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Stories and Evidence



1998 Retiree Healthcare Policy - Board Policy 40 - Diversions of Contributions - Part 1



Stories and Evidence


Choices -

Who Done It?

'98 Retiree Healthcare - '02 Board Policy 40 - Diversion of County Contributions - Part 1

'98 Retiree Healthcare - '02 Board Policy 40 - Diversion of County Contributions - Part 2

'98 Retiree Healthcare - '02 Board Policy 40 - Diversion of County Contributions - Part 3

San Diego - IRS - Excess Earnings

Increase Pensions When Already Deep in Debt

Staffing & Compensation Chaos

Deeply Flawed Pension Fund Financial Statements - Part 1

Deeply Flawed Pension Fund Financial Statements - Part 2

Deeply Flawed Pension Fund Financial Statements - Part 3

Retiree Healthcare

Assumed Investment Profits Too High

Plans to Increase Debt

County Puts Off Bad News

The Myth of 80% Funding

Numerous Financial Errors

 

This is one of the most complex stories I have to tell. But it's also one of the most revealing. I tell it in this and the following two pages.

The County's Retiree Healthcare Policy

In September 1998 the Board of Supervisors adopted a Retiree Healthcare Policy. According to that policy:

  • Employees hired before the policy was adopted will get this benefit if they work for the County for 10 years.
  • Those hired after that date won't get this benefit.
  • Pension Fund "Excess Earnings" will be the primary source of funds.
  • But if there aren't any Excess Earnings the County will split the costs 50 50 with retirees.
  • The method of funding Retiree Healthcare will conform to federal tax laws.

As discussed in Immediate Causes - The Fraud of Excess Earnings elected County officials said they paid nearly $40 million of retiree healthcare benefits from Pension Fund "Excess Earnings".

Board of Supervisors Board Policy 40

In 2002 when the Board of Supervisors approved the sale of the 2002 Bonds - $92 million - they also adopted "Board Policy 40". These are excerpts (click to see the full Policy):

With the goal of ... providing assurance to the County's taxpayers that the County is well managed and financially sound, the County will endeavor to avoid the creation of additional (unfunded pensions) in the future.

... the County shall - quantify, by actuarial study, both the near-term and long-term financial impact of all ... proposed actions (that could increase unfunded pensions). Should such ... findings indicate an increase to the county's (debt), the County shall carefully evaluate the financial impact ...

There Weren't Enough Excess Earnings As Defined by the Law ...


Click the image to watch

I spoke during "public expression" to the Mendocino County Board of Supervisors on September 22, 2009 about Pension Fund "Excess Earnings". Most of what I said was how absurd the definition of "Excess Earnings" is and how the Public would never accept the concept as valid. But during the last 30 seconds I dropped a bomb:

... the Retirement Association's financial statements show there weren't enough Excess Earnings as defined in the law to pay the County's share of Retiree Health over the past 11 years.

Think about that.

The Retirement Association needs to show how its payments of Retiree Healthcare from Excess Earnings conformed to the law. At this point, I don't think it did.

Unfortunately - as has been the case over the past decade - the County Board of Supervisors once again did nothing.

However, a responsible member of the Retirement Board - Randy Goodman - demanded that a report be given to the Retirement Board about how retiree healthcare had been paid for in the past. That report was delivered - after a delay of several months - on March 17, 2010.

Oops - No Pension Fund "Excess Earnings"

Former County Treasurer and Retirement Administrator Tim Knudsen prepared a written report and gave a verbal report to the March 2010 meeting. At one point he said:

We got into the situation I eluded to earlier in 2002 - 2003 where we were paying down our Excess Earnings and, um, at the end of 2003 we had one million five thousand dollars - we started the year with that. And then we had no more Excess Earnings but we had health insurance we were paying for.

Eighteen months after the adoption of Board Policy 40 there were no "Excess Earnings".

County Policy v. What Really Happened

According to the 1998 Retiree Healthcare policy at that point the County would "split" the cost of retiree health insurance 50-50.

But that didn't happen.

In his cover letter to his March 17, 2010 written report Knudsen said:

During this time period (2003 through 2006) MCERA began a process for payment of retiree health insurance that was thought necessary in order to be in compliance with Internal Revenue Service Regulations. The instructions we had (from the IRS through the actuary) regarding retiree health insurance payments were that all payments must be made by the county. During this time we followed a process of "diverting" a portion of the monthly County Contributions made to the Retirement System into the reserve for retiree health insurance ... After a number of years we were informed by the actuary that ... the process of diverting money to the reserve to pay for retiree health insurance meant the county was not making the "normal contribution" to the retirement system and violated certain sections of the 1937 Act Government Code (aka the County Employee Retirement Law - or CERL).

From 2004 through 2006 MendoCERA - with the County's blessing - diverted about $6 million directly out of the COUNTY'S Normal Contributions to pay retiree healthcare - at no cost to retirees.

According to Board Policy 40 - adopted 18 months earlier to assure "the County's taxpayers that the County is well managed and financially sound" the County would obtain a specific Actuarial study of any proposals that might increase unfunded pension debt.

Regarding this "diversion" of County contributions - that didn't happen. And every dime increased the County's long-term interest bearing debt.

Retirement Association's Accounting

Forgive me for going a little "technical" here in analyzing the Retirement Association's accounting for all this - but I'm going to say something pretty remarkable in a bit and I want you to see why.

I analyzed the Retirement Association's 2004-2006 audited financial statements and Actuarial Valuations (see Pension Funding - Actuarial Valuations for an explanation). It appeared about $6.1 million had been paid to the Retiree Healthcare Fund and $6.5 million to the Pension Fund in those three years.

In accounting there are always two sides of any transaction. Not to get too technical - but "debits" (shown on the left) must always equal "credits" (shown on the right). This summarizes what the Retirement Association probably entered in its books for these payments in those 3 years:

  Cash Paid to Retiree Healthcare Fund   $6.1 million
    "Credit" for the County Having Paid the Healthcare Fund     $6.1 million
 
  Cash Paid to the Pension Fund*   $6.5 million
    "Credit" for the County Having Paid the Pension Fund     $6.5 million

* Two smaller local government entities also participate in the Retirement Association - Superior Court employees and a Cemetery District. I don't know for certain but it appears they constitute less than 5% of the contributions and obligations of the Pension Fund. The numbers I show for contributions and obligations by the County are for the entire Pension Fund; I don't try to deduct the share represented by these two much smaller entities. Therefore - the County's "real numbers" are slightly smaller than what I show.

Deceptive County Financial Reporting

This is a footnote attached to Mendocino County's audited financial statements for 6/30/2006 (page 53):

Note 13: Post-Retirement Benefits The County pays in accordance with County ordinance, post-retirement medical benefits for retirees who have at least ten years of County service. If the retiree has less than ten years of service, then the retiree pays a percentage of the medical benefits. The benefits paid by the County are funded on a pay-as-you-go basis. At fiscal year-end, there were 851 County retirees, of which, 623 received healthcare benefits totaling $3,720,135 for the year ended June 30, 2006.

A portion of the County's Normal Contributions to the Pension Fund was diverted during this fiscal year to make these payments. The County "pays" ... is a very deceptive statement. Yes - the money used by MendoCERA that year was paid to MendoCERA by the County. But - by law the money was supposed to go into the Pension Fund - not be used to pay retiree healthcare. And since less than the County's share of the Normal Contribution went into the Pension Fund, then in effect retiree healthcare that year was paid with long-term interest bearing debt.



 
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