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Stories and Evidence



1998 Retiree Healthcare Policy - Board Policy 40 - Diversions of Contributions - Part 3



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

 

It's an Asset. It's a Liability. It's ...

In the March 17, 2010 Retirement Meeting former County Chief Administrative Officer and then current Retirement Administrator (now retired) Jim Andersen made two interesting statements about the $9.6 million "Actuarial Value of Unrecorded Earnings":

There's still $9.557 million that's still outstanding ... there may be a way we can "eliminate" that asset.

This liability (referring to the $9.6 million) that's sitting on the books - what is the disposition of the Board as far as addressing that in the future?

How can something be an "asset""and a "liability" at the same time?

It was recorded as an asset in MendoCERA's books. But it was a "Fake Asset" - a claim against an uncertain future; a "ghost" of real cash that was diverted out of contributions to the Pension Fund and taken out of the Pension Fund to pay for retiree healthcare in a way that clearly was a violation of the County Employees Retirement Law and as we now know was a violation of federal tax law - and therefore is a "liability" for Retirement Officials - in particular the Retirement Board and Administrator.

Comments by Retirement Board Members

After Knudsen and Andersen finished their report each Retirement Director had the opportunity to express their views. (These are from a transcript I made from the video of the meeting.)

Board member Randy Goodman (elected by general County employees):

(The amount that has been diverted out of Pension Fund "Excess Earnings" for retiree health benefits) - It's sitting at $32 million. And that's only 10 years. When did we start doing this?

The answer was 1974.

So you're looking at a whole lot of money. ... If we had that money sitting in the Retirement Plan right now we'd be sitting pretty good.

We have a fiduciary responsibility to the plan. We don't have a fiduciary responsibility to provide retiree health. And I don't think we made the commitment to the retirees on health because I think the County made that commitment. ... Being elected by the employees ... 70% of the current participants in the plan are not going to get retiree health. And we shouldn't be using their money to pay for retiree health - for a benefit they're never gonna get.

Retirement Board Chairman Tim Pearce (elected by Deputy Sheriffs):

We've been working on this for a long, long time. I think the door (on retiree healthcare) pretty much is slammed shut.

... Our focus has to be funding that retirement system (the Pension Fund). We must adhere to our fiduciary responsibility to make sure a retirement is there. Not a benefit that belongs to the County (retiree health benefits). ... We had the last 10 years to work this out; it never got worked out. It's very unfortunate that it didn't.

Board member Caren Callahan (appointed by Board of Supervisors - not an employee or retiree):

It isn't sustainable what we currently have, and our duty is to the pension and to keep that as high as possible. ... I understand a large group has relied on (retiree healthcare) - I understand that. But it's created a huge inequity for the pre and post '98 people.

To paraphrase Retirement Board member and County Supervisor Kendall Smith - "for the next 2, 3, 5 years there are no dollars for healthcare." Smith seemed to imply there might be dollars from Excess Earnings some year after that.

Retirement Board Writes "Actuarial Value ..." Off as Worthless

At the end of fiscal year 2010 - three months after the March Retirement Board meeting - MendoCERA wrote the $9.6 million off as worthless. That immediately increased the calculated value of the County's Net Unfunded Pension Liability by that amount.

County Still Claims to Have Fully Paid Pension Fund

However - to this day the County still reports it paid the full amount to the Pension Fund it was supposed to - and the Retirement Association indicates in its "Actuarial Valuations" (described in "How Pensions are Funded") that the County did so.

To date neither the County or Retirement Association has provided the accounting entries they made at that time.

Violations of Law

County Employee Retirement Law (CERL)

California Government Code Section 31587 (part of the state's County Employee Retirement Law - or "CERL") states:

The (retirement) board shall apply the contributions of the county or district to its obligations under the system in the order and amounts as follows:

First, in an amount equal during each fiscal year to the (pension) liability accruing to the county or district because of service rendered during such year and on account of service and disability pensions, in an amount determined by the actuarial valuation as interpreted by the actuary.

That means all the money paid into the Retirement Association must go into the Pension Fund until the amount the actuary says the County must pay the Fund is paid.

That didn't happen.

See Failure #11 in "Federal Internal Revenue Code" below.

Legal Requirements of Fiduciaries

When the Retirement Board stopped diverting part of the County's Normal Contribution they took another $3.5 million directly out of the Pension Fund to pay healthcare - because there still weren't any "Excess Earnings".

I'm not a lawyer - but I believe that also was a violation of law. The Retirement Board has a fiduciary responsibility to retirees and employees to preserve and safeguard their Pension Fund.

Further - they also have a fiduciary responsibility to treat all beneficiaries "fairly". The Retirement Board authorized taking money being paid to the Pension Fund by the County to fund its current employees' future pensions and paid a benefit for retirees that many of those current employees could never get. That clearly favored one group of participants in the Retirement System over another.

Federal Internal Revenue Code

Mendocino County's Pension Fund must qualify for very beneficial tax advantages under the terms of Section 401(a) of the Internal Revenue Code.

In his written report discussed the Retirement Board meeting on 3/17/10 Former County Treasurer and Retirement Administrator Tim Knudsen wrote:

... there have been many variations of accounting practices that have been used to fund retiree health insurance in the past. To the best of my knowledge all of these practices have been done in accordance with the regulations of the IRS. We have ... been assured by the current system actuary that no IRS regulations have been violated with the practices adopted by the retirement system board of directors.

But a little over 3 years later MendoCERA received a "Voluntary Correction Program Compliance Statement" from the Internal Revenue Service dated January 29, 2014. This describes a specific "failure" to conform to federal tax law related to these diversions:

Failure #11: ("MCERA Failure")
The Plan did not comply (with) the requirements of Section 401(h)* of the (Internal Revenue) Code and did not pay benefits from an account structured to comply with 401(h). In addition, from June 30, 2002 through June 30, 2006, MCERA credited amounts to retiree health insurance reserves even where MCERA had no excess earnings in violation of CERL 31592.4 which increased MCERA's unfunded actuarial liability by $9,957.912.

* Section 401(h) describes requirements regarding how payments of retiree healthcare must abide with the Internal Revenue Code.

How Could County and Retirement Officials Not Have Known Before 2010?

Tim Knudsen was the elected County Treasurer-Tax Collector in 2003 through 2006 when these diversions took place. He also served as the MendoCERA Retirement Administrator at that time. Obviously he knew about these actions - he did them. The County's elected Auditor-Controller Dennis Huey knew of these actions. Any member of the Board of Supervisors who was at that time a member of the Retirement Board knew about these actions.

And - is it really possible no County Supervisor, the Executive Office, any other County financial official didn't remember Board Policy 40 that was passed less than 2 years before all this started happening - much less the 1998 Retiree Healthcare Policy?

And 4 of the 9 Retirement Directors were directly elected by employees and retirees from their ranks. The diversion of pension funds to pay retiree health created more and more long-term interest bearing County debt from 1974 through 2012 (the end of such payments). Nearly 3 decades employee and retiree Directors voted to gut the pension fund to provide this benefit.

And why did they do that? Because employees and retirees wouldn't have to pay for it. It was transferred to the County as debt. The "County" - which means We the People - would be forced to pay for it.


This is the end of this first and most complicated story.



 
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