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Old Mendocino County Courthouse Around 1915

California County Pension Debt


End of Government Pension Financial Reporting "Fraud"

The Fatal Flaw in GASB's Old Rules

End of Pension Accounting "Fraud"

Choices -

Major Reform - GASB 68

Bill Gates-"It's Fraud!" Was He Right?

When Pension Expense Happens

GASB's Basic Principle Retirement Benefits

Fatal Flaw GASB's Old Rules

Major Changes Government Financial Statements

Three Ongoing Impacts Balance Sheets

Pension Expenses

Footnotes - Required Supplemental Information

GASB68 Prior Year Adjustment Important!


Here's how the Fatal Flaw was written into the old rules. I'll explain it - then show how it hid the truth in local and state government pension finances by using Mendocino County as an example.

Annual Required Contribution (ARC) = Pension Expense

The "Annual Required Contribution" - or "ARC" (pronounced "Ark") is what the Actuary says the government must pay the Pension Fund each year. There are two kinds of payments governments make to their Pension Funds:

  1. Normal Contribution: This is the Actuary's estimate of how much needs to be contributed in a specific year so that - with investment profits - there will be enough to pay the part of future pensions being earned by employees that year and the expenses of the Retirement Association. Both the government and employees pay a portion of this payment. The government's share is part of the ARC. If the Actuary's plan "works" this will be the only money that needs to be paid into the Pension Fund.
  2. Unfunded Pension Amortization Payments: However, if in a subsequent Valuation the Actuary estimates there isn't enough money in the Pension Fund to pay a significant part of pensions that have already been earned in the past additional payments must be made to the Pension Fund to eliminate the unfunded amount. Almost always only the government must pay extra - employees and retirees rarely have this obligation.

Payments of Pension Obligation Bonds aren't included in the ARC since they are not made to the Pension Fund.

The most important concept in GASB's old rules was that each year's ARC was reported as the government's yearly pension expense. (This is a simplification. But for practical purposes this captures the basic flawed concept in the old rules.)

The Fatal Flaw in the old GASB rules didn't live in the government's share of the Normal Contribution - it lived in the second payment, the government's unfunded pension debt payments.

Government Unfunded Pension Amortization Payments

Here's how the old rules about unfunded pension debt worked using Mendocino County as an example.

First Second Third
Mendocino County had $125 million unfunded pensions in 2012

Mendocino County owed $125 million unfunded pensions to the Pension Fund going into 2012.

Mendocino County had $125 million unfunded pensions in 2012

Here's the unfunded pension amortization payments the County must make to the Pension Fund over the next 30 years to pay off the debt.

Thirty years of payments to eliminate the unfunded pensions

This is how the unfunded pensions developed up to 2012. The bars are how much unfunded pensions went up or down each year.

Here's the $700 million question (that's how much the People of Mendocino County have to pay to eliminate unfunded pension debt created to date including interest):

When Does the Pension Expense Happen that
Created the $125 Million Unfunded Pension Debt in 2012?

Todays massive unfunded state and local government pension debt across the US exists because for 2 decades GASB gave us the wrong answer.

The Old Rules

Under the old rules When Mendocino County Would Have Reported the Pension Expenses That Created the Debt the amount the County PAID each year to the Pension Fund - the ARC - was what it REPORTED as its pension expense its share of the Normal Contribution PLUS these amortization payments (slight simplification but essentially correct). So Mendocino County was going to report the pension expense that created this debt as part of yearly pension expense over the next 30 years.

When the Pension Expense REALLY Happened

The Pension Expense Happened Here - It Created the Debt

The real economic pension expense that created this debt happened here. This is when the REAL UNDERFUNDING happened.

The Annual Required Contribution (ARC) is an ESTIMATE of what a government should pay to the Pension Fund each year. But given the complexity - these estimates are ALWAYS WRONG.

If the Normal Contribution was paid yet a government has to pay extra unfunded pension debt payments then not only was the Normal Contribution too low - the reported pension expense was also too low. The REAL PENSION EXPENSE in the past was more than what was reported.

Major Point - The Fatal Flaw!

The Fatal Flaw in the old rules was that pension expenses that created 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!

Today's unfunded pension debt was created by pension expenses in the past - most of which was never reported to the People - until now.

For more than 2 decades state and local financial reports AND budgets COMPLETELY IGNORED these expenses when they happened. What they told officials about was the stress on cash flow imposed by growing amortization payments decades after it was too late to prevent them.

Major Point

The Fatal Flaw in the old rules focused officials on the RESULTS - not CAUSES of unfunded pension debt. They treated symptoms not the disease.

No Debt was Reported Because No Expense was Reported

Many pension reformers believe the big failing of past government financial reports was they didn't show the massive unfunded pension debt that developed. But you can't just put a debt on your financial statements - you have to show what caused the debt. Since governments didn't report the past pension expenses that created the debt - they couldn't report the debt.

The "original sin" in GASB's old pension financial reporting rules wasn't that state and local governments didn't report the debt - it's that they didn't report the expense that created unfunded pension debt. If they had reported the expense, then they would have had to report the debt.

GASB's Profound Mistake - Following the Actuaries

Actuaries plan Pension Fund CASH FLOW. As part of that plan they define the Annual Required Contribution - the sum of the government's share of each year's Normal Contribution plus any unfunded pension amortization payments the government is obligated to pay. GASB modeled their old rules on the Actuaries' cash flow plans for Pension Funds - and thereby fell into a trap. WHEN YOU PAY A DEBT is NOT WHEN YOU CREATE IT.

GASB based the old pension accounting rules on how Actuaries plan pension funding. That's why they were fatally flawed.

The Fraud Committed Against the People

$28.5 Billion Loss of Net Worth - 21 CA Counties with Pension Funds
$28.5 BILLION Write off of Net Worth
21 CA Counties with Pension Funds
Result of GASB 68 New Rules

The "accounting fraud" Bill Gates refers to as described on the opening page of this section - "Bill Gates Says It's Fraud - Is He Right?") is precisely because under GASB's old rules the real past pension expense that created today's huge unfunded pension debt was not reported while the debt was being created. As Bill says (paraphrase) "the decision makers (the 'government person') never felt 'any pain' as they created the debt because 'no painful number ever showed up'".

Government officials were not held accountable because the real expense and debt was not reported to the People.

Retirement Boards and union officials were not held accountable because the huge damage the design and management of Pension Funds was imposing on governments - on the People - and on future government employees was not reported to employees and retirees.

The result is hundreds of billions of debt has been imposed on the People and the next generation all across the country but government financial officials didn't report that hard cold fact to the People. It may have been "legal" at the time - but I and many others who know how financial accounting and accountability are supposed to work say - that was a POLITICAL FRAUD COMMITTED AGAINST THE PEOPLE!

Major Point

Tens of thousands of government financial officials over the past two decades - who should have known better - allowed this irresponsible huge destructive debt to develop and thereby failed their duty to the People.

Next I'll lay out the major changes the new pension financial reporting rules will impose and where their impact will be seen in government financial reports.

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