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Helping Citizens Understand Mendocino County's Debt and Finances

Radical Reform
Pension Financial Reporting

The Governmental Accounting Standards Board (GASB) intends to impose huge reforms on how governments report their pension finances next summer. It's going to hit thousands of governments - including Mendoicino County - like a ton of bricks.

You can get a "Plain Language" explanation from GASB by clicking here. I produced a report on how Mendocino County will be affected (click for Mendo report) and a larger more technical paper (click here).

I submitted a "Comment Letter" to GASB about the proposed standards. Almost all other commentators are government financial professionals of various types. Mine was very different - I put my comments in the context of what happened in Mendocino County.

I'll give testimony in a GASB public hearing in San Francisco Thursday 10/13.

You can get a copy of my "Comment Letter" that has a lot to say about Mendocino by clicking here.

I produced this video explaining why GASB's reforms are so important in "non-technical" lingo - for Concerned Citizens.

Mendocino County's Debt

Last month was the fourth in a series of five planned articles laying out my "big picture" understanding of our County's debt The news today displaced the next article - coming soon. (click to view previous topics):

	Date	Topic
	January	The Debt: Past & Present
	March	Major Actuarial Error
	April	The Path to Insolvency
	May	Core Financial Problems
	Next	What Needs to be Done

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Reports, Videos, Data

We've produced a number of videos showing different aspects of Mendocino County's debt. Plus a dozen or so reports. We list our data sources.

How Pension Funds Work

If you understand How Pension Funds Work you can see how our County got into such deep debt, and engage effectively in the debates about what to do now.

I take no position on what retiree benefits should be. I absolutely say that whatever they are their true expenses and debt must be reported to the people and they must be funded properly.

That hasn't happened - and the massive public debt created by unfunded pensions - and the destruction of County jobs and services - is the result.

County Official Financial Duties

• Tell us the Truth!
• Competence and Transparency
• Protect/Build Financial Strength
• Don't Burden the Kids

October 2011 Edition

Will We Finally Hear the Truth?
Retirement Association and the IRS

Bad News Memo

Retirement Administrator Jim Andersen gave the County a “bad news” Memo (click to read) on 9/22/11. The County won’t get $650,000 of “Pension Fund Excess Earnings” to help pay for retiree health insurance. Retirees in January will pay nearly $1000 a month per person insured.

This shocked County officials. But the memo was full of hints of much worse news they didn’t “get”.

(Click to see what I feel about retirees and their healthcare benefit.)

Wait a Minute ...

Many people think County Supervisors voted to stop using "Excess Earnings" for retiree healthcare more than a year ago. They didn't. They voted to not pay retiree healthcare from the County's General Fund if there weren't "Excess Earnings". They did NOT stop using "Excess Earnings".

The Retirement Association tucked away about $5 million of so-called "Excess Earnings" before that vote. County officials knew it was there but didn't talk about it. Now it's down to $650K - the rest went to pay for healthcare over the past 2 years. The County was going to get that money - but now it isn't. Why?

Pension Fund "Excess Earnings" is a political fraud. Click to see this 2 ½ minute video of me explaining it to County Supervisors two years ago.

At the end of that video I say what's most important to today's story. (Click to see the last 30 seconds).

The Really Bad News Supervisors Didn't Talk About - the IRS

This is the story behind Andersen's Memo - what is boiling just below the surface and could erupt within a year.

In his memo Andersen wrote:

(The) Retirement Association submitted an application for a determination letter and a related voluntary correction program (VCP) filing to the IRS. … there is arguably no more critical responsibility than ensuring the tax qualified status of the plan thereby ensuring all contributions to the plan and earnings on the assets will remain tax deferred.

The IRS issues "Determination Letters" stating if a Pension Fund has "tax deferred" status or not. A Pension Fund can initiate a VCP in which it will identify instances when it didn't conform to IRS and other legal requirements, and work out a plan with the IRS to correct violations and prevent them in the future.

The IRS is "easier to deal with" if a Pension Fund "volunteers" to do this as opposed to the IRS having to initiate an investigation.

Andersen states that MCERA recently discovered three significant issues not identified in its original IRS filing in January 2011.

The first issue is significant - but not explosive. The second two are volcanoes that could blow sky high.

• MCERA claims it has satisfied IRS requirements to maintain its tax-deferred status.
• A $9.6 million diversion of County contributions and Pension Funds in 2004-06 to pay retiree healthcare may have violated the State's 1937 County Employees Retirement Act.

This last item is what I warned the Board of Supervisors about 2 years ago. As usual, they did nothing.

City of San Diego

A pension debt scandal blew up in the City of San Diego in 2003. A whistleblower on that City's Retirement Board - Diann Shipione (a real hero - click to read) - exposed serious wrongdoings. Many officials lost their jobs - some were prosecuted - the City was hit with numerous penalties and judgments.

Voters radically restructured the Retirement Board and kicked all the incumbents out. The new Board did what MCERA is doing - initiated a VCP with the IRS.

It was a two and a half year process. The Board's initial filing disclosed one instance of wrong doing. By the end there were 14.

I believe MCERA's process would dig up a similarly expanded list of transgressions - except for one thing.

San Diego's process occurred in full view of the public. MCERA's remains behind closed doors.

"Surplus (Excess) Earnings" Violated Law

The City’s final “Voluntary Correction Program Compliance Statement” (click to see) was accepted by the IRS in January 2008.

Failure #7 was the admission that payments of retiree healthcare didn’t comply with IRS requirements because the source of the payments was Pension Fund “Surplus (Excess) Earnings” that resulted in underfunding of the Pension Fund.

The City and Retirement Board agreed that retiree health benefits must be paid by the City and can’t be funded in any way from pension assets including investment earnings.

Further, the City passed ordinances that permanently prohibited the Retirement System from paying retiree healthcare.

The conclusion seems obvious. Our County's Retirement Association did exactly the same thing - used "Excess Earnings" to fund retiree healthcare that resulted in underfunding the Pension Fund.

The IRS declared what the San Diego Pension Fund did was a violation of its rules and could have caused them to lose their tax-deferred advantages.

What Are They Afraid Of?

Why isn't MCERA conducting their Voluntary Corrections Program with the IRS in full public view?

The San Diego Retirement System wound up admitting to an impressive list of transgressions and worked out how to correct the damage and prevent them in the future. It was done very publicly. And at the end of it all the IRS didn't revoke the City Pension Fund's tax-deferred status or hit them with a heavy penalty.

Why is MCERA conducting this process behind closed doors? Based on San Diego's experience it doesn't appear the IRS would take away MCERA's tax status or penalize them.

Is there something they don't want the people of Mendocino County to know?

It's time for the Retirement Board to stand up and tell the people the truth. That organization put our County so deep in debt it's going to take over a half billion dollars and 30 years to get out of debt. They owe the people of this County the truth.

If they don't – perhaps it will be time for the voters to do what was done in San Diego.

Incidentally - why isn't the County paying anything out of its General Fund to help the 100 or so desperate retirees who can't get affordable insurance because of existing conditions? I know as well as anyone how bad off the County's budget is. But the County told these people in 1998 that if there were no Excess Earnings the County would pay half the cost. I think the County shouldn't have made that promise - but it did.

What do you think? Should people expect our County to keep its word?

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Radical Reform Pension Financial Reporting