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Billion Dollar Potholes in Sonoma County Roads and Pensions

Columnist: Bob Andrews
June, 2016 Issue
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Bob Andrews
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And then there’s the truly gut-wrenching fact that Sonoma County has essentially guaranteed a 7.5 percent investment return on pension assets exceeding $2 billion.

 
 
 
When I wrote my final “Open Trench” column, I addressed the “inexorable financial disaster of public employee pensions” (“Sonoma County’s Unsustainable Pension Costs,” Dec. 2014). It’s a subject I examined multiple times in the column’s four-year run.
 
So why am I back, banging the same old drum? Is there anything new to report about those super-generous defined benefit pension plans for public employees? Yes—but the path to understanding is strewn with a daunting alphabet soup of agencies, regulations, reports and resulting Whisky-Tango-Foxtrots (WTFs).
 
The Government Accounting Standards Board (GASB) is the group that dictates financial reporting guidelines for government entities. Critics complained that its guidelines essentially allowed government entities to hide, or at least obfuscate, the extent to which their pension plans were underfunded. Who would benefit from such deception? Employees, of course: The funny numbers give the appearance that more money is available for salaries, health coverage and other benefits.
 
After literally years of consideration, GASB issued Statement No. 68, effective for government fiscal years ended June 30, 2015 and later. Financial statements are now required to show a “net pension liability” on balance sheets. The liability is the difference between the amount that needs to be in the pension plan to pay for already-accrued benefits and the value of assets actually in the plan.
 
The new reporting rules shine a light on the extent to which government entities have kept the true size of unfunded pension costs concealed. The result for 21 California counties that maintain their own pension plans was a red-ink bloodbath. Between June 30, 2014, and June 30, 2015, these counties wrote off more than $28 billion in net assets from their balance sheets. The worst situation was in Mendocino County, where pension costs caused a negative 170 percent change, resulting in balance sheet insolvency. When you consider all the other government entities in the United States with defined benefit pension plans, it could easily total trillions of dollars.
 
To get a clearer picture of the situation in Sonoma County, you have to plow through more than 400 pages of the County’s Comprehensive Annual Financial Reports for 2014 and 2015. The 2014 report shows “unrestricted funds” totaling almost $68 million. That looks like money available to spend, right? Not so fast. The 2015 report, in the same position, shows a negative $481.5 million. That’s a negative change on the balance sheet of more than $549 million. “Net pension liability” indeed!
 
And don’t forget that this $549 million isn’t the end of the challenge. Between now and 2030, the county will pay an additional $700 million of interest and principal on Pension Obligation Bonds—money that was borrowed from investors and deposited into the Pension Plan assets.
 
But wait, there’s more! Sonoma County also has unfunded costs for already-earned retiree health care. This amount, which is currently estimated at $270 million, will need to be reported on balance sheets next fiscal year. Depending on the outcome of litigation over retiree health care coverage, the cost could soar well beyond $270 million.
 
And then there’s the truly gut-wrenching fact that Sonoma County has essentially guaranteed a 7.5 percent investment return on pension assets exceeding $2 billion. (Wouldn’t you like to have a guaranteed 7.5 percent return on your 401(k)?) If the investments don’t meet that goal, it’s the county—not the employees—that must make up the difference.
 
How did this pension mess occur? In Sonoma County and many other counties, it’s the direct result of retroactive pension enhancements enacted about 14 years ago. Worse yet, Sonoma County didn’t follow clear and simple legal requirements for the adoption of retroactive pension hikes. There’s not enough room here to discuss the rules with which the county didn’t comply. But let’s just ask (and answer) one key question about the entire process: Did Sonoma County executives have a clear self-interest in pushing through the enhancements? Yes, they did.
 
Go to transparentCalifornia.com to research the pay and pensions of public employees. I found data on the five Sonoma County Supervisors who were in office 14 years ago, plus the auditor/controller, the head of the Employees’ Retirement Association and the two top lawyers for the county at the time. The annual pensions of these nine key people total $1,159,842—an average of $128,871 per retiree. About one-third of each pension is attributable to the retroactive enhancement. That’s how we got a billion-dollar pension pothole to match the billion-dollar pothole in our roads.
 
 
 
 
 
A native of Santa Rosa, Bob Andrews is a former pension trust officer at Exchange Bank and was a long-time co-owner of a retirement plan administration firm. He’s married with two children, three grandchildren and loves everything to do with wine. Contact him at bandrews@northbaybiz.com.

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