CPA Ned Leiba on Stockton’s fiscal health

CPA Ned Leiba, the shy and retiring sort who never shares his opinion, was not wild about this story yesterday, which cited a publication’s article ranking Stockton among America’s healthiest cities fiscally.

I’ll say off the bat that the article didn’t necessarily say Stockton is healthy — just that it’s healthier than a lot of other places right now. A person also could be one of the healthiest patients in a hospital, but that doesn’t mean he’s healthy, either, does it?

Anyway, here’s what Mr. Leiba wrote. He began by referring to this paragraph from my article:

“According to the city, the overall [pension] obligation is $343 million, $30 million more than a year ago. Some outside observers have expressed fear that all cities’ CalPERS obligations could balloon in an economic downturn.”

Then, Leiba wrote,

“Look at the 6/30/2016 CAFR and my comments that are cogent:

“The CAFR displays a staggering increase in unfunded pension liabilities. Per the statement of net position, the net liability is $449.3m versus $414.7m a year before. The one year increase in unfunded pension liabilities, after all the payments, was $34.7m.

“But the true unfunded pension liability is far higher than $449.3m. You must add the unfunded pension bonds. The city tells us that the present value of those bonds is only $53.7m. But you must increase this liability by the amount of “contingent general fund payments” that could be millions. Ignoring the millions of “continent” payments, just using the $53.6m results in an unfunded pension liability of $502.9m.

“But the City uses an unrealistic discount rate of 7.65% to value the pension liability. The CalPERS Board voted to reduce that 7.65% to 7.5% and now to 7%. The notes to the financial statements show the effect of a 1% change in discount rate. With just a 1% adjustments, the unfunded pension liabilities jump to $716.5m. A proper discount rate is a risk-free 3% or at most 4%, not 7.65% or 7.50% or 6.50. I estimate that the “true” unfunded pension liability using a proper 3% discount rate (as would be required under FASB rules) would be $1.495 billion. If we used the upper end of the risk free scale 4%, the liability would be a mere $1.282 billion.”

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