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Stories & Evidence



MendoCERA Audited Financial Statements

Impossible and Deeply Flawed Financial Statements - 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

 

Although this story isn't as complicated as the first story I told ('98 Healthcare Policy - '02 Board Policy 40 - Diversion of County Contributions) I need to use 3 pages so you can see a lot (not all) of what happened in context.

I received copies of 10 consecutive years of audited annual financial statements for MendoCERA beginning with statements for June 30, 1998.

Impossible Differences in Return on Investment

This table shows the Net Investment Income, the Average of the Beginning and Ending value of Net Assets, and the Beginning Value of Net Assets for the Retirement and Healthcare funds and MendoCERA as a whole for the first 5 years of this period as shown on MendoCERA's audited statements.

Returns on Assets - Pensions and Healthcare
1998 1999 2000 2001 2002
Net Investment Income
Healthcare 6,721,779 (5,148) (1,604,495) 2,504,434 1,385,086
Pensions 6,170,087 10,052,540 18,356,026 (15,266,240) (10,594,691)
Total 12,891,866 10,047,392 16,751,531 (12,761,806) (9,209,605)
Average Net Assets
Healthcare 4,722,431 6,975,155 4,686,257 3,660,786 3,789,487
Pensions 133,927,604 140,163,341 152,939,326 154,332,320 142,713,79
Total 138,650,035 147,138,495 157,625,583 157,993,106 146,503,278
Beginning Value of Net Assets
Healthcare 1,789,949 7,654,912 6,295,397 3,147,116 4,244,456
Pensions 132,115,943 135,739,265 144,587,416 161,291,236 147,373,404
Total 33,905,892 143,394,177 150,882,813 164,368,352 151,617,860

The table below shows the "Return on Assets" for each of the 2 funds and the difference between them calculated by dividing Net Investment Income first by the Average Value of Net Assets, and second by the value of the Beginning Net Assets.

Differences in Returns for the Two Funds
1998 1999 2000 2001 2002
Return on Average Net Assets
Healthcare 142.3% (0.1%) (34.2%) 68.4% 36.6%
Pensions 4.6% 7.2% 12.0% (9.9%) (7.4%)
Difference 137.7% (7.2) (46.2%) 78.3% 44.0%
Return on Beginning Net Assets
Healthcare 375.5% (0.1%) (25.5%) 81.4% 32.6%
Pensions 4.7% 7.4% 12.7% (9.5%) (7.2%)
Difference 370.9% (7.5) (38.2%) 90.9% 39.8%

My understanding is these two funds were invested together. Therefore there would almost certainly not be a significant difference in ROI.

Many of these return values are absurd and impossible on their face.

For example in 1998 the Healthcare Fund began the year with $1.8 million and there were no contributions made to the Healthcare Fund. Therefore the only money the Fund had to invest was its beginning balance of $1.8 million. The audited statement showed a net investment return of $6.7 million - a 375% return on beginning assets.

In that same audited statement the Pension Fund was reported to begin the year with $132 million. Its average assets through the year were $134 million. Its reported net investment return was $6.2 million - a 4.6% return on average assets and 4.7% return on beginning assets.

Simply put - these differences in returns are completely and hugely impossible. There is no way these audited financial statements are anywhere near correct - they are hugely inaccurate.

Then - Stopped Reporting Pension and Healthcare Funds Separately

From 1998 through 2002 the two main reports in MendoCERA's audited financial reports - Changes in Plan Net Assets and Statement of Plan Net Assets - were reported for both the Retirement Fund and the Retiree Healthcare Fund. Then beginning in 2003 MendoCERA no longer reported the finances of these two funds separately.

That was the fiscal year in which the County sold its second round of Pension Bonds borrowing $92 million. I don't know if the Bonds influenced the Retirement Association to stop reporting the Retiree Healthcare Fund separately - or not.

I exchanged a series of emails with the Public Retirement Systems Analyst in the Local Government Reporting Section of the State Controller's Office. In one email she stated:

In 2001 and 2002 the healthcare fund was reported separately in MCERA's audited financial statements... But starting in 2003 they were combined with the pension benefits into one column.

..., since 2003 we have been asking to have the two plans shown separately as they did in prior years and not commingled. As of 2014, the two plans are still commingled.

My understanding is that generally accepted government accounting principles require these two funds to be reported separately - but for about a decade MendoCERA didn't do that.

And - of course - that prevented anyone who wasn't an "insider" from knowing what was going on between the two Funds - such as taking $3.5 million out of the Pension Fund to pay retiree healthcare and thereby almost certainly breaking a number of laws.



 
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