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June 2012 Edition

The Case for Statewide Reform of County Pension Funds

The Time to Act is NOW!

II. Why Local Reform Isn’t Enough - Statewide Reform is Necessary

I now see that comprehensive pension reform in counties isn't possible without significant change at the state level. A few reasons ...

State Law: Not all California counties participate in CalPERS - 20 counties including Mendocino have independent Pension Funds organized under the state's "County Employee Retirement Law" - ("CERL" or "1937 Act"). (Many Charter Cities have independent Systems organized under other laws.)

CERL is a terrible law . It's incredibly convoluted and hard to understand. It's notorious for allowing some of the most egregious spiking practices in California. It allows the unbelievably politically fraudulent use of so called "Pension Fund Excess Earnings" to pay other benefits even when Pension Funds are badly underfunded.

CERL must be radically re-written or else the ability to reform local County Pension Funds is severely restricted.

State and Federal Oversight: County Retirement Boards operate like independent fiefdoms with no effective State or Federal oversight. Below is one example of how badly state officials duck their responsibilties.

 

Opponents will spend millions to defeat real reform. Small local reform organizations can't hope to compete - resources must be consolidated to have a chance.

State and Bankruptcy Courts: Many claim the California Constitution and State Court decisions protect employees from reduction in pension benefits not just for past but also for future service. Numerous legal experts contest this view. But these assertions must be challenged in state or federal court - that won't be cheap!

From the New York Times - "Vallejo, Calif. planned to cut its workers’ and retirees’ pensions (in bankruptcy court), but it changed course when California’s giant state pension system (CalPERS) threatened a costly and debilitating court battle."

Vallejo City Councilwoman Stephanie Gomes (Vallejo City Councilwoman Stephanie Gomes said "The 1,000-pound gorilla in the room when making our decisions was always CalPERS — they had a lot more time and money to fight us in court."

The Unions: Public employee unions have demonstrated their willingness and capacity to spend millions of dollars to prevent significant pension reform at every stage - in the election of local officials, fighting proposed reforms, and lawsuits challenging reforms if adopted.

State Controllers Office Refuses
to Correct Blatant Mis-statements

On 3/18/09 I met with two County Supervisors and the current and former Retirement Administrator to discuss various differences of data and analysis. One of my issues was that several of the Retirement Association's financial statements were absurd on their face - they reported utterly impossibilities. For example the 1998 statements:

Investment Returns for Retireement (Pension) Fund and Healthcare Fund in $Millions
MCERA - 1998
Health Pension
Beginning Net Assets $1.8 $132.0
Investment Profit $6.7 $6.2
Return on Beginning Assets 375.5% 4.7%

According to MCERA's audited financial statement, the Healthcare Fund started 1998 with $1.8 million of Assets and made a Net Investment Return of $6.7 million. The Pension Fund started with $132.0 million and its Net Return was $6.2 million? Healthcare got a return of 375% based on Beginning Assets and Pension got 4.6%? And - they invest the money together?

These numbers are absurd on their face.

In the meeting former Retirement Administrator and County Treasurer Tim Knudsen said "I never understood why the accountant did it that way".

A couple of weeks later I wrote a report about the meeting that appeared in the local paper (click to see text - look at the part highlighted in yellow).

The Retirement Board and Board of Supervisors then had a joint meeting on 4/28/09. During the meeting the issue of these unbelievable investment returns came up. Mr. Knudsen suddenly had a very different explanation from the one he gave in our smaller meeting a month before.

 

Mr Knudsen told the County Board of Supervisors that the reason the Retirement Association's financial statements were so screwed up is that the State Controller's Office's (SCO) rules about how retirement association financial reports must be produced force the Retirement Association to produce completely inaccurate statements.

Mr Knudsen didn't know I had been working on a project that put me in fairly frequent contact with the Local Government Reporting Section of the State Controller's Office. I had met with the Manager and the people who produce the annual SCO report on Public Retirement SYstems several times.

I sent a video of excerpts from the MCERA-BOS meeting to the Manager of the Local Government Reporting Section in the SCO asking for her thoughts (click to see video).

On the phone she confirmed that what the Mendocino officials said was pure "hooeey". The State Controller doesn't establish the basic rules MCERA must use in producing financial reports - the Governmental Accounting Standards Board does.

But when I asked her to contact County officials and tell them what she had just told me she said their office wouldn't get involved in a "internal political fight" in the County.

Officials from our State Controller's Office chose to stand by and say nothing when Retirement officials made absolutely false statements blaming the State Controller for hugely flawed financial statements released to the public. How can that not be a blatant failure of duty by SCO officials?

State agencies that are supposed to make sure local governments manage finances and produce financial reports according to strict standards have deeply failed their duty. Their failure is a major reason local government debt has grown to such dangerous levels. Significant reform at this level is absolutely needed.

 
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