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Old Mendocino County Courthouse Around 1915

California County Pension Debt


California County Pension Funds

Massive Write-Off of County Net Worth

Pension Financial Reporting Reform Hits Hard!

Mendocino County Takes Biggest Hit (note 1)

Version 4 -

Version 4 Under Construction Under Construction

I'm about to finish (I hope) a year-long project to develop "Version 4" of ("YPM"). I haven't updated Version 3 for the better part of a year. Too much of the information in Version 3 has grown rather stale - brown around the edges. I decided to take "Version 3" off the internet and put this one-page temporary replacement in its place during the last couple of months before Version 4 is ready for Prime Time.

So - for now this and my newsletter signup page is all I have online - at least publicly accessible.

I took John Dickerson live on October 9, 2008. My original focus was solely on my home county - Mendocino. Since then I've learned a lot about unfunded state and local unfunded pension debt, government accounting, the 20 other California counties that have independent County Pension Fund like Mendocino, how the basic structure of these County Funds is determined by State law, major trends in federal bankruptcy proceedings addressing local government unfunded pension debt --- and much else.

As my focus expanded and I learned more I replaced the original YPM with Version 2 - then Version 3. But the structure of Version 3 was too limited to allow me to present data, analysis, and conclusions about the increased range of my interests in these issues.

So - check back. As I say - I hope I can get this sucker finished in the next few weeks. It's like I've been trying to give birth to an 800 pound rhinoceros - a challenge to say the least.


John D

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March 21, 2016
17 of 21 Counties with Pension Funds have released audits

Of the 21 California counties with their own County Pension Funds 17 (red) have released their 2015 audited financial statements - four (gray) haven't. Major new rules from the Governmental Accounting Standards Board (GASB - note 2) require all state and local governments to list unfunded pensions as a liability for the first time. Together these 17 counties wrote-off $26 Billion of their Net Worth in their "Governmental Activities" (note 3) - 2/3 of what they reported last year. These audits show Mendocino County is the most damaged of these 17 counties by listing unfunded pensions as true debt.

2015 Audits

All California counties have financial (or "fiscal") years that end June 30. Most have released their June 30, 2015 audited statements over the past three months. Twenty one counties have their own County Pension Fund instead of participating in the huge CalPERS - 17 including Mendocino have made their audits public. Major new pension financial reporting rules are forcing state and local governments all over the country to list their unfunded pension debt as a "bona fide" debt for the first time in last year's audits.

The Fatal Flaw in the Old Rules Fixed by the New Rules

The fatal flaw in GASB's old rules was that pension expenses that create unfunded pension debt were reported in the future as that debt was paid. That's absurd. Payments of debt eliminate debt, they don't create it. And because governments didn't have to report those expenses as they created the debt, they didn't have to report the debt.

The new rules require governments to report pension expenses that create unfunded pension debt as they happen - not as the debt is paid. And - therefore - unfunded pension debt will be reported as real bona fide debt for the first time.

$26 Billion Write-Off - In Just 17 Counties!
17 of 21 Counties with Pension Funds wrote of $26 Billion of their Net Worth

GASB68 requires these counties to restate their reported June 30, 2014 Net Positions (aka Net Assets or Net Worth) in their 2015 audits. They do this by making "Prior Year Adjustments" in accordance with these new rules (Note 4). The Net Position is the difference in the value of a government's assets compared to its debts. "Positive" Net Worth means its assets are worth more than its debt, "Negative" Net Worth means debt is more than assets. "Negative Net Worth" is one form of insolvency - called "Balance Sheet Insolvency".

These 17 counties together originally reported in their 2014 audits their assets were worth $41 Billion more than their debts as of June 30, 2014. But the new rules forced them to list their unfunded pensions as a real debt (which it's always been) for the first time and that made $26 Billion go "POOF"! They wrote off 2/3 of their Net Worth because they finally had to tell the People the truth!

Just The write-off of the People's Net Worth in cities, counties, special districts, and the 50 states in the next few months will be unbelievably massive these 17 counties wrote off $26 BILLION!!! According to the Census Bureau there are 3031 counties - 16,364 municipalities - 37,204 special districts - and 12,884 school districts in the US. And - there are also the 50 states.

There isn't enough red ink in North America to describe the blood bath that's hitting state and local governments in the US right now!

Scale of Write-Off of Net Assets by New Rules

We can't compare the degree of impact of these Prior Year Adjustments forced by the new GASB68 rules among the counties by only looking at the dollar values of their adjustments.There's a huge range in the financial size of these 17 counties. The smallest - Mendocino - reported $80 million in Net Assets as of June 2014. LA County reported nearly $10 BILLION! Mendocino County's numbers are "rounding errors" for LA.

Three counties wrote off their entire Net Assets and then some - big range among counties In order to compare the impact on these counties this shows the percentage the total adjustments were of the previously reported Net Assets for each county. The Net Assets of each county originally reported as of June 30, 2014 = 100%. The green part of the columns is the Net Worth that wasn't written off - the red part is the write off.

Three counties - Mendocino, Contra Costa, and San Joaquin were forced to write off ALL their Net Worth and then some. They have more debt than assets - which is called "balance sheet insolvency" (note 5).

Mendocino County suffered the largest proportional write off of Net Worth of these 17 counties. The combination of listing unfunded pension debt for the first time and writing off the old worthless Pre-paid Pension Asset reduced the County's Net Assets by 170%! The County originally reported $80 million of Net Assets. After the required adjustments to conform to the new rules the County reported Net Assets at that time were really a negative $56 million (rounded).

Contrast the impact on Mendocino with Tulare way down in the San Joaquin Valley. Tulare was forced to "write down" its Net Assets by 11%. I'm not saying that's "good" - but it's 16 times better than what Mendocino was forced to do.

Two Kinds of Unfunded Pension Debt

There are two kinds of unfunded pension debt but up to here we've only talked about one - the amount of unfunded pensions these counties owe to their Pension Funds today. This type of unfunded pension debt is called "Net Pension Liability".

But half these counties also borrowed money in the past by selling "Pension Obligation Bonds" (POB) and paid the proceeds to their Pension Funds to eliminate previous Net Pension Liabilities.

These counties pay their Pension Funds interest on their Net Pension Liability equal to the Pension Fund's assumed rate of investment profits. That "target rate" was 8% for well more than a decade but County Pension Funds have been lowering their assumed rates in the last few years. They range from 7.25% to 7.75% today (Mendocino is at 7.25%).

Governments sell POBs because the interest rate on government bonds is a lot lower - say in the range of 3% to 4%. They wanted lower interest rates.

Many concerned citizens were very confused in the past when all of a sudden their governments reported a lot more debt than after they sold POBs. But the amount of the DEBT didn't change. What changed is governments restructured that debt from non-reported unfunded pension debt owed to their Pension Funds to reported debt owed to bondholders. The shock and confusion of concerned citizens happened because it was the first time they were really told unfunded pensions are real debt.

The governments changed the FORM of their unfunded pension debt but they didn't change the cause of the debt - the failure to properly fund future pensions.

Lots of officials took great credit for selling the Bonds because "we saved huge amounts of money by lowering our interest expense!" Of course it's much better to pay 3.5% than 7.25% interest - but that's not the issue. The issue is unfunded pension debt isn't supposed to exist. The issue is "why do we have unfunded pension debt we're not supposed to have?"

The pension funding plans adopted by the independent Retirement Boards that run these County Pension Funds were "supposed to fully fund" all future pensions with just regular yearly contributions from the counties and their employees. But when huge Pension Fund deficits developed ONLY the counties had to pay it - employees and retirees very rarely have any such obligation.

Impact of Unfunded Pensions on County Balance Sheets

We've been looking at the impact of the "Prior Year Adjustments" on the June 30, 2014 Net Position for these 17 counties. Let's jump ahead to today. This shows the proportional Balance Sheets they reported as of June 30, 2015 - one year later. Once again we can't really compare the impact of the new rules on these counties by looking at the total dollars because these counties are hugely different in financial size. But instead of making Net Assets = 100% as in the graph above, this time we make Total Assets = 100%. So the question becomes - "For every $100 of Total Assets a county has, how many dollars of Debt does it have, how much of that debt is "Unfunded Pension Debt", and does the county have more Assets than Debt - or less?"

The numbers in the June 2015 Balance Sheets related to unfunded pension debt are not the same as in the June 2014 prior year adjustments discussed above because a whole year of activity happened between those dates that changed the numbers.

17 County Balance Sheets as of June 30, 2015 Eight of these 17 counties still owed money for POBs they sold in the past. That's shown on the graph as the black boxes with red inside at the top. Then the Net Pension Liability is just red with no box.

These two red parts of each county's Balance Sheet are their Total Unfunded Pension Debt. Mendocino County's total unfunded pension debt is 91% of its Assets - 1/3 larger than the #2 county San Joaquin. And it's twice as large as the average of these 17 counties.

The "pink" areas are all other debt. The sum of total unfunded pension debt and all other debt are greater than reported total assets for Mendocino, Sacramento, and Contra Costa. As already said - that makes them "balance sheet insolvent". And Mendocino is the most insolvent of these 17 counties.

Despite the hits from the prior year adjustments 14 counties had Positive Net Worth - the green part) - although LA (the biggest population county in the US) barely squeaked by.

And - again - look at Tulare!!! For every $100 of assets they have, they only owe $19. Compare that with Mendocino's owing $122 for every $100 of assets!



I'll update this as the remaining 4 California counties with their own County Pension Funds release their new audits. Check back.


NOTE ONE: Of the 4 counties with County Pension Funds that haven't yet released their 2015 audits only Merced County may have been damaged as much as Mendocino - but I think that's not likely. When these 4 finally release their audits I'll publish a report on all 21 counties.

NOTE TWO: The Governmental Accounting Standards Board (GASB) sets the basic financial reporting rules for all state and local governments. (GASB doesn't make the rules for the federal government.) All state and local governments must comply with their "Statement 68" (GASB 68) in their annual audits for last year. GASB 68 lays out major new rules for reporting the finances of government pensions. The previous deeply flawed rules allowed governments to "bury" the amount of unfunded pension debt deep in the footnotes attached to their annual audited statements.

All California counties have fiscal (financial) years that end on June 30. GASB 68 must be implemented in their June 30, 2015 audited statements now being released.

NOTE THREE: This analysis is only about what these counties reported in their Governmental Activities - the core functions of county governments.

State and Local governments divide their finances into three categories in what's called their "Government-Wide" financial statements. First is "Governmental Activities" - the "normal" functions of governments - police (sheriffs in counties), roads, bridges, public health services, public assistance, etc. These activities are primarily supported by taxes. All California counties report the finances of their Governmental Activities.

The other two categories are "Business-Type Activities" and "Discrete Component Units". Business Activities such as water and sewer systems are primarily supported by user fees. Many of these services can be provided by private utilities. Discrete Component Units legally are not part of the County and are not tightly integrated in the County's organization. However, governments have significant financial obligations for these Discrete Component Units. First Five - services for children in the first 5 years of life - is an example of what many counties report as a Discrete Component Unit.

Mendocino County reports only Governmental Activities; it does not report either Business-Type Activities or Discrete Component Units. The other 16 counties report Business-Type Activities and/or Discrete Component Units.

NOTE FOUR: GASB 68 requires local and state governments to make a "prior-year adjustment" to their Net Assets (Net Worth) as reported in their 2014 Balance Sheets ("Statement of Net Position" in government reporting) to show what they would have been if GASB 68 had been in effect. Therefore these adjustments show the damage that's been done solely by unfunded pensions without diluting those numbers by everything that happened in 2015.

In effect these adjustments show what the beginning Balance Sheet would have looked like had GASB68 been in effect over the past decades. However GASB68 allows a break-in period in which some of the rules are relaxed in the early years of applying the new rules. Data may not be available to accurately apply the new rules to previous years or the cost of developing the data would be excessive. Some of the provisions of GASB68 will require a decade to be fully implemented - but the main financial changes are reflected in these initial audited statements.

These are the adjustments made by these counties to their June 30, 2014 Net Position (Net Worth) as decribed in their June 30, 2015 audited financial statements - in $Millions. (This data hasn't yet been reviewed by anyone else. I really tried to get the data right - but there could be some errors. If you reside in one of these counties I'd VERY MUCH appreciate you checking your county's data - thanks.)

The terms used in the adjustments are (partially) explained below the table.

  Reported Beg. Net Position (6/14)   Write Off Net Pension Asset Add Net Pension Liability Deferred Pension Inflows/ Outflows Total GASB 68 Net Asset Adjustment % Write Down of Net Assets re GASB 68   Net Assets After GASB68 Adjustment
Alameda 1,935 (1,088) 91 (998) (52%) 938
Contra Costa 750 (308) (821) 67 (1,062) (142%) (312)
Kern 1,779 (120) (1,395) (1,514) (85%) 265
Los Angeles 9,317 (8,920) 1,085 (7,835) (84%) 1,482
Mendocino 80 (31) (105) (136) (170%) (56)
Orange 4,325 (1) (3,687) (3,688) (85%) 637
Sacramento 1,467 (966) (1,186) 172 (1,979) (135%) (512)
S. Bernardino 3,045 (652) (1,474) (117) (2,243) (74%) 801
S. Diego 4,341 (2,239) (2,239) (52%) 2,102
S. Joaquin 1,002 (905) (905) (90%) 98
S. Luis Obispo 1,481 (134) (351) 15 (471) (32%) 1,010
S. Mateo 1,624 (50) (624) 122 (552) (34%) 1,072
S. Barbara 820 (600) (600) (73%) 220
Sonoma 1,400 (447) (197) 52 (592) (42%) 808
Stanislaus 689 (276) (276) (40%) 412
Tulare 1,799 (194) (194) (11%) 1,605
Ventura 1,708 (859) 146 (713) (42%) 995
  34,618 (1,958) (24,560) 1,671 (24,847) (72%) 9,771

All these counties' Prior Year Adjustments reduced the value of their Net Assets. The other "side" of the adjustments explains why they had to do that.

Some aspects of these prior year adjustments are very complex; I'm not delving into them here. Suffice it to say that almost all state and local governments will show a "Net Pension Liability" which is their individual share of the unfunded pensions in their Pension Funds. A few - probably a very small portion of governments - will report "Net Pension Assets" if their Pension Funds have more than they are supposed to have today to be considered "fully funded".

Those that reported Net Pension Assets related to the sale of Pension Obligation Bonds will write them off because they never had any real value.

Some will elect to calculate and report "Deferred Inflows & Outflows of Pension Resources". This is the most complex calculation that's involved in these prior year adjustments - but as I say I won't dig into them here. All governments must report these "Deferred" accounts in the future - but it's optional during this transition year.

These deferred items don't have a significant impact on most of these prior year adjustments - except there are a small number of counties for which they were significant.

NOTE FIVE: Financial analysts distinguish between two types of "insolvency". "Balance Sheet Insolvency" is when an entity owes more debt than the value of its assets. This is the meaning I use here. "Cash Flow Insolvency" is when it is not able to make all payments when they are due. Cash Flow Insolvency is usually much more serious. The first often - but not always - leads to the second.

Technically "Insolvency" and "Bankruptcy" are not equivalent although they are often interchangeable in "ordinary" discussion. "Bankruptcy" in my view is a legal term - although it's defined largely in financial terms. To me "Bankrupt" applies only to local governments, individuals, for-profit and non-profit corporations that have entered the federal bankruptcy process in the federal bankruptcy courts.

Historically "Cash Flow Insolvency" has been a necessary condition for a federal bankruptcy judge to allow a local government to enter the bankruptcy process. (There are other requirements as well.) However - recent decisions in federal bankruptcy courts have begun to suggest that "Service Insolvency" may be deemed a sufficient "Insolvency" for local governments to "enter" bankruptcy. "Service Insolvency" means that a local government is financially unable to provide a sufficient level of service that is its justification to be a local government. This is an evolving area of federal bankruptcy court interpretation.

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