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Helping Citizens Understand California County Pension Debt and Finances

John G Dickerson




 
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Understand Unfunded Pension Debt. Hold Officials Accountable. Redirect Local Government Finances.

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Retirement Board Refuses to Answer

On 4/22/14 a letter signed by 300 Mendocino County residents was delivered to County and Retirement officials. It asked them a series of questions about our County's unfunded pension debt.

Click here to see the letter, the Retirement Board's response - and how County and Retirement officials once again refuse to tell the People the truth about how and why this debt was created.

First California County Pension Reform Conference May 10, 2014

The first California County Pension Reform Conference was held Saturday, May 10, 2014 in San Rafael focusing on the SF Bay - North Coast Region.

Growth of County pension-related payments 20 years change

Mendocino County Payments
to Pension Fund and
Pension Obligation Bonds

Mendocino County Payments to Pension Fund To Increase 25% - Up $4 Million Next Year

Pension Fund Investment Earnings Assumption Cut to 7.25%

County Supervisors "Bite the Bullet"

Mendocino County’s independent Pension Fund lowered their assumed rate of investment profits from 7.75% to 7.25% in October. As a result County payments to the Pension Fund will increase from about $14 million to $18 million next year.

The Pension Fund was probably willing to spread the increase over a two to three year “phase in” period. But the County Board of Supervisors decided to immediately make the full increased payments.

The graph above shows the growth in County pension-related payments over the last 2 decades including the next fiscal year. The fiscal year is July through June. The payments are to both the Pension Fund and to retire Pension Obligation Bonds (a few paragraphs below).

Before I lay out what I see as the “big picture” about all this - here’s some of the immediate “good news” and “bad news”.

The Best Good News About the County

… is the difference between today’s County Board of Supervisors and those in the past.

Previous Boards and the Pension Fund repeatedly made decisions that created more and more debt – including finding ways for the County and its employees to pay significantly less into the Pension Fund than was needed . They would have chosen to spread the increased payments over two or three years so they’d have around $3 million more to spend on programs and current staff salaries and benefits next year.

In stark contrast today’s Supervisors realize that would force the County to pay much more in the long run. Not only would it have to pay the deferred amount anyway, it would incur interest expense on those deferred payments. This Board elected to “bite the bullet” to prevent much greater cuts in services and staff in the future.

But - the Bad News About the County

In 2010 the Pension Fund was supposed to have about $435 million but it was $135 million short. Only the County is obligated to eliminate that shortfall (see next story below) – and incurs interest expense at the Fund’s assumed rate of return. (Actually two other smaller local government entities participate in the Pension Fund – Superior Court employees and a small cemetery district. But the County accounts for more than 95% of the Fund’s finances. And these payments and interest expense assume all other Pension Fund assumptions come true.)

At that time County Supervisors decided to take the most years allowable to pay off this debt – 30 years. And the payment schedule they adopted is actually increasing the debt because they’re paying about $35 million less than the interest expense for the first decade.

The County’s plan is to pay a total of about $485 million from 2010 through 2040 to eliminate the Pension Fund’s deficit. But this doesn’t include the $210 million the County will have paid for the “Pension Obligation Bonds” they sold in 1996 and 2002 to eliminate earlier Pension Fund deficits in those years.

So - the County will pay a total of nearly $700 million to eliminate this debt that isn't supposed to exist - about $450 million will be interest expense.

Today's County Supervisors chose to pay more now to prevent $5 million more debt. And – that is a good commendable thing

But they’re still planning to impose another $300 million of interest expense on the County in the future. That is NOT good.

What About the Retirement Board?

Yes – the independent Retirement Board that controls the Pension Fund significantly lowered their assumed rate of investment profits from 7.75% to 7.25%.

But consider this quote from the minutes of their October meeting when the lowered the rate (notes at top of next column):

Mr. Stephens [1] urged the Board to consider a rate of 6.75% based on the Callan Associates study [2] which showed an expected rate of return for MCERA's allocation model [3] of 6.66% (before administration and investment expense) for the next 10 years and our actual historical rate of return for the last 17 years of 6.73% (before administration expense and the skimming of "excess earnings [4]"). Mr. Stephens further stated that he believed it would be reckless for the board to adopt a rate above the 6.75% level because [that] would shift all risk from the participants to the plan sponsor [5 - the County and its People].

(Continued in next column.)

 

[1] Ted Stephens is one of three members of the County’s 9 member Retirement Board who will not receive a County pension.

[2] Callan Associates are the Pension Fund’s professional investment advisors. They produced this study for the Retirement Board last year.

[3] MCERA is the “Mendocino County Employees Retirement Association” – the independent organization that controls the Pension Fund. The “allocation model” is the mix of investments in the Pension Fund (stocks, bonds, real estate, etc.).

[4] The Retirement Board – with the approval of the County Board of Supervisors – paid about $40 million of retiree health benefits from 1995 through 2011 from so-called “Pension Fund Excess Earnings” – meaning earnings above the target rate of return in any one year regardless of the financial position of the Fund. During that entire time the Fund was underfunded, earned significantly less than its target on average, and about $250 million of unfunded pension debt was created.

[5] Only the County must pay extra to eliminate unfunded pensions - Employees and retirees have no such obligation. (See next story below)

The Biggest Problem

County officials still haven't identified the fundamental causes of this debt and how to prevent them from creating more debt.

I don’t mean to diminish what the Board of Supervisors did by choosing to immediately pay the additional $4 million by not spreading the increase over a “phase-in” period. That was a tough decision to make – and they deserve praise for it.

I prefer to believe it shows County Supervisors are heading in the right direction.

The “Reform Our County Coalition” (Let’s “ROCC” Our County) gave my 4th report in the past 8 years to the Board of Supervisors last April laying out the data, analysis of that data, and conclusions based on that analysis about how the County's unfunded pension debt developed - and why. The ROCC cover letter was signed by 300 County residents asking County officials and and Retirement Board – to either prove the data, analysis and/or conclusions were wrong, or to admit after 8 years they can’t prove they’re wrong.

The Retirement Board provided a response but once again avoided directly answering the questions. The Board of Supervisors never responded.

Click here Questions County Officials Chose Not To Answer to see ROCC's letter, my report, and the Retirement Board's response.

If the Pension Fund had worked the way it was supposed to no significant unfunded pension debt would have been created. But now the County and its People have to pay nearly $700 million to eliminate this unnecessary and irresponsible debt.

County Supervisors don't "own" this County - the People do. They should tell the People the fundamental truths about how this debt was created and what they will do to prevent more debt.

But they aren't simply avoiding telling the fundamental truths about the weaknesses and failures in the County's financial management and accountability. The fact is - they don't know those fundamental truths because they've never made any real effort as a Board to find out what they are.

Today’s County Supervisors are way ahead of their predecessors in recognizing how severely unfunded pensions threaten our County’s ability to provide services to the People and good paying County jobs to the next generation. And they have shown they are willing to make tough decisions to confront these threats now to prevent worse situations in the future.

That's a very good thing.

But they are still far from where they need to be.

WHO FUNDS PENSIONS?

The County’s Pension Fund is controlled by an independent organization – the Mendocino County Employees Retirement Association (MendoCERA) governed by its Retirement Board. The County doesn’t pay pensions to retirees directly – MendoCERA pays the pensions.

Each year the Retirement Board adopts a “pension funding plan” called an “Actuarial Valuation” that lays out how it intends to get the money to pay pensions in the future. That plan defines two types of payments to the Pension Fund.

  Yearly Normal Contribution Unfunded Pensions
County $ $
Employees $ X
Retirees X X

Normal Contribution: This payment focuses on the current year only. The actuaries first estimate the part of future pensions that employees estimate how much needs to be paid into the Fund this year so that - if the Fund earns its target rate of return – the part of future pensions being earned that year can be paid. Both the County and employees pay a share of the Normal Contribution each year.

Unfunded Pension Amortization Payments: Next the actuaries calculate whether there’s enough money in the Fund to pay all the pensions earned in past years.

If there’s a big unfunded pension deficit the unavoidable conclusion is past pension funding plans failed. And no matter what caused the Pension Fund’s deficit it’s clear past Normal Contributions WERE TOO LOW. Given how things turned out, they should have been higher.

And here’s the kicker. Only the County pays extra to eliminate unfunded pensions. Employees and retirees have no such obligation.

WHO CONTROLS THE PENSION FUND?

Six of the 9 Retirement Directors Composition of Mendocino County's Retirement Board are either retirees who receive County pensions today or current employees who will receive them when they retire (shown in red). Two of those 6 are elected County officials.

The other 3 Directors are public members who don’t pay into the Fund and won’t receive pensions (green).

The evidence shows that numerous actions (or inactions) by the Retirement Board over the past 2 decades that created huge County debt resulted in a combination of:
Employees paid less to the Pension Fund than they should have.
Retirees got more from the Pension Fund than they paid their fair share for.
County officials had more money to spend on salaries and benefits and services next year.
• All paid for by more and more long-term interest-bearing debt imposed on the County and its People.

 

THIS PERVERSE INCENTIVE CREATED TODAY'S $220 MILLION DEBT

On June 30, 2013 Mendocino County’s Pension Fund should have had $510 million (rounded #’s) to be able to pay all pensions in the future that were earned in the past. It’s Assets (mostly investments) were worth $385 million. So the County owed the Fund $125 million unfunded pensions – 25% of what the Fund was supposed to have. )

But the County still owed $75 million borrowed a decade ago by selling Pension Obligation Bonds to eliminate unfunded pension debt owed to the Pension Fund back then. The Fund got the money – the County and the People kept the debt. Pension Bonds are part of the County’s unfunded pension debt.

The County also had paid $20 million of Unfunded Pension Amortization Payments in the past few years. If MendoCERA had achieved its funding requirements these payments wouldn’t have been necessary.

The fact is Mendocino County's Retirement Board achieved 55% of its funding requirements– the Retirement Board achieved only slightly more than half the funding requirements of their pension funding plans.

The rest is County debt that isn’t supposed to exist – wouldn’t exist if the Retirement Board had achieved its plans.

And as I said above unfunded pension debt is proof that past yearly Normal Contributions were way too low.

Since 1995 total Normal Contributions to the Pension Fund were about $200 million. The County’s share was $105 millionemployees’ share was $95 million.

But now we know the Normal Contributions should have been roughly twice as much. The County’s Normal Contribution should have been closer to $210 million, and the employees’ share should have been $190 million.

That means roughly $95 million of what employees should have paid as their agreed-upon fair share – but didn’t pay - was transferred to the County and its People as long-term interest bearing debt.

Here's the result. For every dollar paid by employees for their pensions how many does the county pay - 20 years change Two decades ago for every dollar contributed by employees for their future pensions the County put in $1.42.

Next year (fiscal year July 2015 - June 2016) County pension-related payments (payments to the Pension Fund and for Pension Bonds) will be about $4.50 for every dollar paid by employees.

The County's payments relative to what employees pay to the Pension Fund has tripled over 2 decades.

The spread will continue to grow.

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