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Old Mendocino County Courthouse Around 1915

California County Pension Debt


End of Government Pension Financial Reporting "Fraud"

Three Ongoing Impacts on "Balance Sheets"

Statement of Net Position - Government Wide Statements

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!


What Is a Balance Sheet? (Statement of Net Assets)

If you know this stuff skip to "Net Pension Liability" below.

The most fundamental accounting formula is:

Assets = (Liabilities + Net Worth)


That's why it's called a "BALANCE SHEET" - it ALWAYS BALANCES!!!

Assets are things you own that are of value. Liabilities are what you owe (your debts) or are obligated to pay. Net Worth (called Net Assets or Net Position for governments) is the difference between the two. If you have more assets than liabilities you have a positive Net Worth. If you have less then you have negative Net Worth which is the definition of "Balance Sheet Insolvency".

Balance Sheets are for a specific point-in-time, usually the end of the fiscal (financial) year or quarter. The fiscal year for all California counties is July 1 through the following June 30. Their Statements of Net Assets in audited annual statements is always as of the end of June 30 - the last day of their fiscal year.

Net Pension Liability
Largest New Ongoing Impact on Balance Sheets

All state and local governments in the US are now required to report unfunded pensions owed to their Pension Funds as a real debt on their Balance Sheets. Some very small percentage may report Net Pension Assets if their Pension Funds are over funded - but by far most will report Net Pension Liabilities. These Net Pension Liabilities will - by far - be the largest impact on government Balance Sheets. My sense is in most cases the Net Pension Liability will be the same as the value calculated by the Actuary as the "Unfunded Actuarially Accrued Liability" (UAAL).

Most state and local governments participate in Pension Funds that provide pensions to retirees of more than one government. The huge statewide systems like CalPERS serve literally thousands of governments' retirees. Most if not all of the 21 California County Pension Funds provide pensions to employees of some cities and special districts in the County.

The total Net Pension Liability for the Pension Fund as a whole is assigned to each participating government in proportion that its contributions to the Pension Fund (not including amounts withheld from employee paychecks) is of total employer government contributions. Mendocino County provides about 90% of the employer governments' contributions - therefore it must report about 90% of its Pension Fund's Total Net Pension Liability.

Deferred Outflows and Inflows of Pension Resources

These concepts are a little "slippery". But although these items take more explanation their impact is much less than the reported Net Pension Liability. The 21 California counties with County Pension Funds have now released their first financial statements that conform (supposedly - another story) with the new rules in GASB68. The financial impact of their Net Pension Liabilities was 15 times greater than that of Deferred Outflows & Inflows of Pension Resources.

GASB68 requires the total Net Pension Liability (NPL) of the 21 county pension funds be allocated to each participating government employer (the county and any other participating local governments in the county). So each county's share of NPL will be reported in full as explained above.

But GASB68 requires two additional items to appear on government Balance Sheets (Statement of Net Position) - Deferred Outflows of Pension Resources and Deferred Inflows of Pension Resources.

One of the most basic concepts in GASB68 is that yearly changes in the Net Pension Liability will be reported as each year's pension expense (See Pension Expense) - EXCEPT the change of three variables will be spread over a number of years. The amount of these changes not yet included in pension expenses are the Deferred Inflows (or) Outflows of Pension Resources. They impact reported pension expenses like this -

Deferred Outflows of Pension Resources = Amounts that will increase pension expenses in future years
Deferred Inflows of Pension Resources = Amounts that will decrease pension expenses in future years

This shows how many years it will take to fully include each year's Deferred pension items in reported pension expense. The current year is the first of these years.

1) Difference Between Assumed and Actual Net Investment Income Each year's difference spread over 5 years
2a) Difference between Expected and Actual "Actuarial Experience" &
2b)Changes in Actuarial Assumptions
Spread over the average number of remaining years of employment for BOTH active and retired employees

There are other kinds of Deferred Outflows or Inflows of Resources - but pension related deferred items will be separately identified.

Under GASB's rules these Deferred Outflows/Inlows are NOT either assets or liabilities - they are separate items reported on the Statement of Net Assets. Therefore GASB modified the Balance Sheet formula shown at the top to be -

(Assets + Deferred Outflows of Resources)
(Liabilities + Deferred Inflows of Resources + Net Worth)

1) Difference Between Assumed and Actual Net Investment Income

Let's say in 2015 a Pension Fund had $1 million and invested it expecting a 7.5% return - or $75,000 (this is a simplified example). But they only earn $50,000. The $25,000 shortfall will increase pension expenses over 5 years - the first being for 2015. There are a couple of different ways of calculating each year's share. We'll assume it's the same dollar amount each year. So - $5,000 will be included in 2015's pension expense and there will be a $20,000 balance in Deferred OUTFLOWS of Pension Resources reported in the June 30, 2015 Statement of Net Position. Then in each of the next 4 years another $5,000 will be added to pension expense. After the end of 2019 there will be no balance in Deferred Outflows related to investment earnings in 2015.

If the Fund had earned $100,000 - then $5000 would have been DEDUCTED from the 2015 pension expense and there would be a $20,000 balance in Deferred INFLOWS on 6/30/15.

2) Deferred Items Related to Actuarial Assumptions

Actuaries use a large number of mostly complex assumptions about the future when they develop pension funding plans. These include life spans, average number of years of remaining service for current staff, the amount of each employee's pension in their first year of retirement, cost of living adjustments to pensions, and on and on.

There are two ways these assumptions can create Deferred Outflows/Inflows of Pension Resources. But these Deferred items will flow into pension expenses and disappear from the Statement of Net Assets using the same method.

2a) Actual Results are Different from Assumed Results

As discussed in How Pensions Are Funded the Actuary defines what next year's "Normal Contribution" should be. This is the Actuary's estimate of how much needs to be contributed in a specific year so that if all assumptions come true there will be enough to pay the part of future pensions being earned by employees that year.

But in the real world actual results will always be different from what was projected using these assumptions.

Typically every three years Actuaries for the 21 County Pension Funds perform a "Three-Year Experience Study". That is a comparison of what was assumed would happen with what actually happened. It will always find that results are different from the assumptions used to set the Normal Contribution which is a major component of annual pension expenses.

And - therefore - the conclusion will be that past reported pension expenses were either less than what they wound up being - or more.

2b) The Assumptions Themselves Are Changed

As a result of the Experience Study the Retirement Board may adopt changes to one or more assumptions. This will immediately change the Net Pension Liability (NPL). If the assumed rate of return is lowered the NPL goes up. If the assumed rate of COLAs in the future is decreased, the NPL goes down. These changes can cause very significant changes in NPL and if those changes were included in pension expense the year the assumptions are changed the impact on that year's pension expense can be drastic.

How Should These Changes Related to Assumptions About the Future Flow Into Pension Expense?

GASB based its answer on two fundamental assumptions about the long-term nature of pension expenses:

• The "pension transaction" between governments and its employees happens over the employees' entire career - not just year by year.

• Each generation should fully pay for the expenses governments incur to produce the services consumed by that generation - those costs should not be pushed onto the next generation. In terms of financial reports GASB's goal is to make them show whether or not each year's government revenue is paying for ALL the expense incurred to provide services that year - including the present cost of future pensions being earned that year.

Based on these principles GASB concluded that the impact on annual pension expenses of these items (difference between actual and assumed results and changes in the assumptions) relates to the expense of current and past employees - not future employees. Therefore the impact on pension expense should be fully reported by the time current - and past employees retire.

GASB decided that as a practical matter the remaining years of employment for current staff should be an average for the entire staff. And - of course - the remaining years of employment for retirees is zero. Therefore if the proportion of retirees to current employees increases the average remaining years of employment decreases. Similarly the closer current employees are to retirement - again the average remaining years of employment decreases.

The Actuary for Contra Costa County's Pension Fund estimated the average remaining employment was 4.60 years. Therefore these Deferred items related to assumptions would flow into pension expense over 4.60 years. The Actuary for Mendocino County's Pension Fund (who is also Contra Costa's Actuary) estimated Mendo's average remaining employment to be more than a year less - 3.42 years. Again - remember this includes retirees with an expected remaining employment of zero years.

Net Assets - the "Bottom Line"

These two new ongoing items (Net Pension Liability (very rarely an Asset) and Deferred Outflows/Inflows of Pension Resources) are for the first time part of the calculation of a government's Net Assets (or Net Position).

A government's Total Net Assets is the sum of three types:

Net Investment in Capital Assets
Restricted Net Assets
Unrestricted Net Assets

Net Pension Liability and the Deferred items do not affect the first two. They are part of the calculation of Unrestricted Net Assets.

Net Investment in Capital Assets is the value of major assets (roads, bridges, buildings, etc.) as reported in the Statement of Net Position less any outstanding debt owed to buy or construct those major assets. Very often these assets can't be "sold" and therefore aren't available to turn into cash, which means it's very difficult to use that amount of a government's "capital" for other purposes.

Restricted Net Assets can only be used for specific purposes. For example the state and federal governments often restrict the use of certain funds they convey to local governments. A government can restrict its own funds but ONLY if it does so through an act of its legislative body BEFORE it raises the funds.

Unrestricted Net Assets basically are those that aren't either of the first two forms of Net Assets. Generally they can be used for any legal purpose - although they may not be cash. Unrestricted Net Assets generally are the share of a government's assets over which it has discretionary control.

In general the impact of unfunded pension debt on Unrestricted Assets far better conveys the quality of a government's long-term financial management. It shows how well the government has been a steward of the resources provided by its citizens and residents.

This shows the combined value of Net Assets reported by the 21 California counties that have their own independent County Pension Funds in the year before GASB68 was implemented and the year of implementation.

Net Assets Reported June 30, ($Billions) ... 2014 2015
Net Investment in Capital Assets $35.7 $36.1
Restricted Net Assets 10.0 9.5
Unrestricted Net Assets (4.9) (30.9)
TOTAL NET ASSETS $40.8 $14.7

The requirement to list Net Pension Liabilities on their Balance Sheets (Statement of Net Position) results in these 21 counties reporting a ONE YEAR MELT-DOWN of $26 BILLION of their Net Assets. But in particular they went from a negative $5 Billion of Unrestricted Assets to $31 Billion in the hole.

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