Mendocino County continues to borrow against the future as pension payouts exceed income. Pension financing seems a matter of smoke and mirrors—especially in these times of recessions, globalization and shifting economies.
The smoke and mirrors kick in when investments pay less than expected. When the rate of return on a pension investment portfolio is set, the pension plans then consider money the pension failed to earn as “deferred” future income. This makes pension fund reports look pretty rosy even when drowning in red ink.
This process is so magic most of us cannot believe it, because it is so different than what happens in the “real” world.
If I conducted my personal finances this way, I could “predict” my annual income will be $100,000 for the next 20 years. When I look at my 2015 W-2 and discover that I only made $25,000; I subtract my real earnings from my prediction and add the $75,000 difference to my “deferred” income pile.
If I go to the bank in 2016 to get a loan, I would tell them I expect to earn $175,000 in 2016 (my $100,000 per year prediction plus the $75,000 in “deferred” income from 2015).
While this won’t work with my bank, it seems to work with our Board of Supervisors.
Continuing the pension analogy, in 2016, I still only make $25,000. This means I now have $75,000 in deferred income from 2015 and $75,000 in 2016, which I add to my 2017 income projection. This means my 2017 predicted income goes to $250,000.
While pensions spread deferred income over a much longer time frame, the 2008 financial melt down had more of an impact than routine pension plan adjustments have been able to handle.
When the markets crashed, the value of the county investment portfolio dropped and did not recover until mid 2012. Despite the losses, the county pension fund has “banked” nearly $55 million in mythical deferred income, which causes the situation to look rosier than it truly is.
Alas, the situation is even more troubling.
The county’s pension plan predicted a constant rise in the county’s investment portfolio. The county had about $355 million invested in June 2008, sufficient to fund 94.5 percent of its pension liabilities.
The plan assumed levels of income from investments plus employee and county contributions would allow it to pay pensioners and to build the county’s investment portfolio. This model assumed the portfolio would reach $610 million by June 2015. This did not happen.
The county now has $428 million not $610 million in its portfolio as of June 2015 which will only cover 70 percent of its pension liabilities. The county must pay its employee’s future pensions whether covered by the county investment portfolio or not.
Since 2008, county has tweaked the pension plan assumptions but these changes have done little to address the huge hole created by the recession. In 2015, the county pension fund paid out $2.5 million more than it took in. This was after the county adjusted its expected rate of return on investments from 7.75 to 7.25 percent in 2014. The actual 2015 return was 3.02 percent.
Even if we are foolish enough to think the mythical $55 million in “deferred” income will ever show up, it falls far short of stemming the $182 million in red ink. And that shortfall is growing.
It is time for the Board of Supervisors to face this issue head on and stop hiding behind accounting smoke and mirrors.
(Linda Williams is Editor of The Willits News. Courtesy, the Willits News)
Maybe this article could be titled “The Little Short” – as in “we’re a little short” on your promised pension benefits. Just think of all the local folks who are counting on this. And since nothing has really been fixed, nationally or locally, another big meltdown is gonna happen some time. Probably soon.
You SHOULD have been in that room today! High tension conversations