To Home Page
This is the ...

Mendocino County's Debt Section
Choices -


Description

Compared to Other Counties

Basics

Pension Debt

Retiree Healthcare Debt

"Excess Earnings"

Other Debt

Budget Crisis Next 2 Years

Impact of Debt

What Went Wrong

What To Do

spacer

The Basics
The Most Important Causes of
Mendocino County's Debt

Last update - 6/14/2010.

When most people realize how much debt trouble our County is in and that most of the debt is unfunded retiree benefits, their first instinct is to change policy or procedure regarding the funding of retiree benefits. "Convert to an IRA-type system. Raise taxes. Cut benefits and expenses."e

Of course numerous policies, proceedures and systems must be changed. And issues such as what retiree benefits are, the level of County revenue and spending, and many more must be debated.

But there are several substantial problems with focusing on specific "solutions" too soon.

The first big problem of jumping to specific solutions is -

Before you can solve a problem you need to admit you have one. And then you need to know what it is.

All County and Retirement officials know there's a problem, but most point the fingers away from themselves - it's the stock market, the economy, the state - it's "someone else's fault". Of course these are big problems - but as a practical matter they are pretty much out of our control.

When figuring out the most important things to do to solve a huge problem, you have to identify what can solve the problem that you can do - that is under your control.

After years of analyzing Mendocino County's debt we've concluded there are two huge causes of our debt that are within our control to change:

  • County and Retirement offiials failed in their core financial duties.
  • The people did not hold County officials accountable.

Core Financial Duties of County Officials

There are four fundamental financial duties of County officials:

  • Tell us the important financial truths.
  • Manage our money competently and transparently.
  • Protect and build our County's financial strength.
  • Don't put unfair burdens on our kids.

Most County and Retirement officials have spectacularly failed in these duties for at least 15 years.

The second

Changes in retiree benefits, actuarial policies, financial reporting - while important to consider - are not the core problem.

YourPublicMoney.Com takes no position on what Mendocino County's retirement expenses should be. We absolutely believe:

  • The County should report the true retirement expense cost and debt for each year, and not defer reporting the expense to future years.
  • The County should properly finance those benefits each year, and don't force future generations to pay our expenses.

County officials spectacularly failed to do so.

This is a brief introduction to these issues.

Mendocino County's Retirement Benefits

The County has provided two retirement benefits for decades- pensions and healthcare. The pension benefit is a "Defined or Guaranteed Benefit". If a County employee works long enough they get a pension for the rest of their lives. The amount is determined by a formula that considers years of service, average ending pay level, service-related disabilities, cost of living increases, etc. (See Pension Debt for more information.)

The County's retiree healthcare benefit changed significantly in 2009 and 2010. In September 1998 the County Supervisors established a policy that only employees hired before that date were eligible for this benefit. Several hundred retirees received this benefit and several hundred more would have been elegible when they retire. The source of funding has been so called "Pension Fund Excess Earnings". This is a hugely flawed financial concept and is related to some of the most questionable actions by the County and Retirement Board. (See Retiree Healthcare Debtfor more information.)

This is Important   The Most Important Concept to Understand   This is Important
Einstein - the Most Important Concept to Understand

This quote from the Government Accounting Standards Board (GASB - pronounced "Gaz-bee") is its most basic principle regarding defined retirement benefits. Make sure you understand this - it's the key to understanding the bulk of Mendocino County's debt.

Here's the County's deal with employees - "If you work for us this year, we'll give you one year's credit towards your eventual retirement benefits". But the County never reported the true cost of that promise while employees were earning those benefits. And it didn't report the astonishing debt it built up until forced to by new accounting requirements.

This previously undisclosed debt is hitting the County like a ton of bricks today.

How It's Supposed to Work

An "Actuary" figures out how much the County and its employees should pay into the retirement fund each year. The goal is to have enough money when they retire to pay all their retirement benefits for the rest of their lives.

The County should only need to pay each year's contribution into the Retirement Fund. Then the Retirement Fund should properly invest those contributions to earn its target investment profits. That's all the money the Retirement Fund should ever need.

The County should never have to pay more. If the Retirement Fund develops a "deficit" - called an "Unfunded Obligation" - something's wrong.

The Core Reason Most of the County's Debt was Created

Prop 13 in 1978 limited the amount and rate of increase of property taxes. Most taxpayers stopped paying attention to County finances because they no longer feared significant tax increases. The demand for services, however, increased.

Since Prop 13 the role of public employee unions greatly increased. This is simply a statement of fact. Over the past twenty years or so the County’s employee unions bargained with County officials who didn’t have enough money to make everyone happy.

The way local government accounting worked when Prop 13 was passed was that the cost of retiree benefits was not considered an expense until they were paid. And, local governments weren't required to report their retirement benefit debt.

The result was predictable.

Wimpy - I Will Gladly Pay You Tuesday for a Hamburger Today

Remember Wimpy's Offer?

It was easy for County Officials to make promises about retirement benefits to employees they didn’t have to fulfill. It was easy for Union Officials to get praise from their members by saying “See, we brought home the bacon,” when most of the bacon wouldn't have to show up for decades. Their agreements were words on a piece of paper; they weren’t dollars. It would be someone elses problem decades later when the bills come due.

Unfortunately for Mendocino County - and for its citizens - the bills are coming due. In spades!






In its most simple terms, the County (and its Retirement Association):

  • Didn't report at least $250 million worth of promises made in the past to employees about retirement benefits. They still haven't reported those expenses, but they have finally been forced to disclose the debt.
  • Earned about a $125 million less than its target investment returns over the past 12 years.
  • Diverted about $35 million out of the underfunded Pension Fund to pay Retiree Healthcare which increased Unfunded Pension Obligations dollar for dollar. A number of actions in this regard were almost certainly in violation of provisions of California law.

Now let's look a little deeper at the County's Pension Debt.

 Valid XHTML 1.0! Home  Mendo Debt  GASB 68 & Moody's  Data, Video, Etc.  About Us & Website  Newsletter  Archives  Contact Us

© 2008 - 2014 YourPublicMoney.Com
PO Box 301, Redwood Valley, CA 95470
Click to Send Email