WatchSonoma Watch

GUEST OPINION: Major changes coming concerning North Coast pensions


Next summer, new rules about how state and local governments must report the finances of their pension benefits are going to hit Sonoma and Mendocino counties (and thousands of other local governments) like a ton of bricks. Hundreds of millions in past pension expenses that have never been reported to the people are going to be flushed out of their hiding places onto county financial statements. The result is going to look like a bloodbath — which it is.

John Dickerson (Charlie Gesell / The Press Democrat, 2005)

The Governmental Accounting Standards Board intends to impose these reforms next summer. Sonoma County will probably have to immediately comply. Mendocino may elect to delay a year.

These new rules will increase Sonoma County’s reported yearly pension expenses from $60 million to roughly $200 million. Mendocino County’s will jump from $13 million to about $50 million. Unfunded pensions aren’t reported as liabilities on government financial statements today. But they will be. Sonoma County’s long-term debt will jump from the most recently reported $730 million to about $1.3 billion — nearly double. Mendocino County’s will go from $120 million to about $260 million.

The current rules have a fatal flaw. They allow governments to report the pension expenses that create unfunded pension debts as expenses up to 30 years in the future when the debt is paid. But they’re really expenses of the past when employees earned those pensions. Our counties’ failure to properly fund their promises created the debt. The new rules will force governments to report pension expenses when they occur, not decades in the future.

Pension funds are supposed to be fully funded over the long term. There shouldn’t be unfunded pension debts. The obligation to eliminate unfunded pensions falls entirely on our counties. Employees and retirees don’t pay a dime. County officials who mismanaged pension financing and built up this debt will receive pensions. The debt they created will be paid by the people.

Sonoma County citizens have $900 million of unfunded pension debt. Mendocino County’s is $250 million. It will take three decades to pay these debts — plus interest. Residents won’t get one minute of county services or one dime of public infrastructure for it.

County officials said in past decades they had balanced the budget. The new Governmental Accounting Standards Board rules will show us they didn’t. They were only able to make that claim by building up hundreds of millions of unfunded pension debt without reporting the pension expenses that caused it.

The standards board has no authority to change how and when pensions are funded. But they do define how governments must report their finances to the people. The political impact of the people learning county officials didn’t report hundreds of millions of true past pension expenses is likely to be profound. It remains to be seen what the impact will be on credit ratings, access to loans and credit, state requirements to operate with balanced budgets, etc.

Some say columns like this are attacks on public employees. Bull. Public employees took a job with the benefits that were offered. It wasn’t up to them to manage their financing correctly. Most of them didn’t realize what was happening. Some did, and their unions certainly should have. Shame on them. Unfunded pension debt is destroying county jobs and services today.

What do we expect from our elected officials? Tell us the financial truth, manage our money competently and transparently, protect and build our counties financial strength, and don’t put huge, unfair debt on our kids.
These duties have been spectacularly violated for decades. The new rules will prove it.

John G. Dickerson is a Mendocino County financial analyst who tracks local debt issues via his website, yourpublicmoney.com, where more information about the new accounting rules is available. He lives in Redwood Valley.

17 Responses to “GUEST OPINION: Major changes coming concerning North Coast pensions”

  1. John says:

    This in not an article. It is one persons interpretation. NOT NEWS!

    That is why is titled … “guest OPINION”

  2. To David Stubblebine

    The proposed new rules are complicated. It’s easy to misunderstand some aspects – I know because I did until an official at GASB corrected my mistake.

    Re your analogy of the 30 year $200K mortgage – I think there’re a few misinterpretations of the new rules.

    I started to explain my understanding of what the new rules will do related to your $200K mortgage analogy – but I abandoned the attempt after I got to a full page. (As I say – this stuff is complicated).

    Now – I’m assuming your analogy is referring to unfunded pension debt – not the “normal” yearly payment meant to fund the pensions that are being earned in any year.

    It’s important to realize that the new rules would completely sever the connection between reported pension expenses and payments made by governments to eliminate unfunded pensions. Those payments will be reflected as what they really are – ONLY the payments of debt.

    The monthly payments of $1103 will not be included in any way in calculating pension expenses. It’s cash flow and payment of debt (with interest) – it’s not expense.

    The amount reported as the government’s yearly pension expense will result from a much more detailed set of calculations than today. About 10 different factors will be analyzed each year – and the results of that analysis will be included in reported expenses in 3 sets of time frames.

    As I say – this is complicated – but the result is that pension expenses that cause unfunded pensions will be reported on average within around 4 years of so of when they really happen instead of being spread out over 30 years as is done today.

    Regarding reported liabilities – assuming the government has a history of paying the full amount the Actuary has told it to pay to the Pension Fund, the “Net Pension Liability” reported on its balance sheet would probably be the $200K or something very close to it – not the total of future payments.

    Now – IF the government has a history of not paying what the Actuary said it should pay – THEN the new rules contain a complicated calculated “trigger” that would result in using a lower discount rate than the projected rate of investment return for projected payments after some year in the future in which the “trigger was pulled”.

    This would result in a higher “Net Pension Liability” being reported.

    The total amount reported as debt would have nothing to do directly with projected payments to eliminate unfunded pensions EXCEPT for how they are used in calculating the “trigger” I mention above.

    Regarding your concern that the new rules would result in an inflated amount of debt being reported – remember that all these numbers are based on massively complex projections, estimates and assumptions made by Actuaries. The uncertainties about all these calculations are huge. This uncertainty and complexity makes all our debates about government pensions very “mushy” – there are very few “hard walls” to push against, it’s all made out of “jello”.

    There is – in my opinion – a very credible body of analysis by financial analysts and economists that holds that it is extremely deceptive to use a Pension Fund’s projected rate of investment profits as the discount rate for projected future pension payments to determine the Present Value of those future payments – which is assumed to be the Total Pension Liability. They assert it’s far more financially and economically accurate to use a lower “risk free” discount rate – which would produce much higher Pension Liability calculations.

    IF these lower rates were completely used to calculate the value of today’s Net Pension Liability, then I think you could assert the resulting reported debt would be “inflated” – although I think there are strong arguments against that assertion. However, these lower rates would only be used if the government has a history of not making its required payments to the Pension Fund – in which case you’d be on much shakier grounds because if they continue to do what they have done in fact the debt will increase.

    Incidentally – the new rules are ONLY about pensions – other retirement benefits such as healthcare are not involved. (New rules are being developed for those other benefits and can be expected to be imposed perhaps 4 to 5 years from now).

    John D

  3. Rick says:

    I know that public employee unions exist because they have the right to exist. I may not like what a group of people or a community organization does, but I would not suggest they don’t have a right to do it. Some would gripe that it may cost taxpayers money. So do auto worker unions, they may drive up the cost of a car, costing people, taxpayers, money. Tax money is spent to by gov’t vehicles, which are just vehicles, with union costs included. Where should anyone draw the line at telling any other group of people wether or not they have the right to get together for a common interest??

  4. GAJ says:

    Well said BigDog.

    I guess before Kennedy allowed Public Servants to Unionize they were slaves!

    What nonsense.

  5. BigDogatPlay says:

    There is a distinct difference between computing mortgage expense and computing pension expense. They are apples and oranges.

    A mortgage is generally a fixed cost, assuming a locked in rate for the term of the loan, and it can (usually) be paid off early to lower the final cost. Indeed the true cost of a mortgage is principal plus interest amortized over the life of the loan.

    A pension is an open ended expense. It’s cost is governed by:

    * Size of the benefit
    * Length of payout
    * Unknown future increases in payout which must be assumed but which amount cannot be truly known.
    * Cost of borrowing to cover unfunded liability down the road

    So the true cost becomes the liability per retiree, which will grow incrementally over time with COLA, plus the cost of money that has to be borrowed to cover the liability. The new rules put that future cost of borrowing onto the correct place on the balance sheet where they can be correctly understood.

    As to public employee unions…. having been a public employee myself, why are they needed, really? Civil Ssrvice rules and decades of case law provide all the job protection a public employee needs. Other than being able to flex political power to gain greater compensation and benefits, which seems to have worked out pretty well over time, what then becomes the real benefit of unionized public employees?

  6. Time to govern says:

    So, what would this mean for a city like Rohnert Park? I believe that promises made to employees are to be kept. What needs to be done to see that happen? Does anyone know? Perhaps the City of RP can put an simple, layman’s explanation on their website so we can see what the path to long term pension solvency looks like.

  7. David Stubblebine says:

    A few weeks ago I “tipped my hat” to Ken Kimari for listing the facts of his CalPERS pension. Today I have to tip my hat to John Dickinson for his largely accurate description of the new Governmental Accounting Standards Board (GASB) rules. I only wish to comment on two areas.

    First, Mr. Dickinson says the “the current rules have a fatal flaw.” Well, so do the new rules. The new rules require governments to report an inflated amount of debt, thus deepening the panic over it. Let me illustrate using a home mortgage as an example. A 30 year mortgage of $200,000 at 5.25% fixed requires a monthly payment of about $1,103. If the loan is paid off exactly on schedule, the borrower will have paid back a total of $397,131; almost twice the original $200,000. At the start of the mortgage, if this borrower had to prepare a financial statement based on today’s GASB rules, he would only have to declare the $1,103 monthly expense. This ignores the $200,000 debt and so it is a skewed picture; this is (I think) the flaw Mr. Dickinson referred to. However, if that borrower prepared a financial statement under the new GASB rules, he would still have to declare the $1,103 monthly payment and also the entire $397,131 liability; nowhere would he have to list the actual $200,000 of indebtedness. This corresponds to nothing in the real world of residential mortgages where all loan applications and financial statements would call for the borrower to report the $200,000 debt and not the $397,131 total liability. The “rub” in all this is that in the world of pension and health care liabilities, there is no quantity that corresponds to the $200,000 from this example. So, in an effort to “fix” the flaw of the current system, GASB has imposed an equally flawed “solution.”

    Mr. Dickinson included some numbers for the Sonoma County and Mendocino County pension debt and then he added “– plus interest.” This is incorrect. Actuarial reports that come up with the debt figures include interest in the calculations (sometimes with assumptions of rates so high as to make their bottom lines preposterous – these reports should be read with a certain amount of skepticism).

    Secondly, Mr. Dickinson charges that the unions may not have been on top of how the finances were being handled. In my own case, in Rohnert Park, we tried to be. When Labor accepted the first of three major concessions in retiree health care in 1993, all three major labor groups urged the City to begin setting aside funds to cover the future expenses and to maintain the City finances in a responsible, money-making manner. When the City’s CalPERS rate dipped to half the contracted rate, Labor urged the City to invest that money themselves so that when the rate went back up, it wouldn’t hurt as much. Labor went public with candidate endorsements to help shape a Council qualified to maintain the City’s fiscal health (not to pad our benefit packages, as is often reported by those who were not there). Instead, the money the City set aside starting in 1993 is now too small to help and is not set aside for retiree medical (it is in the General Fund reserve); the CalPERS savings were spent on capital improvements and then when the rate tripled as predicted, certain City Council members began blaming the unions for how much they had to pay; and the candidates we endorsed were defeated and those who won promptly brought us to the doorstep of financial ruin. Workers and unions understand full well that they are in it for the long haul while politicians see life in 4-year segments. We recognized when some of the bad decisions were being made and we spoke out. Our unions tried to protect the health of our careers, as well as the health of the City as a whole, but we were ignored.

    Finally, to the posters who advocate outlawing public unions: Be mindful what you are saying. To outlaw public unions would unfairly limit the rights of public workers as compared to private workers. One class of citizens with fewer rights than another class is exactly what America fought against in 1776 and in every war since – it is simply un-American. Public employees are employees, not slaves, and they should never be thought of as being “owned” by the public.

  8. Money Grubber says:

    I applaud the Press Democrat for joining with other media organizations to force, through legal action, a corrupt public pension system to open their books.

    Thank you, Press Democrat.

  9. David says:

    Wonder what the employees of this “rag”, I mean paper make year?

  10. Frank says:

    well said
    it’s time evrybody got some skin in this game

  11. Steve Humphrey says:

    Excellent article. And it’s high time taxpayers had a clear picture of where their money is spent.
    Regardless of where one may stand on this issue, it should be apparent to all sides that this is an unsustainable path. Having seen hundreds of loan applications from retired public pensioners, I can understand why they want to protect their income…but quite frankly I don’t know how they can defend it. When compared to those retirees from the private sector who saved for retirement through 401K plans or whatever, the public pensioners receive a truly unbalanced amount. They know it and now so will everyone else.
    To continue to allow public employees to unionize is only going to increase the pain of correcting this problem.
    Is it fair to change the rules for all involved at this stage? Probably not. But I would like to think that those responsible could come up with a plan that would draw a line in the sand and correct this issue for our future.

  12. County worker says:

    “”The morally right thing to do would be to allow you to roll all of your accumulated pension funds into your own personal 401k account and then have you deal with it.””
    Really? That’s moral? Taking a person who worked 30 or 40 years, gut their income and tell them to “deal with it”. I remember when the BOS voted to end medical coverage for hundreds of retirees, some in the room, on oxygen in wheelchairs. They did not care and they were the employers, why should I expect anything less from a few posters out there?

    How about, since you are changing the conditions, just give them their jobs back and let them earn more time. lay off the younger workers who have more time to earn more, right? Then the old ones won’t be destroyed financially. No, I don’t think your morality goes that far. You may suggest a one way bus ticket to Oregon for a final exit. Or not.

  13. GAJ says:

    The morally right thing to do would be to allow you to roll all of your accumulated pension funds into your own personal 401k account and then have you deal with it.

    The taxpayer shouldn’t be on the hook in the future for bad pension decisions…like the one CalPers made in 1999 and sold to our brain dead legislators.

    Legislators have proven they will do anything to get reelected, even if it means throwing the taxpayer under the bus.

  14. bear says:

    There is a morality issue regarding what you folks and your new rules are going to do to retired employees. Put us on the street?

    I’m sorry, but haven’t State officials of both parties been involved with this for decades? Haven’t we had some republican governors and legislators who signed off on this?

    So maybe it’s a bipartisan responsibility to fully fund the promises made to public employees?

    The alternative is what?

    What is the morally right thing to do?

  15. GAJ says:

    “The CalPERS board was among those pushing for the pension changes in 1999. An over-performing stock market led the firm to make rosy assumptions about the pension fund’s future performance. In short, they counted on a continuing boom, and said the state could reduce general fund payments to the pension fund, even while increasing benefits for workers.

    The annual state payment to PERS, which was about $1.2 billion in 1997-98, was cut to about $766 million in fiscal 1998-99.

    A CalPERS brochure from 1999 predicted, “CalPERS fully expects the state’s contribution to remain below the 1998-99 fiscal year for at least the next decade.

    That measure, passed at the end of the 1999 legislative year in headier financial times, passed out of the state Senate 39-0. It passed 70-7 out of the state Assembly. ”


  16. It Was a Cold and Storming Night says:

    The fuzzy math the public agencies have used for years has led to this fiscal crisis. Heads in deep sand up to their as……

    Who is going to be held responsible for this mess? Fingers are going to be pointed and some may not get what they expected in a public pension.

    This could have been avoided if the elected officials had not said yes to all of the public union demands for more over the years. But the city councils and the boards of supervisors have been put in place with union money and the unions have called the tune the officials have danced to for far too long.

    Public union power has got to be curtailed or this fiasco will go on and on.

    Elected officials, most if not all, are democrats and will not confront union bosses who exercise the real power in local elections.

    One thing for sure, things dealing with pensions are going to change and change soon.

  17. Excellent Article

    Here is the takeaway >>> “Our counties’ failure to properly fund their promises created the debt”.

    Here is the problem >>> One can not hold a “thing”, like a county, accountable.

    Example of Accountability : Bernard Madolf has been sentenced to 150 years in Federal prison for cooking the books and defrauding “investors”.

    We, the tax paying public, are the “investors” & our political leaders are looking for more “investments” NOW, to cover the debt …that’s code for TAXES.

    Want to learn more? Go here > http://woolsey.house.gov/index.cfm?sectionid=18&sectiontree=6,18&itemid=1077
    See the meeting place, time and date? Be there and listen to the words they use and question the board sitting on this forum, the meaning of “investments”, “jobs”, & the “role of government”.

    Get involved. Be at that meeting.