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All data sources are listedin the section Data Sources and Downloads.
Pension Obligation Bonds
The Main Driver of County Debt
Defined Benefits v. Defined Contribution Retirement Plans
As is true of practically all public jurisdictions in California, the County of Mendocino offers a "defined benefits" pension plan as part of the benefits provided to its employees. This means that if an employee satisfies the requirements of a plan, he or she will receive an amount of money per month defined by established formulas for the rest of their lives after retirement. This contrasts with the more common
"defined contributions" plans that are the major retirement plan offered by private sector employers. In this type of plan the employer makes set payments into retirement funds that are placed in various investments, and when the employee retires he or she receives funds from that retirement fund until the fund is exhausted.
In both plans funds are invested in various ways while the employee is still working and continue to be invested while the employee is retired and receiving retirement benefit payments. The main difference between the two types of plans is that in a defined benefits plan the employer takes the risk that the investments may not pay enough in the future to provide a guaranteed payment to the retiree as long as he or she lives, whereas in the guaranteed contribution plan the employer's obligations to the retirees retirement income is complete when the employee retires.
In a defined benefits plan the employer doesn't really know if it has fulfilled its pension obligations to a retiree until the retiree passes away. It's entirely possible that the funds deposited by the employer and employee and the changes (hopefully growth) in value of those funds as a result of investments over time may not be enough to completely pay the defined benefits due to the retiree. In that case the employer must then produce new funds to continue to pay the retiree, whereas in a defined contribution plan the employer's obligations are over once the employee leaves the employer (although the employer remains responsible to properly manage the funds unless they are completely turned over to the employee).
A major effect of this difference is that employees in defined contribution plans are extremely interested in whether or not the employer actually deposits the funds they promised into the employee's retirement fund, whereas in a defined benefits plan employees know that employers are responsible to pay their retirement payments in the future regardless of what is paid in today.
"Unfunded Actuarial Accrued Liability"
So, if our County used a defined contribution plan we'd know if we had met our obligations as a County simply by making sure that the County paid into the pension fund what is due each year.
But our County is actually obligated to make set payments in the future to retirees regardless of what it pays into the pension fund today. Then how do we know if enough is being paid into the pension fund today while employees are on the job so that the County will be able to pay them all that is due them in the future?
The money in pension funds that pays future retirement obligations comes from two sources. First, the amount paid into the fund by employers and employees each year, and second profits on the growth of the the investments that contributions are put into.
In a Defined Benefits Pension Plan, no one knows for certain either about how much money an employer is going to have to pay to its retirees in the future, or how much the money contributed into the pension fund will increase because of investment profits.
That's why Pension Fund Actuaries exist. Defined Benefit Pension Plans are analyzed by Actuaries who develop several estimated numbers.
- Actuarially Accrued Liability (AAL): The Actuary calculates what the expected payments to retirees will be until the last retiree WHO WORKED FOR THE COUNTY BEFORE THE END OF THE DAY OF THE REPORT passes away.
- Actuarial Value of Assets (AVA): The Actuary projects, starting with the current market value of assets in the County's Pension Fund, A) the expected growth of assets until the day the last retiree WHO HAS WORKED UP UNTIL THE DAY OF THE REPORT passes away, B) but deducting from that projected value of assets each payment for pension obligations FOR THE PEOPLE WHO HAVE WORKED FOR THE COUNTY UP UNTIL THE DAY OF THE ACTUARY'S REPORT.
If the Actuary determines that the value of AVA (assets) is less than the AAL (liabilities), then he reports that as –
- Unfunded Actuarial Accrued Liability (UAAL): This is the amount of additional cash the Actuary states is needed to make the Pension Fund capable of making all the promised future pension payments FOR THE EMPLOYEES WHO HAVE WORKED UP UNTIL THE DAY OF THE REPORT.
We're not experts in governmental accounting. But we collectively are experts in accounting generally. The Employers Council has nearly 200 business members who are responsible to conform to Generally Accepted Accounting Principles in our financial reporting.
Our best judgement as business people is that this UAAL arises because THE COUNTY DIDN'T PUT IN ENOUGH MONEY TO PAY FOR THE OBLIGATIONS IT ALREADY CREATED FOR ITSELF TO EMPLOYEES FROM THE DAY OF THE ACTUARY'S REPORT BACK. In other words, THOSE OBLIGATIONS ARE ECONOMICALLY EITHER CURRENT OR PRIOR YEAR EXPENSES – not future expenses!
We believe strongly that the County should put enough money each year into it's Pension Fund so that the pension payments it will make in the future for its employees that year will be fully funded. But when an Actuary tells the County that it has a UAAL, as business people, we think that means the County has not put enough money into the Pension Fund.
Unfunded Accrued Actuarial Liability
County of Mendocino
According to the State Controller's Public Retirement Systems Annual Report for 2003, in the year the Slavin Study was adopted our County's Pension Fund was $19 million short of the amount needed to be able to pay retirees in the future. By 2002, 2 years later, the shortfall was $69 million. The County elected to borrow money and pay it back (principal AND interest) out of future budgets. In the past 10 years our County borrowed twice by selling Pension Obligation Bonds to bring its pension fund up to a proper level. The total of these two bond issues was $123 Million, but since the second issue paid off much of the balance remaining of the first, the total net borrowing was around $105 Million.
Per Capita Pension Obligation Bonds
Per Capita Pension Obligation Bond Debt
California Counties
As of 2003 only 17 of California's 57 counties (not including City and County of San Francisco) had borrowed money by selling Pension Obligation Bonds. Of the 17 who did, Mendocino was by far the most indebted per capita.
In 1996 Mendocino County borrowed $30.7 million by selling bonds to fill unfunded pension liability. Then, in December 2002 the County borrowed another $92.2 million by selling more bonds. $13.2 million paid half of the balance of the earlier issue, $2.7 million went to cover the costs of selling the bonds, and $76.3 million covered new unfunded pension liability. Today the County owes about $100 million in these bonds, 10 times the average per capita for other counties.
Three Really Big Deal Questions
The Employers Council is extremely concerned about 3 issues regarding these Pension Obligation Bonds:
- Has This Been Shown as a Staff Expense? If the County only shows the amounts it actually pays into the pension fund as pension expenses for each year, and the County was forced to borrow $105 million because not enough money was in the pension fund, doesn't that mean the staff's pensions actually cost the County $105 million more than it reported in its financial statements?
- How Do We Know The Problem Is Solved? Our County was forced to borrow $105 million because of unfunded pension liabilities. Especially if this $105 million was never reported as an expense and incorporated into the County's budgeting process, isn't it possible the fundamental problem that created this debt still exists, and we could be faced with having to borrow more money in the future?
- Shouldn't the People Have Been Asked If They Wanted to Take On Over $100 Million in Debt? This $105 million Pension Obligation Debt totally dwarfs all previous County of Mendocino debt levels. The people of the County will be paying this off for decades. Each year nearly $10 million will be spent in debt service instead of providing services for County residents. Regardless of legal loopholes and fine print, shouldn't the people have been consulted before they were burdened with this massive debt?
NOTE: County officials have stated they believe many California counties in fact have very large unfunded pension funds but haven't acted to properly fund them. They assert this means a "real" debt exists for those counties that has not yet been reported. This would mean their per capita debt is greatly understated. In contrast, county officials say that the County of Mendocino acted responsibly in borrowing $105 million so that its pension fund would be properly funded. The Employers Council is researching this idea and will report our findings.
However, our understanding is that various "triggers" exist in public pension funds that would force counties in such a position to put more money into its pension fund. And even if such triggers don't exist, from our point of view that just means that lots of California counties will lose their discretionary funds.
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