Holding Counties Accountable

Helping Citizens Understand

Old Mendocino County Courthouse Around 1915

California County Pension Debt


California County Pension Funds

Massive Write-Off of County Net Worth

Major Pension Financial Reporting Reform Hits Hard!

Mendocino County Takes Biggest Hit (Proportionally)

Version 4 -

Version 4 Under Construction Under Construction

I'm about to finish (I hope) a year-long project to develop "Version 4" of ("YPM"). I haven't updated Version 3 for the better part of a year. Too much of the information in Version 3 has grown rather stale - brown around the edges. I decided to take "Version 3" off the internet and put this one-page temporary replacement in its place during the last couple of months before Version 4 is ready for Prime Time.

So - for now this and my newsletter signup page is all I have online - at least publicly accessible.

I took John Dickerson live on October 9, 2008. My original focus was solely on my home county - Mendocino. Since then I've learned a lot about unfunded state and local unfunded pension debt, government accounting, the 20 other California counties that have independent County Pension Fund like Mendocino, how the basic structure of these County Funds is determined by State law, major trends in federal bankruptcy proceedings addressing local government unfunded pension debt --- and much else.

As my focus expanded and I learned more I replaced the original YPM with Version 2 - then Version 3. But the structure of Version 3 was too limited to allow me to present data, analysis, and conclusions about the increased range of my interests in these issues.

So - check back. As I say - I hope I can get this sucker finished in the next few weeks. It's like I've been trying to give birth to an 800 pound rhinoceros - a challenge to say the least.


John D

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Reports on Mendocino County's Pension Debt KZYX Public Radio - January 2016

Mendocino County's NPR affiliate - KZYX - has been producing a series of reports and interviews on the County's pension debt. I produced thesse audio excerpts from their reports. Click to play (assuming you have a program that can do that):

My Intro to the Series - 40 seconds
KZYX reporting on Joint Meeting of the County Supervisors and Retirement Board with comments from the public - 16 minutes
John Sakowicz public member of Retirement Board - 8 minutes
Dan Gjerde (JUR-dee) Chair of Mendocino County Board of Supervisors - 3 1/4 minutes
Dan Gjerde - John Dickerson Chair of Board of Supervisors followed by yours truly - 8 minutes
John Dickerson ditto - 4 1/2 minutes

  12 of 21 Counties with Pension Funds have released audits
February 1, 2016

Twenty-one California counties have their own independent County Pension Funds instead of participating in the huge statewide CalPERS (see Note 1). Thirteen of these Counties have published their June 30, 2015 audited financial statements as of today. These are the first audited statements required to conform to major new rules about how state and local governments in the US must report their pension finances as defined in Governmental Accounting Standards Board Statement 68 ("GASB68") that was issued in June 2012.

The Fatal Flaw in the Old Rules Fixed by the New Rules

The fatal flaw in GASB's old rules was that pension expenses that create unfunded pension debt were reported in the future as that debt was paid. That's absurd. Payments of debt eliminate debt, they don't create it. And because governments didn't have to report those expenses as they created the debt, they didn't have to report the debt.

The new rules require governments to report pension expenses that create unfunded pension debt as they happen - not as the debt is paid. And - therefore - unfunded pension debt will be reported as real bona fide debt for the first time.

GASB68 requires these counties to restate their reported June 30, 2014 Net Positions (aka Net Assets or Net Worth) in their 2015 audits. They do this by making "Prior Year Adjustments" in accordance with these new rules. (See Note 2 below) The Net Position is the difference between the value of a county's assets and its debts.

12 of 21 Counties with Pension Funds wrote of $25 Billion of their People's Net Worth in those counties
$25 1/2 Billion Write-Off!

These 13 counties together originally reported in their 2014 audits that their assets were worth $36.4 Billion more than their debts as of June 30, 2014. The column on the right is what GASB68 forced them to "write off" $25.5 Billion! They wrote off 70% of their Net Worth!

Just The write-off of the People's Net Worth in cities, counties, special districts, and the 50 states in the next few months will be unbelievably massive these 12 counties wrote off $25.5 BILLION!!! There are over 3000 counties in the US, tens of thousands of cities, school districts, and special districts, and the 50 states.

There isn't enough red ink in North America to describe the blood bath that's hitting state and local governments in the US right now!



Huge Range of Impact on These Counties

Not all these counties are in the same boat. Several just got their bottoms riped out whereas one only got a slight dent. But the rest are taking on serious water.

Scale of Write-Off of Net Assets by New Rules

Two counties wrote off their entire Net Assets and then some - big range among counties We can't compare the degree of impact of these Prior Year Adjustments forced by the new GASB68 rules among the counties by only looking at the dollar values of their adjustments.There's a huge range in the financial size of these 12 counties. The smallest - Mendocino - reported $80 million in Net Assets as of June 2014. LA County reported nearly $10 BILLION! Mendocino County's numbers are "rounding errors" for LA.

In order to compare the relative impact on these counties this shows the percentage the total adjustments were of the previously reported Net Assets for each county. That is, the Net Assets of each county originally reported as of June 30, 2014 = 100%.

Mendocino County suffered the largest proportional write off of Net Worth of these counties. The combination of listing unfunded pension debt for the first time and writing off the old worthless Pre-paid Pension Asset reduced the County's Net Assets by 170%! The County originally reported $80 million of Net Assets. After the required adjustments to conform to the new rules the County reported Net Assets at that time were really a negative $56 million (rounded).

One financial definition of insolvency is having more debt than assets. (See Note 3) Two counties were forced into that form of insolvency by the new rules - Mendocino and Contra Costa.

Contrast the impact on those two counties with Tulare way down in the San Joaquin Valley. Tulare was forced to "write down" its Net Assets by 11%. I'm not saying that's "good" - but it's 16 times better than what Mendocino was forced to do.

Impact of Unfunded Pensions on County Balance Sheets

In contrast to what the impact of the "Prior Year Adjustments" were on the June 30, 2014 Balance Sheets for these 12 counties - this shows the proportional Balance Sheets they reported as of June 30, 2015 - one year later. Once again we need to not look at the total dollars reported because these counties are hugely different in financial size. But instead of making Net Assets = 100% as in the graph above, this time we make Total Assets = 100%. So the question becomes - "For every $100 of Total Assets a county has, how many dollars of Total Debt does it have, and if Total Debt is less than Total Assets, then how many dollars of Net Assets does it have?" Another question - "How much of its Total Debt was caused by unfunded pensions (the sum of the newly reported Net Pension Liability AND remaining balances of Pension Obligation Bonds - money borrowed to plug past holes in the Pension Funds?"

There are two differences between the adjustments to the June 30, 2014 Balance Sheets shown above and these Balance Sheets as of one year later - June 30, 2015. the biggest difference - obviously - is that a full year of activity and changes happened between them. A less significant difference is that some counties had to adjust their June 2014 Balance Sheets for reasons other than the new pension reporting rules - the impact of which are not shown in the previous graph.

13 County Balance Sheets as of June 30, 2015 The solid red at the top are the newly reported Net Pension Liabilities - unfunded pensions the counties owe to their Pension Funds. Below them for 8 counties are solid red inside black boxes - these are the remaining Pension Bond balances. These two together are these counties' total unfunded pension debt.

The "pink" areas are all other debt. The sum of total unfunded pension debt and all other debt are greater than their reported total assets for two counties - Mendocino and Contra Costa.

If a county has more assets than debt the green areas are the proportion of Net Assets as a percentage of Total Assets. Ten counties had more assets than debts - although LA barely squeaked by.

Los Angeles County on Edge of Insolvency

For every $100 of assets LA County reported they had $99 of debt. The largest population county is the US is on the edge of balance sheet insolvency (See NOTE 3).

Mendocino and Contra Costa again reported more debt than assets. Technically - they are "Balance Sheet Insolvent" (See NOTE 3).

And - again - look at Tulare!!! For every $100 of assets they have, they only owe $22. Compare that with Mendocino's owing $124 for every $100 of assets!

Impact of Unfunded Pension Debt on Balance Sheets

Impact of Unfunded Pension Debt on  County Balance Sheets as of June 30, 2015 Total Unfunded Pension Debt is the sum of Net Pension Liabilty and the remaining balance of Pension Obligation Bonds. Although you can see the impact of unfunded pension debt (not including other types of debt) in the graph above this shows it more clearly. Again - this is taken from these counties' June 2015 Balance Sheets.

Mendocino County has suffered the largest relative "hit" from Unfunded Pension Debt - 40% more than the second most impacted county that's reported their 2015 audits so far - and more than twice as much as average for these counties. Mendocino County's assets have almost been "wiped out" by its Unfunded Pension Debt.

GASB68 Prior Year Adjustments

These are the adjustments made by these counties to their June 30, 2014 Statement of Net Position (Balance Sheet) as decribed in their June 30, 2015 audited financial statements - in $Millions. (This data hasn't yet been reviewed by anyone else. I really tried to get the data right - but there could be some errors. If you reside in one of these counties I'd VERY MUCH appreciate you checking your county's data - thanks.)

  Reported Beg. Net Position (6/14)   Write Off Net Pension Asset Add Net Pension Liability Deferred Pension Inflows/ Outflows Total GASB 68 Adjustment % Write Down of Net Assets re GASB 68   Net Assets After GASB68 Adjustment
Alameda 1,935 0 (1,088) 91 (998) (52%) 938
Contra Costa 852 (308) (1,138) 95 (1,351) (159%) (499)
Los Angeles 9,735 0 (10,426) 1,268 (9,158) (94%) 577
Mendocino 80 (31) (105) 0 (136) (170%) (56)
Orange 5,450 (1) (3,767) 0 (3,768) (69%) 1,682
Sacramento 2,735 (966) (1,251) 182 (2,035) (74%) 700
S. Bernardino 3,268 (652) (1,651) (128) (2,432) (74%) 837
S. Diego 4,592 0 (2,249) 0 (2,249) (49%) 2,343
S. Joaquin 1,134 0 (1,115) 0 (1,115) (98%) 19
S. Barbara 916 0 (611) 0 (611) (67%) 305
Tulare 1,841 0 (195) 0 (195) (11%) 1,646
Ventura 2,079 0 (963) 164 (799) (38%) 1,280
  34,618 (1,958) (24,560) 1,671 (24,847) (72%) 9,771



I'll update this as the other California counties with their own County Pension Funds release their new audits. Check back.


NOTE ONE: Twenty counties have County Pension Funds organized under California's County Employees Retirement Law ("CERL" - aka "1937 Act"). One County's Pension Fund - San Luis Obispo - is its own unique legal entity.

NOTE TWO: All state and local governments are now required by GASB68 to restate their previously reported Statement of Net Position (aka "Statement of Net Assets" and "Government-Wide Balance Sheet") as of the end of their last fiscal year.

All California counties have fiscal (financial) years that end on June 30. GASB68 must be implemented in their June 30, 2015 audited statements now being released. GASB68 requires these counties to "restate" their "beginning balance sheet" as of June 30, 2014. They do so by making a Prior Year Adjustment.

In effect these adjustments show what the beginning Balance Sheet would have looked like had GASB68 been in effect over the past decades. However GASB68 allows a break-in period in which some of the rules are relaxed in the early years of applying the new rules. Data may not be available to accurately apply the new rules to previous years or the cost of developing the data would be excessive. Some of the provisions of GASB68 will require a decade to be fully implemented - but the main financial changes are reflected in these initial audited statements.

All these counties' Prior Year Adjustments reduced the value of their Net Assets. The other "side" of the adjustments explains why they had to do that:

  • Net Pension Liability: All counties will add unfunded pensions as "Net Pension Liabilities" for the first time.
  • Net Pension Assets: Some will also write off previously reported "Prepaid Pension Assets" that in fact never had any real value. These Net Pension Assets were set up when those counties borrowed large sums of money by selling Pension Obligation Bonds to eliminate unfunded pension obligations in the past.
  • Deferred Pension Inflows/Outflows of Resources: The basic concept in GASB68 is that the yearly changes in the Net Pension Liability will be reported as each year's pension expense - EXCEPT the impact of certain events will be spread out over a number of years. This is necessary both to prevent sudden chaotic changes in the value of the Net Pension Liability and pension expense in certain years and also to spread other changes over many years because of the longer-term nature Proportion of the 3 types of Prior Year Adjustments Made per GASB68's new rules - 12 County Balance Sheets as of June 30, 2014 of those events. Some counties made adjustments to these items in their Prior Year Adjustments - some didn't. However, all will make entries to these items each year in the future.

This shows the relative size of these three adjustments for all 12 counties (not dollar weighted). By far the biggest impact is adding the Net Pension Liability - 87% of the total. The other two each have about the same impact - 6% to 7%.

One example of Deferred Pension Inflows/Outflows - the difference between a Pension Fund's assumed rate of investment return and its actual return. Every now and then stock markets crash but in time have always recovered. If the yearly variances between expected and actual returns were completely included in the calculation of liability and expense each year their reported values would jump around so much it would be hard to see the more important long-term trend. So these differences will be spread across 5 years.

Another example - if it turns out retirees are living longer than expected then the Pension Fund will have to pay out more than was planned - and therefore the Net Pension Liability would be more than previously reported. But such a trend would have gradually occured over many years. And - for current employees the goal would become having enough money in the Pension Fund to pay their pensions when they retire - which would now be estimated to be larger than was planned for. So the financial impact of debt and expense that was calculated in the year the "longevity assumption" was changed will be spread over the average estimated remaining years of employment for BOTH current employees and retirees. That's turning out to be in the 4 to 8 year range.

The accounting method to implement these requirements is to enter the amount of these items to be recognized in pension expense in the future as "deferred inflows or outflows of resources". In effect these immediately increase either the apparant assets or liabilities. Then these will gradually be eliminated by converting them into either increases or decreases of pension expenses reported over the next several years.

NOTE THREE: Financial analysts distinguish between two types of "insolvency". "Balance Sheet Insolvency" is when an entity owes more debt than the value of its assets. This is the meaning I use here. "Cash Flow Insolvency" is when it is not able to make all payments when they are due. Cash Flow Insolvency is usually much more serious. The first often - but not always - leads to the second. Technically "Insolvency" and "Bankruptcy" are not equivalent although they are often interchangeable in "ordinary" discussion. "Bankruptcy" in my view is a legal term - although it's defined largely in financial terms. To me "Bankrupt" applies only to local governments, individuals, for-profit and non-profit corporations that have entered the federal bankruptcy process in the federal bankruptcy courts. Historically "Cash Flow Insolvency" has been a necessary condition for a federal bankruptcy judge to allow a local government to enter the bankruptcy process. (There are other requirements as well.) However - recent decisions in federal bankruptcy courts have begun to suggest that "Service Insolvency" may be deemed a sufficient "Insolvency" for local governments to "enter" bankruptcy. "Service Insolvency" means that a local government is financially unable to provide a sufficient level of service that is its justification to be a local government. This is an evolving area of federal bankruptcy court interpretation.

NOTE FOUR: Tulare has long had a reputation among reformers for having done things the right way - doing what needed to be done to both provide promised pensions to retirees AND to continue to provide services to its residents and taxpayers. Someday someone should figure out how - and why they were so different.

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