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Old Mendocino County Courthouse Around 1915

California County Pension Debt

 

Stories & Evidence



Numerous Financial Management Errors



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

 
ballet dancer going on pointe
On "Pointe"

Every profession - every way people earn a living - has certain necessary basic skills. A teacher needs to know how to put a lesson plan together. A ballet dancer needs to know how to go on "pointe". A chef needs to know how to make an omelette.

It's certainly that way with financial professionals. You need to know how financial statements "work". You need to know how to calculate an accurate "amortization schedule" - like a 30 year mortgage. You need to know the difference between "cash" and "accrual" accounting - and why you need to analyze complex organization finances from both points-of-view.

Unfortunately there are way too many examples of the failure to be able to perform fundamental - and simple financial management tasks in the financial management of Mendocino County and its Pension Fund in the past.

Deeply Flawed Amortization Schedules

Because of severe Pension fund stock market losses in the Great Recission the County had to begin making unfunded pension amortization payments in July 2010. Several of us encouraged the County and Retirement Association to prepare the "amortization schedule" asap so the County could prepare. But instead the payment schedule wasn't available until mid-June - just weeks before the County had to start making significant payments.

The payment schedule was developed by the Fund's soon-to-be terminated Actary - Buck Consultants. I got a copy and within 5 minutes I knew it was bogus. There were two alternatives - Level Dollar and Level Percent of Payroll Amortization. I first looked at the Level Dollar. Here's the first two years:

Fiscal Yr
Beginning
UAAL (Beg Bal) AMTZ (Payment) Interest Principal
2009* 66,933,480 5,328,132 5,354,678 -26,546
2010 66,253,283 5,328,132 5,300,263 27,869

* This is actually the year of the Valuation. The Valuation is always produced in the following year and sets payments for the year after that - in this case fy2010-2011. (There's a lot of confusion about what the years in Valuations really mean.)

That's all it took. Level Dollar Amortization is a fixed payment system. The County would pay $5,328,132 each year for 30 years. If the interest is more than the payment in the first year - you will never pay off the debt. It'll just keep growing.

And yet - somehow magically the beginning balance at the beginning of the next year was about $680,000 less than the year before - even though the previous year's payment was $26,546 less than the interest expense?

There's nothing subtle in this. These kinds of errors were all through both payment schedules. They were hugely wrong. You can't get out of a first year college accounting course if you can't produce an accurate Level Dollar amortization schedule.

I calculated the correct payment schedules (both of them) and sent them to the Retirement Administrator. If they'd adopted Level Dollar the first year's payment needed to be $5,945,529 - over $600,000 more

But the Retirement Board allowed the County to use the Level Percent of Payroll method. The Actuary's first year payment was $3,408,320 which turned out to be about $550,000 too low.

But - the Retirement Board didn't have the schedule corrected until the next year.

And no one - not the Retirement Administrator, their outside auditor, 8 of the 9 members of the Retirement Board (one did catch it - but the rest of the Board wouldn't act), the County Auditor-Controller, Treasurer-Tax Collector (who was also Retirement Administrator at that time), County Executive Office, or any of the 5 County Supervisors - caught these huge blatant simplistic errors - or did anything about it until the next year when the debt was a half million more than it should have been because of this "error".

Impossible Financial Statements - No One Cared

I tell this story earlier in MendoCERA Audited Financial Statements - Impossible Deeply Flawed. Simply put - for years the Retirement Association produced absurd financial statements that were obviously incorrect on their face. Once again - no officials in either the Retirement Association or County raised the issue.

The Long-Term Failure of "Excess Earnings"

I describe the financial absurdity of the practice of diverting so-called "Pension Fund Excess Earnings" to pay retiree healthcare in The Fraud of Pension Fund Excess Earnings".

This just doesn't take a genius to realize:

  • Its absolutely necessary for the Pension Fund to earn its assumed rate of return on average over the long run to prevent creating long-term County interest bearing debt.
  • Therefore - if every time the Fund earns more it's stripped out of the Fund to pay something other than pensions - then the Pension Fund is doomed to be underfunded.

Former Coast Supervisor Norman deVall told me he questioned the practice when he was in office - but no one was interested. Other than that - I've never heard of any other Retirement or County official raising this issue during the 20 years this diversion took place - until the system inevitably blew up.

Never Asked Why Debt Kept Growing

  • In 1996 the Net Pension Liability was $45 million. The County borrowed $30 million by selling Pension Bonds to patch up the hole.
  • In 2002 Total Unfunded Pension Debt was $110 million. The County borrowed another $80 million by selling more Pension Bonds to patch up the hole a second time - and swore it wouldn't happen again.
  • As I describe in Pension Increases every County employee received generous pension increases even though the County had over $100 million of Pension Bond debt. Further - between the 2002 Bonds and when the County began paying unfunded pension amortization payments in 2010, nearly $30 million was taken out of the still-underfunded Pension Fund as "Excess Earnings" to pay retiree healthcare.
  • In 2010 Total Unfunded Pension Debt was $220 million. Instead of trying to borrow more money by selling more Bonds the County tried to get the sales tax increased. Measure C got a 70% No vote.

Ask any County official today for a copy of the report that clearly and honestly explains the immediate and fundamental causes of this debt. You won't get a copy - because County officials have never asked for such a report to be done.

Never Challenged Underperformance

A related issue - except for a few exceptions it appears County officials never substantially challenged the Retirement Association for its profound underperformance relative to its peers over the long run. Data from the State Controllers Office - although it has its problems - is readily available and would have shown the Pension Fund over a decade was nearly at the bottom of County Funds in return on investment. (The Fund is performing much better in the last few years.)

One Year Cash-Flow Planning

My observation is Mendocino County's main financial planning system - the County Budget - is a one-year cash flow plan. I've seen no comprehensive financial planning beyond one year into the future. And the County's budget is based on cash flow - it utterly ignores the causes of the County's extremely damaging level of unfunded pension debt. The County gets the future it planned for - a chaotic unplanned future.

Failure to Project Long-Term Impact of Unfunded Pension Debt Payments on County Services

Payment schedules for both the Pension Bonds and unfunded pension amortization payments to the Pension Fund are readily available. But there's been no attempt I'm aware of to project what their impact is likely to be on future staffing and salary levels through different economic conditions - and therefore the impact on County services and infrastructure.

Wait Until the Last Moment

As I describe in Put Off Difficult Financial Issues the County has a history of not anticipating things like main changes in how they must report their finances until the very last possible moment - when it's too late to plan a response with enough time to do something about it.

"We're In the Process of Figuring Out"

Retirement Director Randy Goodman requested a report about how retiree healthcare had been financed sometime in fall of 2009. In a Retirement Board meeting on October 21, 2009 he said:

I asked Jim (Andersen - former County Chief Administrative Officer and current Retirement Administrator) in an email last month to get how much the Retirement Plan (Pension Fund) had contributed to retiree health since the inception of this resolution (the 1998 Board of Supervisors resolution that said the primsary source of the retiree health benefit would be Pension Fund "Excess Earnings").

Former Retirement Administrator and County Treasurer Tim Knudsen replied:

We're in the thought process trying to find out how we're going to find that out.

This is a very perplexing response to people with financial management experience. The accounting system should make that information easily available. In fact, the annual financial statements should have that information. There shouldn't be any problem and certainly no need to wonder how to find the answer to Board member Goodman's question.

There are numerous examples of officials saying they didn't have a way to get information when it should have been readily available.

The Fake Receivable

As I describe in Healthcare Policy - Board Policy 40 - Diversions of Contributions" the Retirement Association carried a form of an asset receivable in its books titled "Actuarial Value of Unrecorded Earnings" from about 2006 into 2010. As I explain I'm firmly convinced that was a "fake" asset.

But this nearly $10 million asset was only reported on interim financial statements given to the Retirement Board - it was never separately reported in the Association's audited financial statements. In the context of Mendocino's Pension Fund, $10 million is a material amount. It appears it was "spread" over the various types of investments.

I can't prove it beyond a shadow of a doubt because I don't have the power to conduct the kind of investigation that would be required. But I believe it's almost certain this "receivable" was set up to make it appear the County had made that amount of contribution to the Pension Fund when in fact it didn't.

That is a very severe issue.

I've told several County officials about why I believe this is probably so - but to date I see no evidence of any action from them about it.

This almost-certainly "phony asset" was on the Association's internal financial statements and in its records for 5 years - but I see no evidence that any County official or Retirement Director asked for a clear explanation - or why it wasn't reported in the public audited statements.



I could go on ... and on ... and on ... and ...



 
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