Ned Leiba writes:
“Thanks for the links to the study by Professor Joshua Rauh and article by Ed Mendel.
“They do a good job of pointing out that a proper economic and accounting measure of pension liabilities should be based on a risk free discount rate. That concept seems IMPOSSIBLE for most state and local government accountants to accept. When the discount rate is brought up, the response of the City is that the CALPERS rates will be “phased in” over time. The proper measurement standard is a low discount rate and is not something to be “phased in over time.” Period.
“The prayed-for rate of return is something else, as is the politics that influences the decisions of CALPERS, as is the marketing spin kicked out by the City, e.g., the City Manager claimed “we are in a good position” in respect to our pensions.
“I liked this quote from the footnotes of the Rauh study:
“The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent” (Walsh and Hakim 2012). Buffett: “[State and local governments] use unrealistic assumptions . . . in determining how much they had to put in the pension funds to meet the obligations. The pension fund assumptions of most municipalities, in my view, are nuts. But there’s no incentive to change them. It’s much easier to get a friendly actuary than to face an unhappy public” (Summers 2011).
“Now, let’s get a little more accurate.
“Do you realize that the estimates of unfunded pension liabilities even by Rauh are understated?
“Look at the Stockton pension bonds. They are 100% unfunded.
“At the last Audit Committee meeting, a very important question was asked of the City accountant by a member of the Council Audit Committee. How much of the contingent liability to Assured Guarantee will the City pay on the pension bonds? What is the threshold to start payments? In other words, what is the true estimated present value of that added part of the unfunded debt? The City accountant had no answer, other than pure generalities. No numbers.
“It is at least $55m. Assured Guarantees (perhaps) values the entire debt at $100m. The face amount before adjustment in bankruptcy was over $140m.
“Hopefully you can see that we need to add in the unfunded pension bonds to reach the correct amount of unfunded pension liabilities for our City. You need to know the true present value of the pension bonds, and the City does not seem to know, or will not say.
“And finally, you need proper accounting, audits and financial statements.
“You recently posted a display of selected financial information for Measure A. That was not a GAAP financial statement. It was not audited. It was not reviewed and approved by the Measure A Committee. It seems to have material misstatements compared to GAAP. But someone gave you that document and you posted it, without understanding its meaning.
“Well, think about this issue.
“We have substantial past pension liabilities – relating to the CALPERS debt and the pension bonds – that have been charged to Measure A police costs. Those costs were included in that statement you posted as part of the 65% Marshall Plan costs.
“Is it proper to show as a current cost of hiring new officers, the costs of a pension debts that existed well before Measure A passed?
“The answer is no. Expenses belong in the period they economically arise. Not when they are paid. Because you have a pot of $28m per year, does not mean that anything paid from those funds is an expense properly charged to the 65% or 35%.
“There are other significant problems with the “display” you posted. The City adamantly refuses to produce (1) a proper financial statement of Measure A, and (2) have a proper audit of Measure A. Instead, they gave you a display of some, selected financial information.
“Do you know why?
“Perhaps because a proper financial statement audit would result in an audit report that (1) the financial statements are materially misstated (2) the financial statement are incomplete (3) there are material weaknesses in internal control like with the CAFR and (4) the City did not comply with the expectations of the voters to spend 65% of the Measure A proceeds wisely, efficiently on the Marshall Plan activities and 35% to get us out of bankruptcy (already done as of February 2015) and for services to citizens etc.
“Today is April 18, 2016. We do not have a proper financial statement nor audit for Measure A activity for the periods ending 6/30/2014 or 6/30/2015. No auditor would even respond to the cockamamie RFP issued by City Management in March. The City has failed to have an audit as promised to the voters.
“Thanks for continuing to follow the very important pension story, and of course, for watching Measure A.”
A few comments:
• Leiba is right that a proper measure of pension debt should be based on a risk-free “discount rate,” the estimated investment returns of the pension management system. Discount rates are inflated for political reasons to hide the true cost of pensions from the public.
• But the idea that more realistic accounting should not be phased in is crazy. If CalPERS switched to a risk-free discount rate tomorrow, Stockton would be bankrupt before the end of the year. Again. The books would be tidier but the city would be in a permanent vegetative state.
• Leiba’s point about the pension bonds — they’re part of the liability, too — is right on. So add at least another $55 million to the city’s staggering pension liability.
• To criticize me for posting a city financial report “without understanding its meaning” is presumptuous. I understand Leiba believes most every city financial report and chart is false. But we have to start fiscal discussions somewhere. The important thing is that we’re having far more fiscally literate discussions than we did before Stockton’s meltdown.