Fox News: “It all comes down to unfunded liabilities”

Russ Steele

His Purpleness has taken note that Stockton is going bankrupt, but it does not have much to do with unfunded liabilities, it was just a bad economy.

Editor’s note: As expected, Stockton is going to become the nation’s largest city to seek bankruptcy protection. Though a cautionary tale, I’d warn readers to be leery about sweeping statements that this could be a widespread trend. Yup, it will happen again. But it also will be politicized by political “fear mongers.” In addition, a lot of Stockton’s problems stemmed from the real estate collapse (a “revenue” problem) and millions of dollars of debt on overly ambitious development projects, not just a problem with public unions and pensions. Context is extremely important when analyzing a trend.

Yes, context is important.  According to a Fox News Report yesterday 20% of California cities and counties are on the verge of similar bankruptcy problems, including Los Angles and San Francisco.  We will soon have an opportunity to see the books for all California cites, counties and other agencies according to the WSJ:

Accounting rule makers approved a series of changes Monday that will shine a harsher light on the troubles of public-employee pension plans, boosting their reported obligations by possibly hundreds of billions of dollars.

The new rules by the Governmental Accounting Standards Board will force pension plans to show their funding shortfalls more prominently and calculate their obligations in ways that will make some underfunded plans look even weaker. Pension plans will also have to record their costs sooner than they do now, among many other changes.

Closer to home, these new accounting rules will soon expose the “rural myth” of Nevada County’s unfunded liabilities.  According to Rick Haffey writing in a Union Other Voices, June 1, 2012 the county’s unfunded liability is $119 million.  If a discount rate of 3.9%, which PERS uses for some purposes as of September 2011, rather than the 7.75% used to calculate the $119 million liability,  then the unfunded liability of the County doubles. Oops.

As a very knowledgable local observer writes:

The key, of course, is the use of a realistic discount rate in the Present Value calculation.  Not mentioned is if the realistic discount rate is applied to the unfunded liability only or if it was applied to the complete liability.  At one time, when the draft GASB standard was being circulated the compromise suggested was to apply the new rate to the unfunded portion only. 

When this liability is moved to the visible part of a financial statement will it impact the borrowing cost of all agencies. 

Stay Tuned, this story will have more legs as the unfunded liabilities go on the books, shattering all those “rural myths.”

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About Russ Steele
Freelance writer and climate change blogger. Russ spent twenty years in the Air Force as a navigator specializing in electronics warfare and digital systems. After his service he was employed for sixteen years as concept developer for TRW, an aerospace and automotive company, and then was CEO of a non-profit Internet provider for 18 months. Russ's articles have appeared in Comstock's Business, Capitol Journal, Trailer Life, Monitoring Times, and Idaho Magazine.

4 Responses to Fox News: “It all comes down to unfunded liabilities”

  1. Dave Cranfield says:

    Building inspection chief in SF demoted, but allowed to keep her salary. I guess they did not want to ruin her retirement stipend.
    http://www.sfgate.com/bayarea/matier-ross/article/S-F-building-inspection-chief-stepping-down-3646605.php

  2. Dixon Cruickshank says:

    You really can’t be demoted or ruled a nincompoop in Gov circles

    Russ this goes to the core of the problem of Gov interceding in credit markets by artificially keeping rates at near zero for Gov purpose. It kills the retiries of a safe return on their funds and drives them towards risk – same thing is happening to the pension funds – no returns and they shouldn’t be taking undue risk either – catch 22. At that time then they start to draw down capital, capital that cannot be replaced – if you lose 10% on an investment, you need to earn 20% on the next one just to get even because your capital disappeared.

    It also is a core problem with the banks and economy – the banks try and skim .25% to 1% off some deal – because they can’t lend at a rate that warrents the risk to lend to a private business at 4/6% that may fail – risk and reward.

    The Treasury can’t let rates go up at all or the country would collapse under the debt load we have – see the EU, everything hit the fan when the markets moved soveriegn debt to 6% so we have to keep everything at zero – which is negative due to inflation – called negative interest rate.

    • sean2829 says:

      The most remarkable thing about negative interest rates is that is what Japan tried after their real estate bubble in the late 80′s early 90′s which led to Japan’s lost decide. So the US and Europe try the same thing and get the same results. Einstein defined insanity as doing the same thing over and over again and expecting a different result.

  3. Arthur M. Day. says:

    Welcome all to life in the VOAM. Vast open air madhouse. Dame Thatcher’s ‘Sooner or later’ is now.

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