Budget Crisis Over the Next Two Years

Situation

The County faces very extreme economic threats. The State of California's budget is in a deeper crisis than ever before. It can be expected to somehow "raid" local government funding. The County's credit rating has substantially declined. The recession has increased demand for County human services. The County's debt has grown very significantly.

Unfunded Pensions

Unfunded Pension Obligations
and Pension Obligation Bonds

The County has twice sold Pension Obligation Bonds:

1. 1996: $30.7 million
2. 2002: $75.3 million

In July the Pension Fund's Actuary estimated the Pension Fund's Pension Obligations would be $110 more than the actual market value of its assets on June 30, 2009. The County won't receive the "official" valuation until late after the 2009-10 fiscal year has begun. The County could wait until July 1, 2010 to begin to reduce this Unfunded Obligation.

If the County had done nothing it would have been forced to add at least an additional $10 million or so to its annual debt payments.

There are basically only two ways to eliminate this deficit:

• County Pays It Off
• High Pension Fund Investment Profits

The County and its employees make annual payments to fund pensions employees earn each year. But only the County has to pay down Unfunded Pension Obligations.

Three Choices - All Bad

The County must choose one of three directions to take. There are no good choices - only less bad ones:

1. Continue "As Is"
2. Reduce Payments for a few years to reduce short-term pain
3. Eliminate Unfunded Obligations either by paying it off now or hoping the Pension Fund Earns High Investment Profits

The least "bad" choice would be to borrow another $100 million. But how can the citizens allow the County to do that? This would be the third time the County went deep in debt to paper over its failed financial management of retirement benefits in the past - and the County has done nothing to figure out what's gone wrong - much less anything to try to fix it.

Unfortunately, the County and MCERA are taking the route of reducing payments for a few years by making the deficit seem less than it is, and stretching the re-payment period way out into the future. This almost certainly will backfire - Unfunded Pension Obligations will continue to increase over the years, debt payments will eat up more and more of the County's discretionary funding, and a slow strangle-hold will be applied to the County's services.

Significantly Higher Healthcare Payments

Retiree Healthcare is about to cost considerably more than in the past because more of the retirees are entering the highest healthcare cost period of their lives. The Pension Fund was $125 million below its target investment returns over the past two years. As of June 30, 2009 it estimates the market value of its assets was $110 million less than its obligations. This should mean the Pension Fund wouldn't pay healthcare for a few years until it eliminates these Unfunded Pensions.

But given the current policy, if the Pension Fund makes more than an 8% return this year, it will almost certainly transfer money out of the Pension Fund and into the Healthcare Fund even though there will still be a huge deficit in the Pension Fund. This absolutely is "robbing Peter to pay Paul" - it will simply increase the Pension Fund's real deficit.

Mendocino County's Budget Crisis

The County and MCERA have not yet made public how they are planning to make the Pension Fund's deficit appear to be much smaller than it really is, or how far into the future they will defer paying this debt. That is the direction the County is going today.

That will force future generations to pay far more for retirement expenses that have already been earned by County employees in the past - and because of interest expense they will pay far more than we would pay to eliminate the Pension Fund's deficit. In fact the County's method of financing Retiree Healthcare directly increases its Unfunded Pension debt. That means the debt the County is using to finance Retiree Healthcare will also be pushed farther and farther into the future, and will be magnified many times over by the long-term effect of interest expense.