The Essential "Fraud" of Excess Earnings

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 14 year return through 2010 was 5.2% compared to 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 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. The fact that the Pension Fund had big deficits and this diversion simply increased the County's debt didn't matter.

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 today has the deepest pension deficit ever based on a "'real" cash basis.

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.

A Little Problem With the Law

On September 22, 2009 I attended a meeting of our County Board of Supervisors. I laid out my case for why the County's policy of using Pension Fund Excess Earnings to pay Retiree Healthcare was absurd. But I went on to say ...

Even if this policy technically conforms 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.

Think about that.

The Retirement Association needs to show how its payments of Retiree Healthcare from Excess Earnings conformed to the law. At this point, I don’t think it did.

As has almost always been the case when confronted with views and assertions like this - the Board of Supervisors did nothing.

Then, in Spring 2010 some members of the Retirement Board began to make some waves. They demanded that former Retirement Administrator and County Treasurer Tim Knudsen provide such an accounting to the Retirement Board.

Knudsen presented his report on March 17, 2010 to the Retirement Board. He admitted he diverted over $6 million directly out of County yearly contributions to the Pension Fund to pay retiree healthcare because "there weren't any excess earnings but we had (retiree) health insurance to pay".

The Retirement Association is organized under the "1937 County Employee's Retirement Act". Here's what that law says the Retirement Board MUST do with the money it gets from the County:

The (retirement) board shall apply the contributions of the county or district to its obligations under the system in the order and amounts as follows:

First, in an amount equal during each fiscal year to the (pension) liability accruing to the county or district because of service rendered during such year and on account of service and disability pensions, in an amount determined by the actuarial valuation as interpreted by the actuary. ...

I think that's pretty clear. Every dime the Retirement Association receives from the County in a year MUST be put into the Pension fund UNTIL the full amount the County is supposed to pay that year to the Fund is in the Fund. I don't see how these diversion of County contributions to the Pension Fund in 2004 through 2006 met the requirements of that law.