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Old Mendocino County Courthouse Around 1915

California County Pension Debt


Mendocino County's Pension Debt

What Happened - Really?

Perverse Incentive & Conflict of Interest

Fundamental Cause #2

Fundamental Causes of Unfunded Pension Debt

Choices -

Immediate v. Fundamental Causes

Failure of County Government

Perverse Incentive & Conflict of Interest

Profound Lack of Accountability


I MEAN THIS. I have a LOT of sympathy for most employees and retirees. Most simply accepted a job with promised retirement benefits. As individuals they didn't twist the arms of those who offered and they had every reason to take the offer at good faith. But they are in an increasingly scary position - and I really fear it's going to get much more threatening for many of them.

I truly believe most didn't know what was happening. But I also believe that if most really took a hard look they'd be appalled by what was done "in their name" - even though it might feel too scary to admit it in public.

But - as I'll describe later - they are not simply innocent victims. It's more subtle than that.

Composition of Retirement Board

6 of the 9 Retirement Directors either receive County pensions or will when they retire

County Supervisors appoint 4 Retirement Directors - one of which traditionally is a Supervisor. Employees and Retirees elect 4 Directors. The County Treasurer is automatically the 9th Director.

Although the Voters elect the Treasurer-Tax Collector and the Supervisor who is on the Retirement Board (shown in black), frankly very few voters (other than perhaps employees and retirees) even know they are on the Retirement Board. In fact few even knew such a Board existed.

Two-thirds of the Retirement Directors are employees or retirees - 2 of them County officials. They either receive County pensions now or are making contributions today for the pensions they'll get when they retire.

Employee and retiree Directors want to provide their peers more benefits AND let them keep more money. County officials want more money to spend while they're in office to provide services and create more jobs and give raises and benefits.

On their own - these are good things. Understandable things. But these understandable instincts were the first steps down a steep slippery slope.

The Perverse Incentive

As described in How Pensions are Funded each year the Actuary quantifies two types of payments to the Pension Fund that must be made in the next year.

  1. Normal Contribution: This is the Actuary's estimate of how much needs to be contributed in a specific year so that - with investment profits - there will be enough to pay the part of future pensions being earned by employees that year and the expenses of the Retirement Association. Both the County and employees pay a portion of this payment.
  2. Unfunded Pension Payments: However, if in a subsequent Valuation the Actuary estimates there isn't enough money in the Pension Fund to pay the part of future pensions that has already been earned in the past additional payments must be made to the Pension Fund to eliminate the unfunded amount. Only the County is obligated to make this payment - employees and retirees have no such obligation.

Retirees have no obligation to make a part of either payment to the Pension Fund.

Who Pays for Pensions?

I've analyzed dozens of actions like those I'll describe in "Examples" that created the debt and with only a couple of exceptions, they resulted in some combination of:

  • Retirees got more than they paid for
  • Employees paid far less than their fair share
  • County officials had more money to spend next year
  • And all that was paid for by more and more long-term interest-bearing debt imposed on We the People and the next generation of County employees and residents.
We can have our cake and eat it too!

Why not use "Excess Earnings" or divert County Contributions to pay retiree healthcare even if it creates more and more debt? So what if we don't earn our target rate? Why not keep the assumed rate much higher than what's likely? - after all the County will be able to pay more salaries next year and employees will keep more money in their pockets? Why not give free retroactive pension increases?

Employees don't pay for all this - retirees still get their pensions - the County can spend more next year. What's not to like?

We CAN have our cake - and eat it too.

There's a huge perverse incentive built into County pensions. Employees, retirees, and County officials were REWARDED- in the short term - by actions that directly weakened the Pension Fund and imposed this debt. The cost of failure was not imposed on them. In fact - the cost of failure wasn't imposed on anyone immediately. It was spread out 30 years into the future - long after the actions that created the debt and the people who did them are gone.

The system imposed the cost of failure on We the People and younger County employees decades after it was too late to stop.

There's another word for this:

Moral Hazard: One person seeks greater profits and advantages by choosing to engage in risky behavior because they are able to transfer the costs of that risk to someone else. They enjoy the profit and don't pay the loss.

If employees and retirees had been required to pay their fair share of Mendocino County's 1996 Pension Bonds most of the much greater damage since then wouldn't have happened. They would have demanded the problem get fixed and their Pension Fund would be much more secure today.

Instead - they wanted more of the same - not because they're bad people, but because of the subtle influence of this perverse incentive.

Who doesn't want to pay less and get more? I admit it - I like it. You don't?

Employees, retirees and the Board of Supervisors were rewarded in the short-term by the actions that created this debt - and they chose who would make those decisions on the Retirement Board and held them accountable to make the decisions they wanted.

As long as this Perverse Incentive exists and the Retirement Board is dominated by representatives of people who are rewarded by the actions that create debt - we'll get more and more debt over the long-run.

Most Didn't Know - But ...

I don't believe most Retirement Directors and County officials in the past realized the impact of the Perverse Incentive in their actions. I think they believed they were behaving responsibly as they saw it in the service of those they saw as the people they were most morally obligated to serve.

But incentives matter - and the incentive was NOT to avoid failure - it was to create it - and profit from it. And no one was immediately motivated to hold them accountable for the debt they created.

But - I also believe some DID KNOW what the effect of what they did would be.

I don't know how they sleep at night.

And even though I think most didn't know - it was their DUTY - TO KNOW.

The blunt fact is employees and retirees appreciated what the Retirement Board did and rewarded them for it. They reinforced the perverse incentive and to my knowledge never attempted to get their Retirement Board Directors to stop creating more debt.

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