OK — The Real Answer Please (Updated 02-03-12)


Russ Steele

SESF has been raising the issue of unfunded liabilities since 2007 and again in 2009.  The County keeps telling the public that we are getting it all wrong, move along no problem here.    This comment is from the CEO Friday Memo:

Pension Liability Article

This past Saturday there was an Other Voices opinion article that grossly overstated the cost per county employee at $222,000.  The fully loaded cost per employee is well below half of that erroneous number.  This outrageous statement was apparently derived at by the author because he divided the entire County budget by the number of employees currently budgeted.  This was an erroneous methodology.

OK, where did Mike McDaniel, who wrote the Other Voices, go wrong?  How much is “well below half” The CEO does not explain, thus missing a perfect learning moment to explain the correct methodology for all to see. How much of the Budget should have been used? How many employees should have been considered?

I am sure there will be some more explaining by folks who are more expert on this issue. Maybe we will finally get to the real answer. Stay Tuned!

Update (02-03-12, 12:12) I asked for some answers and this came in over the e-mail transom:

The fundamental points behind Mike McDaniel’s research article remains the same, regardless of semantics and variances in calculation methods.

1)     Salaries and Benefits are continuing to rise–both in real dollars, and as percentage of the budget.

2)     The 47% share of the budget allocated to “Salaries and Benefits” is unhealthy.

3)     Salaries and benefits per employee have increased by over 73% during the past ten years.

The projections in Mike’s McDaniel’s research article are based on these facts:

The $81 million in budgeted “Salaries and Benefits” includes the benefits to all current retirees.   We have a lot of retired county employees, and many of them retired at close to full salary beginning at age 50 or 55.   Their pension is promised to continue for the rest of their lives.   So when a full time employee with 33 years of services retires, there is no significant decrease in Salaries and Benefits.  The only change is that the dollars that were paid to a working employee are now paid to a retired employee.   This is precisely what explains why a reduction of 278 County employees over 10 years is accompanied by a $30 million increase in Salaries and Benefits.

Based on the composition of the current County employees, it’s reasonable to anticipate that the number of retirees will increase.

Based on economic realities, it’s reasonable to anticipate that the County will have to reduce staffing to balance its budget.

Confronted with these realities, McDaniel’s projection is very reasonable:  Tax dollars will increasingly be allocated to paying retiree pensions, while the taxpayer receives decreasing levels service.    This will lead to special taxes to fund core services.   And we’re seeing this now.  Penn Valley fire department secured a special tax to sustain its department in 2010.  And the Nevada County consolidated fire district is seeking a special tax increase in 2012.

We are still waiting for the County’s answer. According to Rebane’s Ruminations, CPA Dai  Meagher has an excellent article on this issue in the Union today. I have not read it due to the pay-wall.

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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.

5 Responses to OK — The Real Answer Please (Updated 02-03-12)

  1. Barry Pruett says:

    Last week, Lassen County funded all of their unfunded liabilities. They took their tobacco money and other funds and solved the problem. With a population of almost 35,000 and slightly over 400 employees, Lassen County’s unfunded portion was $6.7 million in 2009. Over three years, the Lassen board of supervisors worked hard and finally last week funded the liabilities.

    Nevada County has a population of 99,000 and county employees of over 750. In 2009, the amount of promised benefits in Nevada County was $248,063,046 minus the amount available to fulfill the promises of $164,137,323 created an unfunded liability in Nevada County of $83,925,723.

    Note: This math was reviewed in September 2009 with Joe Christoffel from Nevada County and it only includes the MISC Employee Pension plan (it does not include the Public Safety Employee Pension plan).

    I am fearing a problem in Nevada County which leadership does not desire to solve. See alcoholics doing the 12 step program…step one is admitting that you have a problem. There is an $80 million problem, but they would rather deny its existence.

  2. B White says:

    Another indication of Nevada County leadership’s apathy concerning debt and spending is their complacency toward the final cost of the AtPac settlement. They also choose to deny or ignore the actual final cost of that fiasco.

    Perhaps not for much longer!

  3. Russ says:

    The LA Times has a story on retirement “salary spiking” HERE

    Such “salary spiking” was banned in 1993 by CalPERS, the state’s largest public employee retirement system, to help control spiraling costs. But 20 of California’s 58 counties — including Los Angeles, Ventura, Orange and San Diego — do not participate in CalPERS and their employees may legally continue to spike their salaries.

    Nevada County participates in CalPERS, but do they have spiking controls in place? Where can I find a copy? If they have a policy, is it being followed?

    The scope of the practice is unclear because counties have resisted releasing complete pension data, citing the difficulty and cost of assembling the information.

    Is this why it is so hard to get some straight answeres from the County? Just wondering!

  4. Russ says:

    Here is an insightful article on the problem in San Jose. Interesting that they refuse to deal with reality. One wonders if our local officials are having the same reality problem? See the three problems listed in the article.

    Recent San Jose actuarial reports show $3.5 billion of city debt for underfunded pension and retiree health benefits — a shortfall that works out to about $11,000 for every household in the city.

    Yet, as Mayor Chuck Reed proposes substantive pension reform, workers and a local television reporter are hyperventilating about irrelevant numbers that distract from the ballooning problem.

    If not for major layoffs and salary cuts last year, the shortfall would be much worse. It would also be much larger if the city used more realistic investment earnings assumptions rather than relying on overly optimistic forecasts.

    Nevertheless, the calculations show the city’s retirement programs combined have only 56 percent of the funds they should. Put another way, the unfunded liability equals about eight years of city payroll.

    To understand what’s going on here, keep in mind that employees earn additional future retirement benefits for each year that they work along with their salaries. So the city and its workers should invest enough money annually to cover the future costs of those newly earned benefits.

    The city has three problems: First, the amount that should be set aside for those newly earned benefits has increased.

    Second, even that greater amount isn’t enough because the payment calculation relies on those optimistic investment assumptions.

    Third, past reliance on unrealistic assumptions, retroactive benefit increases and actuarial changes have caught up with the city, leaving it with huge unfunded liabilities for pensions. As for retiree health benefits, only small amounts have been set aside for future benefits.

    The resulting debts are treated like mortgages, with annual payments spread over as much as 30 years, thereby passing costs to the next generation.

  5. B White says:

    Salary Spiking

    First it should be accepted that the percentage of the population that is aware of the nature and magnitude of salary spiking is still at a level that permits it to continue. I am not excluding CalPERS because it appears that it is inappropriately prevalent in that system as well as all other public employee systems if not to a lesser degree do to unenforced restrictions.

    The salient point here is not that it is “banned” in one system as opposed to another but rather that disregarding any prescribed restrictions it is illegal in its nature regardless of venue. The mere fact that the practice is performed to accomplish subversion of intent at the cost and damage to the contributory party constitutes fraud in a most basic and incontrovertible form. It is therefore an illegal act and prosecutable. Because of this it is also retroactively actionable. And this applies to all public employee systems in all States as well as the Federal Government.

    Now, when the party that is damaged by the fraud reaches critical mass the legal system should be activated to correct the injustice and recoup damages.

    For those of you that are unable to grasp these fundamentals further elaboration on when this might happen and description of its image is futile. For the rest of you projection of the details of this prognostication should come naturally.

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