Pension Fund and Measure C in Understandable Language (Updated)


From JANIE SHEPPARD
Mendocino County

[This is a must-read if you want to understand Measure C and the Pension System. John McCowen explains below how the pension system works and the relationship to Measure C (the money from Measure C will not go to pay debt). Please read and pass along to anyone who truly wants to understand the financing of the Pension Fund.

Update: The main reason, in my opinion, that Dickerson and Sakowicz complain that “no one listens” to their rants on the state of the debt and unfunded liability is (1) they seem incapable of explaining their position in plain English and (2) the county has addressed the issues that could be addressed, including making sure payments on the debt are being made, not deferred. In reality, there is nothing left to gripe about regarding the county debt, except for the unavoidable fact that it’s there. The county could get in worse shape if revenue is not increased. Then who would be to blame? I think the blame would fall squarely on deluded voters.

Please read John’s post and then VOTE IN FAVOR OF MEASURE C. -JS]

Original message from Supervisor John McCowen:

I think there are valid reasons to be opposed to a sales tax increase, but I worry that people who would otherwise vote in favor of protecting vital services, will be fooled by the deceptive effort to capitalize on people’s concerns about the cost of the pension obligation and the County’s long term debt. I sent the following response to someone who was persuaded by Mr. Carter’s argument [in our debate] that any Measure C revenue will pay for debt, not services. He was also not a big fan of the Sheriff’s Office. If anyone does not want to wade through the tedium of the debt, they can read the first paragraph and skip to the last two and the PS to get the essence of my argument. Anyone should feel free to respond to me with any questions they may have.

It is always surprising how different people will have such divergent opinions of the same event. Personally, I did not think I did all that well in the debate. But I do think the basic premise of Yes on C, that it is needed for vital County services is true. I also think the basic premise of No on C, that it is a “pension bailout tax” that will go to fund debt is false. The County debt, and the payments on the debt, are built into the ground floor of the budget, in much the same way that cement goes into the foundation of a building, not into the ceiling.

Before continuing, I want to clarify that the 54% of the discretionary revenue that goes for Public Safety includes the District Attorney, Public Defender, Alternate Defender, Probation, and Juvenile Hall, not just the Jail and Sheriff. The combined Jail and Sheriff budget has also been cut $2 million dollars this year, so don’t imagine that the Sheriff is getting a free ride. But if all the Measure C money will go to law enforcement, none of whom are SEIU, then why do you think SEIU is so heavily involved in putting this measure forward and in funding a campaign to support it?

Maybe you don’t like the Sheriff, but the fact is, without Measure C, everyone will suffer. Maybe it is also not important to you if the Public Health department eliminates family planning and every prevention program next year, which is currently under discussion, or if we slash mental health even more than we already have to, or if hours at the libraries are cut further, or if the roads continue to deteriorate. Maybe those don’t really matter to you, but they do to the people who need those services. But I guess the free market economy will pick up the slack.

Ok, back to the debt. The County long term debt consists of Pension Obligation Bonds (POBS) issued in 2002 (the 1996 bond has been paid off); Certificates of Participation (COPS) issued in 2001 and 2002; the Teeter Plan debt (Teeter); and the unfunded liability.

The POBS and COPS are iron clad obligations and are built into, and paid for, at the ground floor of the County budget. [The COPS are a real estate financing mechanism that was used to fund many county government building on the coast, in Willits and Ukiah. Once the COPS are paid off, the County will own the buildings.] The combined payments are roughly $10 million dollars a year (8 mil for the POBS and 2 mil for the COPS) and are level over time. The County makes payments on these debts according to a fixed amortization schedule. The POBS are grist for the mill, but because of the level payments they are not a driver in blowing up the County budget.

The Teeter debt is the smallest part of the County long term debt. The basis of Teeter is that the County pays the property tax owed to each special district, school district, etc. and is paid back when people pay their property tax. The County is then entitled to receive the penalties and interest from those who do not pay on time. As Teeter funds came in, not enough was set aside to pay the principle and interest on the debt. I believe that up until the 2008 budget hearings no one on the BOS, and few if any in the County, had a grasp on all the details of Teeter. In reviewing the numbers, I believe that what tripped most people up was that they did not understand that the “current year delinquency” (separate from the principle and interest on the debt) had to be paid in full each year. [If you want to know more about Teeter, we can set aside an hour or so sometime.]

Properly managed, no one on the BOS should have had to know all the intricacies of Teeter. In my opinion, the highest level financial and administrative staff who were charged with protecting the financial health of the County were not doing so. Either they were intentionally balancing the budget on the backs of the Teeter Plan, or they did not understand how Teeter works. In either case, the result was that the original Teeter debt grew from about $5.5 million to about $11.5 million.

The Teeter debt, by Board policy established in 2009, is also paid according to an amortization schedule. Even in a bad budget year such as this one, no one on the Board said, “Oh, lets not pay any principle on the Teeter this year, lets just pay the interest.” So I think that shows that we are committed to paying off the Teeter debt according to our amortization schedule, and in fact we are doing so.

The pension fund unfunded liability is the real joker in the deck because it changes each year based on many factors, not least of which is the retirement fund return on investment. The pension obligation liability, the unfunded pension obligation liability, and the County’s payment on that liability are calculated each year based on a multiplicity of factors, including a “smoothing” formula where recognition of gains and losses is spread over five years to buffer market fluctuations.

The Retirement Board then adopts the amount that the County must pay each year to cover the current year employer’s contribution and an additional amount for the County’s payment toward the unfunded liability. The Retirement Board reports those numbers to the County and we are required by law to adopt them. Last fiscal year it was about $9.6 million for the County. Again, the point is that the payment is built into and paid for at the ground floor of the budget.

It helps to understand that the retirement obligation is funded about 10% by employee contributions, about 20% by employer contributions, and about 70% by return on investment. This is common practice. The debt will not be paid by raising the sales tax 1/2 cent. It will be paid by future appreciation of the retirement fund and by containing costs as the Board and Retirement Board are doing. From a low point of $222 million dollars in March of 2009, the retirement fund has gained about $90 million dollars in assets and now stands at about $312 million. Continued recovery of the national and global economy, not further decimating our ability to pay for County services, is what will pay the bulk of the retirement obligation.

We could extend the discussion for hours about what was and was not done in the past with regard to the pension obligation. Far more is being done than Mr. Dickerson would have you believe. The County has reduced 400 employees (over 25%) from peak employment and reduced 200 (or 15%) in the last 27 months. Salaries are being cut across the board 10% or more. The CEO was hired at a 16.67% reduction in pay from her predecessor and the Deputy CEO position has been left vacant. Where we had seven top administrators in Health and Human Services, we now have two. We have eliminated two department head positions this year. We have combined and restructured departments. Staffing levels have been slashed across the board, including in the COE and BOS offices.

The County makes an easy punching bag, but if it is corruption and mismanagement that is driving Mendocino County’s pension debt, then why are the great majority of pension funds, public or private, facing financial challenges? Any fair analysis must include the stunning impact of the financial meltdown triggered by the collapse of the housing bubble. These problems are not unique to Mendocino County.

The Retirement Board has also done a lot of work that is not recognized. Not everyone likes Jim Anderson, but there has been a sea change since he was hired as a full time administrator in November of 2008. As of last year they have a new investment advisor, one whom Sakowizc praises lavishly. Their meetings are televised, they have a website with lots of documents posted to it, including the source documents from the other 1937 Act counties that shows that Mendocino County’s rate of return compares favorably with other counties. They have also hired an independent auditor to audit the work of their actuary.

Most importantly, the diversion of so-called excess earnings out of the retirement fund has been stopped and will not be coming back. According to Dickerson, that is the single biggest factor in blowing a hole in the retirement fund. The practice should have been ended in 1998 when the evidence was in that funding an employee retirement plan with mythical “excess earnings” was not sustainable. Although belatedly, the practice has been ended. In fact, there has been no diversion out of the retirement fund since well before I joined the Board, which means it has not happened since before Dickerson started beating his drum. Therefore, he continues to beat up the current Board and the Retirement Board over a practice that ended years ago. Yes, we still have to deal with the consequences of past actions, but to pretend nothing has been done is disingenuous at best.

Despite all that has been changed at the Retirement Board and at the County, Dickerson and crew persist in saying that no one is paying attention, no one is listening, no one is doing anything, and that no one knows what happened or how or why it happened. I understand that the Board is held in low esteem, deservedly so, in my opinion. Democracy in action is often a messy process. I, like each of my colleagues, would like to have had certain votes go differently, but we are not as inept as some would like to believe. Overall, the collective decisions of the Board have moved us in the direction of greater financial responsibility and accountability, whether people want to believe it or not.

Anyway, back to Measure C, the debt payments are paid out of the revenue that the County currently receives. If payments for the unfunded liability increase, and they may, that increase will also come out of the revenue the County currently receives. The County discretionary services are paid with what is left. Measure C will add to what is left, and will provide additional revenue that will be spent for County services, it will not be spent to pay the County debt payments that were built into and paid for on the ground floor of the budget.

Finally, it will be up to the voters to decide if Measure C passes or not. I confess I won’t be happy if it is defeated based on the web of mis-representation spun by Dickerson and crew, but I will accept the will of the voters. I just think it is unfortunate if people vote no thinking it will not have an impact on our ability to provide the basic services that many people rely on and which collectively help to define a civilized society.

John.

PS I am concerned that people will vote “no” to punish the Board of Supervisors, but the only people who will be punished are the County employees and the County residents who rely on the services provide by those employees whether it is a deputy sheriff, public health nurse, librarians or road workers. If people are not happy now with how the money gets spent or the services they get, I do not think they will be happier when the County has less money to spend on vital services. I am worried that people may be deciding this on an emotional instead of a rationale level.
~~

6 Comments

This is a very confusing issue, but my understanding of what John wrote is that the unfunded liability is paid first and then what is left is the discretionary fund. So if the unfunded liability goes up, then that will come out of the discretionary fund first, which in a sense ultimately comes from the new 1/2 cent sales tax increase. Did i understand that correctly? I don’t want services cut any more than necessary, and I understand that passing measure C will help pay for these services, but I want to be clear about what gets paid first. I.e., does the unfunded liability have priority in getting paid over the other county services.

    Yes, payments on the debt get paid first, and what is left pays for services. Measure C will add to what is left and will provide additional revenue that will be spent for County services.

    Measure C will not be spent to pay the County debt payments that were built into and paid for on the ground floor of the budget.

    To argue that payments on debt will go up is really to argue that the County needs additional revenue, not less.

    The bottom line is, without Measure C, there will be less money left over to pay for county services, which will result in more programs shut down and more layoffs, which is exactly what some opponents of Measure C want to see. Like Grover Norquist, they want to shrink government until it is “small enough to drown in a bathtub.”

“The debt will… be paid by future appreciation of the retirement fund”

“Continued recovery of the national and global economy… is what will pay the bulk of the retirement obligation.”

“if it is corruption and mismanagement that is driving Mendocino County’s pension debt, then why are the great majority of pension funds, public or private, facing financial challenges? Any fair analysis must include the stunning impact of the financial meltdown triggered by the collapse of the housing bubble. These problems are not unique to Mendocino County”

Supervisor McCowen always sounds like a thoughtful, reasonable guy, and I have no reason to suspect he isn’t. But the above extracts appear to demonstrate a set of assumptions that not everyone shares at this point in history. Of course corruption and mismanagement are not unique to our county – the news and developments of the past few years ought to make it clear to anyone with a pulse that they are systemic, and run all the way to the top. Indeed, much of it starts at the top. Assuming continuity of growth and profit based on the current model and an ongoing replication of the economic experience enjoyed during the glory years is assuming a lot, and almost seems like willful blindness. Reading on the subject shows that the Pension Fund has consistently under-performed and failed to meet it’s own projections. What exactly is going to change that in this climate of uncertainty and contraction? Over the past two or three decades the US economy has largely shifted from production-based to bubble/debt-driven, and there is no cohesive plan to stop that (it actually looks like that is the plan). There may not even be any fix possible from within the Ponzi Scheme corporate finance model we currently operate under.

Vital services are vital, and I suppose we’ll keep lurching along from one patch to the next. Until we can’t. And that day will come.

    Izzy, the set of assumptions are not mine, per se, but are those that virtually all public and private pension systems are based on. The ultimate fix for the pension issue will come from beyond the borders of Mendocino County.

    We are doing everything at the local level that we can to bring costs under control. The use of “excess earnings” to pay for health care has been stopped. The County has cut 200 jobs in the past two years, has combined departments, eliminated many administrative positions, is cutting salaries 10%, and is adding a lower retirement tier for new hires.

    The pension issue is serious and needs to be addressed, but in the meantime, the County still needs to provide pubic services.

    Faced with declining discretionary revenue, the decision was made to put Measure C on the ballot. It will be up to the voters whether or not to approve it. But the bottom line is, without Measure C there will be less money and services will continue to be cut.

“Continued recovery of the national and global economy…is what will pay the bulk of the retirement obligation.” And if you think that’s going to happen, I’ve got a bridge, check that, several bridges to sell you. And you get to charge as much as you want per car, each way, and you get to keep all the money. Puh-leez. The national and global economies have collapsed, are in collapse, and anyone who thinks that the latest phony stock market bubble is proof of a recovery is either a crook or a dimwit.

    Again, the assumptions are not mine.

    Meanwhile, the County still needs to provide critically needed pubic services.

    Measure C will help do that.

Follow

Get every new post delivered to your Inbox.

Join 4,562 other followers