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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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Retirement Board Refuses to Answer

On 4/22/14 a letter signed by 300 Mendocino County residents was delivered to County and Retirement officials. It asked them a series of questions about our County's unfunded pension debt.

Click here to see the letter, the Retirement Board's response - and how County and Retirement officials once again refuse to tell the People the truth about how and why this debt was created.

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.

The Perverse Incentive

That Created Mendocino County's Massive Unfunded Pension Debt

See For Yourself - Wednesday October 15

Part One - The Perverse Incentive
Part Two (next week) - Assumed Investment Profits

Over a HALF-BILLION dollars will be extracted from Mendocino County Pension Debt on the People's ShouldersCounty’s weak local economy to eliminate unfunded pension debt that isn’t supposed to exist. It won’t directly produce one minute of County services or fill one pothole. Kids not born yet will pay this debt and get nothing for it.

The most powerful cause of this debt is the PERVERSE INCENTIVE directly built into how County pensions are funded and managed. Nothing is more important to change.

The clearest display of this Perverse Incentive in 3 years will occur in mid-October.

The independent Retirement Board that controls the Pension Fund starts work on their pension funding plan for the next 3 years at their Wednesday, October 15 meeting starting at 8:30AM.

The most important of many decisions they must make is how much investment profit they project the Fund will earn - the “assumed rate of investment returns”.

That discussion is where the Perverse Incentive will be in plain view.

If you want to see the Perverse Incentive in action - go to this Retirement Board meeting - or watch the video when they post it - click "OnLine Videos" and choose "MC Retirement Association".

 

I don't believe most Retirement Directors over the past 20 years made decisions based on their own personal financial interests.

I believe most felt a duty to "fulfill the main interests" of their constituents as they saw them – for employees to keep more of their salary and still get their full promised pensions, for retirees to get more benefits, and for County officials to have more money in next year’s budget.

Taken by themselves these are good things. Over the last 2 decades the Retirement Board delivered about $200 million to do these good things.

But where did the money come from?

Incentives matter – they impact and often control behavior even when you aren’t fully aware of them.

Employees, retirees and County officials in those decades received those benefits without having to pay for them because the Retirement Board was able to transfer the cost to the County, the People, and future County employees as long-term interest bearing County debt that would have to be paid decades in the future.

They could have their cake
and eat it too.

That – in a nutshell – is the Perverse Incentive that created our County's huge unfunded pension debt.

I believe very few employees, retirees or - amazingly - County officials and Retirement Directors fully realized that was happening.

But - it was.

WHO FUNDS PENSIONS?

The County’s Pension Fund is controlled by an independent organization – the Mendocino County Employees Retirement Association (MendoCERA) governed by its Retirement Board. The County doesn’t pay pensions to retirees directly – MendoCERA pays the pensions.

Each year the Retirement Board adopts a “pension funding plan” called an “Actuarial Valuation” that lays out how it intends to get the money to pay pensions in the future. That plan defines two types of payments to the Pension Fund.

Normal Contribution: This payment only focuses on next year. The actuaries estimate how much needs to be paid into the Fund next year so that - if the Fund earns its target rate of return – the part of future pensions being earned next year can be paid. Both the County and employees pay a share of the Normal Contribution each year. Since the assumption is pension for retirees will be fully funded when they retire, retirees don't pay the Normal Contribution.

Unfunded Pension Amortization Payments: Next the actuaries calculate whether there’s enough money in the Fund to pay all the pensions earned in past years.

If there’s a big unfunded pension deficit the unavoidable conclusion is past pension funding plans failed. And no matter what caused the Pension Fund’s deficit it’s clear past Normal Contributions WERE TOO LOW. Given how things turned out, they should have been higher.

And here’s the kicker. Only the County pays extra to eliminate unfunded pensions. Employees and retirees have no such obligation - even though we now know they should have paid more as their share of the Normal Contribution in the past.

  Yearly Normal Contribution Unfunded Pensions
County $ $
Employees $ X
Retirees X X
 

WHO CONTROLS THE PENSION FUND?

Six of the 9 Retirement Directors Composition of Mendocino County's Retirement Boardare either retirees who receive County pensions today or current employees who will receive them when they retire (shown in red). Four are elected by employees or retirees. The other two are elected County officials.

The other 3 Directors are public members (green) who don’t pay into the Fund and won’t receive pensions.

Two-thirds of the Retirement Board have a direct personal financial interest in the Pension Fund. More importantly - they view employees, retirees, or current County officials as their primary constituents and peers. Most want to serve the interests of those constituents.

The evidence shows that numerous actions (or inactions) by the Retirement Board over the past 2 decades that created huge County debt resulted in a combination of:

Employees paid less to the Pension Fund than they should have.
Retirees got more from the Pension Fund than they paid their fair share for.
County officials had more money to spend on salaries and benefits and services next year.
• All paid for by more and more long-term interest-bearing debt imposed on the County and its People.


Next week I'll post Part Two about the Retirement Board's October 15 meeting and the Perverse Incentive -

Retirement Board results compared to pension funding requirements.
Importance of investment profits in pension funding.
What the assumed rate of return should be and how the Perverse Incentive means the Retirement Board won't do it.

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