendocino County.

This is profoundly true. And although they may say it differently, bottom line - all 5 Mendocino County Supervisors agree. None of the Boards of Supes in the other 20 California Counties with independent County Pension Funds come close to this clear unanimous understanding.

We can't overstate how important this is to the possibility of comprehensively and fairly confronting these huge threats.

But ... Massive Avoidance of Issues

Unfortunately ... the unanimous reaction of dozens of members of the Reform Coalition is the Retirement Board's response is almost a complete avoidance of the issues.

The Retirement Board answered one part of one question and gave a "mis-directed" reply to another. They simply "blew off" the rest.

How Should the County Pension Fund Work? NO ANSWER.

What Are the Real Numbers? NO ANSWER.

What Caused the Unfunded Pension Debt: The Retirement Board identified three causes - the aging "baby boom" living longer, two recessions in the last 16 years, and pay/pension increases granted by the County a decade ago. But they didn't identify how much debt was caused by each. Besides - demographers have known for decades baby boomers were going to live longer. And they'll always be recessions - Pension Funds must be able to "plow" through them.

Far more pointedly they didn't mention any of the several undeniable past actions by their Board that created significant unfunded pension debt.

The Retirement Board cited two recent reports that showed their Pension Fund's returns on investment rank among the highest of the 21 California County Pension Funds. These reports cover only a few recent years - and it's good news they are doing better. But they didn't address the data in the analysis that shows the Pension Fund earned significantly less than its target over most of the past 2 decades. Nor did they directly address State Controller data that shows they earned the 2nd lowest return of the 21 County Pension Funds from 1996 through 2011 (the available data).

But more to the point - something caused the County's unfunded pension debt. Good financial managers would not just suggest causes. They'd show how much debt each created and rank-order them in importance. The Retirement Board made no effort to do so. I believe they never have.


HOWEVER - Supervisor McCowen pointed out a significant error in my analysis. I had said a third of County employees received retroactive pension increases back to the day they were hired. I made a mistake - it was about half that number - 15% or so. Although this error doesn't change my basic analysis or findings, I regret the error and apologize.

Deeply Flawed Unaccountable Financial Management: Our analysis laid out evidence that both the Retirement Board and County at several times ignored their own policies when they created tens of millions of unfunded pension debt which calls into question the value of County and Retirement Board policies that can be ignored with impunity, that the Retirement Board set up a "phony" $9.6 million asset to hide the fact they paid that much retiree healthcare without having the so-called "Excess Earnings" the law required, that the County was "credited" for paying $6 million to the Pension Fund it never paid, that Retirement and County officials diverted $10 million of so-called "Excess Earnings" after they learned that the IRS determined in 2008 that the City of San Diego violated federal tax law by doing the same thing, that every County employee got significant pension increases at the same time we owed over $100 million of unfunded pension debt, that a number of Pension Fund audited financial reports significantly violated government accounting rules and Retirement officials appear to have purposefully misrepresented how that happened, and that hundreds of retirees had good reason to believe they would continue to receive health benefits but the actions of the Retirement Board and County officials not only doomed that benefit but in fact created tens of millions of County debt by how they paid for it.


The Moral-Political Argument - Why must only the People pay and the next generation of County employees must be thrown under the Bus?


Bottom Line - Why Does This Matter?

Two Reasons.

First - those who do not learn the lessons of history are doomed to repeat them. The debt didn't cause itself. We need to confront this debt and greatly reduce it, but we need to fix what broke that caused it.

The second and most important reason ...

The People own this County - it's theirs. They elected officials to manage it on their and the future's behalf. They deserve to know what really caused this debt since they legally must pay it. They MUST know what caused this debt to hold government officials accountable.


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