Retiree Healthcare Debt

Last Update: 7/20/10

Benefits and Organization

Before 1998 all County employees had access to retiree healthcare benefits. In September of that year the County Board of Supervisors changed the benefit. Only those hired before September 1998 were eligible.

Up until a couple of years ago eligible retirees received their own healthcare benefits without payment of a premium, but paid a fee for dependents (spouses and children).

There is great dispute about whether or not retirees have a legal right to receive this benefit as they do pensions. It appears to us that the County has the legal authority to unilaterally change the terms of this benefit including termination of the benefit. Employees and retirees dispute this. A legal analysis has not been performed for this report.

Changes in Reporting Requirements

New government accounting rules were issued in 2004 requiring the County to begin reporting the financial condition of its retiree healthcare benefits in its audited financial statements for June 30, 2008 in the same way as it does for pension obligations.

County officials knew at least since 2004 they were going to have to report the financial condition of this benefit in 2008. Numerous national reports predicted unfunded retiree healthcare of governments was many billions of dollars.

Members of the public (including me) repeatedly suggested the County find out how bad the County's unfunded retiree healthcare was while they had a few years to come up with a plan.

Instead they waited until the very last minute to find out.

The County hired an Actuary - Aon Consulting - to determine its financial situation. The Actuary released a report on August 21, 2008 - two months after the new rules took effect. Aon reported an Unfunded Retiree Healthcare Liability of about $136.3 million.

Projected Payments

This shows actual payments for retiree healthcare as reported in audited financial statements (fiscal years 1993 through 2007) and projected by Aon for 2008 through 2037. The projections were based on the benefit as stated when Aon produced their report.

Only retirees who were hired by the County before September 1998 were eligible for this benefit. There were no younger people coming into this group.

Most health care costs we incur in our lifetime, on average, occurs during the last year of life. Retirees who received this benefit were steadily moving into that stage during which their healthcare costs as a group would significantly increase. That's why Aon predicted such a large increase.

In fact payments for this benefit were rapidly increasing at the time Aon's report was released.

The County's Financial Management of this Benefit

Retirees were eligible to receive this benefit because of their work in the past. The County never calculated or reported the accumulating debt, and therefore didn't report the corresponding true economic expenses each year.

If the County had ever been serious about providing this benefit it would have built up a Retiree Healthcare Fund while the retirees were still working. And they would have reported the expenses and debt to the people - and to their employees.

But the County never set aside one dime. In fact, the County itself didn't pay for this benefit - on a year to year basis.

Simply put - the County never did what it needed to do to secure this benefit for its retirees.

County Says "Retiree Healthcare Paid From Pension Fund Excess Earnings"

As stated on the previous page, Mendocino County and MCERA officials maintained for years that MCERA paid the County's retiree healthcare benefits out of "Excess Earnings" in the Pension Fund. The 1937 County Employees Retirement Act basically defines Excess Earnings as earnings in any year bove the Pension Fund's target rate of return. This absurd definition is one of many examples of how how badly the California Legislature structured County Retirement Systems.

What Excess Earnings?

MCERA paid about $30 million for Retiree Healthcare from 1998 through 2010. How can there have been Excess Earnings when -

• The Pension Fund’s own Actuary says its 13 year return through 2009 was 4.4% - nearly half its target of 8%.
• If there were Excess Earnings, why was the County forced to borrow $110 million by selling Pension Obligation Bonds in ‘96 and ’02?
• Unfunded Obligations increased in 14 of the last 16 years.
• The Pension Fund has always been under-funded.

The truth is the County and MCERA didn't care how deep the Pension Deficit was. The policy was that if the Pension Fund earned more than 8% in any year those "Excess Earnings" would be swept out of the Pension Fund and into the Healthcare Fund.

MCERA paid about $4 million of Retiree Health costs in 2010 out of Pension Fund "Excess Earnings" even though the Fund was $130 million short of its target over the previous two years.

This County and Retirement Association policy doomed the Pension Fund to be under-funded. The 8% target was not a target, it was a "ceiling". Any amounts above that were diverted to pay retiree healthcare. The Pension Fund had to absorb its shortfalls, but couldn’t keep its surplus.

The truth is that the County’s Retiree Healthcare was funded by increasing Unfunded Pensions. The County twice had to borrow money to eliminate those pension deficits and as of June 2009 had the deepest pension deficit ever based on a "'real" cash basis.

The truth is that the ultimate source of the funds that paid retiree healthcare over the past two decades will be cuts in staff and public services over the next 30 years so the debt those payments created can be paid.

Supplemental Information: Click to read about how the Pension Fund's Financial Position is Determined - Lies, DAMN LIES, and Actuarial Statistics (pdf file - 371KB).

A Little Problem With the Law

Even if this policy technically conformed to the law, the Retirement Association’s financial statements show there weren’t enough Excess Earnings as defined in the law to pay the County’s share of Retiree Health over the past 11 years.

YourPublicMoney.Com asked the Retirement Association in November 2009 to show how its payments of Retiree Healthcare from Excess Earnings conformed to the law. The numbers simply didn't add up. The Association never provided such an accounting.

Then, in Spring 2010 former Retirement Administrator and County Treasurer Tim Knudsen provided such an accounting to the Retirement Board. Some members of that Board had finally gotten worried enough to demand such an accounting.

Knudsen admitted he diverted over $6 million directly out of County yearly contributions to the Pension Fund to pay retiree healthcare. This appears to have been a direct violation of the law.

We are preparing a complete explanation of why it appears laws were broken. It will be posted on this website in the near future.