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Pension Obligation Bonds – Our Main Form of Debt
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Real Estate Debt – Long Term Leases and Certificates of Participation
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Highest County Interest Expense Share of Budget in California
Per Capita Pension Obligation Bond Debt
California Counties
When 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. This led to the second time our County borrowed money to properly fund its pension fund. In the past 10 years our County borrowed $123 million in this form, but since the second issue paid off part of the first, the net borrowing was about $105 million.
As of 2003 only 17 California had borrowed money by selling Pension Obligation Bonds. Of the 17 who did, Mendocino was by far the most indebted per capita. Today the County owes about $100 million in these bonds, 10 times the average per capita for other counties.
The Employers Council is extremely concerned about 3 issues regarding these Pension Obligation Bonds:
- Has This Additional $105 Million Been Shown as a Staff Expense?
- How Do We Know The Problem Is Solved?
- Shouldn't the People Have Been Asked If They Wanted to Take On Over $100 Million in 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 join us on the deck of the Titanic. $105 million is a huge amount of money for a little county like ours.
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As of 2003 our County was obligated to pay a total of $56 Million in future lease-purchase payments, which made us the 9th most indebted California county per capita for long-term real estate obligations.
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Mendocino County's interest expense consumed 4.7 per cent of its budget in 2003, by far the highest amount among California counties. The number 2 and 3 counties had interest expense a hair above half that. All the rest of California's counties were less than half our percentage. The average percentage of their budgets paid by counties for interest expense was 0.9%.
Interest Expenses as Percent of County Budgets
The federal and state governments define how the County has to spend most of its budget. Somewhere between $20 million to $30 million is actually "discretionary" in the sense that the County can decide how to spend it. By incuring this level of debt, somewhere between 25% to 35% of the funds we control was committed to paying off debt (principal and interest) rather than providing services.
The County budget is very complicated and is affected by thousands of factors. But in very simple terms, if our County had maintained staff expenses's at 2/3 of its operational budget and maintained an average level of debt for California counties, we'd have $18 million to $20 million more money to spend this year.
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Click here to go to Page 3 of the Summary – The Fundamental Causes of This Debt.
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