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Who Governs?

Columnist: Bob Andrews
March, 2014 Issue
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Bob Andrews
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What does “balance sheet insolvency” mean to you? That’s where liabilities exceed assets on the county’s balance sheet for “government activities.” Would it bother you if the Sonoma County was balance sheet insolvent at the end of its 2014 to 2015 fiscal year? Could it happen? Yes, it could.
 
The Fantasyland of public employee pension accounting rules has let government entities delay reporting the liabilities for earned pension benefits until years after the liabilities were incurred. But the old accounting rules have changed. Effective in the 2014 to 2015 fiscal year, the liabilities associated with currently earned pensions must be reported on current balance sheets. And government entities will have to report the actual market value of pension assets rather than a somewhat-mythical value that’s been “adjusted” in several interesting ways. Sounds logical, yes? For Sonoma County, the liabilities associated with its pension plan (and unfunded retiree medical costs) may exceed $1 billion, leading to possible balance sheet insolvency.
 
I thought about this as county supervisors proudly announced a labor agreement with deputy sheriffs recently. That agreement, when paired with those reached with other labor unions, supposedly “saves” the county $150 million in pension costs over the next 10 years. But the same agreement requires the county to pay more toward health costs. Will there be actual net savings for the county, or is it simply moving costs around? Further, the supervisors didn’t mention that most of the changes were mandated by state law. Most important, the supervisors don’t tout the fact that pension costs will actually be sharply higher for years to come despite the “savings.” In other words, “savings” doesn’t mean “less money spent now.” It means “lower increases in the future.”
 
This made me wonder about the qualifications of our supervisors to run the huge business known as Sonoma County. I read the biographies of each supervisor and came away concerned. Two of them don’t declare what actual jobs they held before being elected. It took some digging to get information. One previously worked for Redwood Credit Union, but not as a high-level business manager. One formerly headed the Council on Aging, which is modest in comparison with county government, and the majority of her other work experience was as a family therapist, minister, hospital chaplain and social worker. One supervisor’s prior business experience was primarily as a solo architect. Another reportedly worked at TV50 in marketing. Last, one supervisor’s main “job” before becoming a supervisor was being mayor of Santa Rosa for two years.
 
The biographies refer mostly to their prior and current positions on myriad councils, advisory boards, authorities, commissions, associations, committees, boards of directors, foundations, leagues and districts. In other words, the important “qualification” to be a highly paid and highly benefitted supervisor in Sonoma County appears to be appointment or election to various lower-level councils, advisory boards and such. But one huge challenge common to entities with public employees is that the pension promises made to those employees are unsustainable and could lead to balance sheet insolvency. Unfortunately, I don’t find any supervisor biographies that say: “I led a company with 3,600 employees; I balanced the budget for that company annually; when my company was faced with insolvency, I took immediate action to eliminate unsustainable expenses; I will apply the same expertise to Sonoma County.”
 
Some people might say: We’re electing “leaders.” You don’t expect supervisors to know how to repair roads or set up an emergency communication system or run a drug sting for the sheriff’s office. The county employs people who know how to do those things. We need “leaders” to set policy.
 
Let’s look at how that philosophy can lead to leadership failures and balance sheet insolvency. Twelve years ago, Sonoma County supervisors adopted pension formula enhancements for all employees, including themselves, retroactive to date of hire. The enhancements were massive, amounting to a 50 percent boost to most pensions. I suspect that every county employee involved in the process was giddy with the prospect of a huge lifetime boost to pensions. Of course, the supervisors weren’t actuaries, lawyers, accountants, investment advisors or mathematicians. They relied on opinions from county counsel—who would benefit from the enhancement—and on a lot of people in the Sonoma County Employees’ Retirement Association (SCERA)—who would benefit from the enhancement—and on their own leadership abilities.
 
Despite all this “help,” and although state law was clear, the supervisors failed to get an independent actuary’s determination of the cost of retroactive pension enhancements, and they failed to publish a notice so the public would know they were voting on retroactive pension enhancements. They accepted the SCERA actuary’s guess that a 3 percent-of-pay future contribution by non-public-safety employees would cover the cost of the enhancements, while ignoring his warning about the fiscal danger of employees retiring earlier.
 
In the fiscal year between approval of the enhancements and their effective date, almost no county employees retired. After the effective date, county employees began retiring in record numbers, such that the county now has more retirees than employees. On average, employees began retiring five years sooner than before, thus making their (higher) pension payment period five years longer. This is a fiscal disaster that’s made Sonoma County an unfortunate leader among Bay Area counties in pension debt, unfunded liabilities and funding costs.
 
Supervisors could be forceful leaders for effective pension changes. They could support San Jose Mayor Chuck Reed’s proposed initiative to allow adjustment of future pension accruals. Instead, one supervisor (who’s now campaigning for state office) preemptively urged rejection of the initiative. Like the Sonoma Clean Power Board, they could reject unsustainable defined benefit plans for new employees and use a fixed-contribution 401k plan instead. But somehow I think our supervisors are more comfortable with the thought expressed in one supervisor’s biography: “She learned the basic need to balance one’s inner compass.” Why not just let the county budget balance itself?


 

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