This quote from the Government Accounting Standards Board (GASB - pronounced "Gaz-bee") is its most basic principle regarding defined retirement benefits. Make sure you understand this - it's the key to understanding the bulk of Mendocino County's debt.

Here's the County's deal with employees - "If you work for us this year, we'll give you one year's credit towards your eventual retirement benefits". But the County never reported the true cost of that promise while employees were earning those benefits. And it didn't report the astonishing debt it built up until forced to by new accounting requirements.

This previously undisclosed debt is hitting the County like a ton of bricks today.

How It's Supposed to Work

An "Actuary" figures out how much the County and its employees should pay into the retirement fund each year. The goal is to have enough money when they retire to pay all their retirement benefits for the rest of their lives.

The County should only need to pay each year's contribution into the Retirement Fund. Then the Retirement Fund should properly invest those contributions to earn its target investment profits. That's all the money the Retirement Fund should ever need.

The County should never have to pay more. If the Retirement Fund develops a "deficit" - called an "Unfunded Obligation" - something's wrong.

The Core Reason Most of the County's Debt was Created

Prop 13 in 1978 limited the amount and rate of increase of property taxes. Most taxpayers stopped paying attention to County finances because they no longer feared significant tax increases. The demand for services, however, increased.

Since Prop 13 the role of public employee unions greatly increased. This is simply a statement of fact. Over the past twenty years or so the County’s employee unions bargained with County officials who didn’t have enough money to make everyone happy.

The way local government accounting worked when Prop 13 was passed was that the cost of retiree benefits was not considered an expense until they were paid. And, local governments weren't required to report their retirement benefit debt.

The result was predictable.

Remember Wimpy's Offer?

It was easy for County Officials to make promises about retirement benefits to employees they didn’t have to fulfill. It was easy for Union Officials to get praise from their members by saying “See, we brought home the bacon,” when most of the bacon wouldn't have to show up for decades. Their agreements were words on a piece of paper; they weren’t dollars. It would be someone elses problem decades later when the bills come due.

Unfortunately for Mendocino County - and for its citizens - the bills are coming due. In spades!

In its most simple terms, the County (and its Retirement Association):

• Didn't report at least $250 million worth of promises made in the past to employees about retirement benefits. They still haven't reported those expenses, but they have finally been forced to disclose the debt.
• Earned about a hundred million less than its target investment returns.
• Diverted millions out of the Pension Fund to pay Retiree Healthcare while creating deeper and deeper Unfunded Pension Obligations, and almost certainly in violation of provisions of the County Retirement Act.

Now let's look a little deeper at the County's Pension Debt.