Moody’s New Pension Rules Would Bankrupt Six Cal Counties Including Marin

Under the enactment of Moody's Pension Rules Marin County would become technically bankrupt because its investment return assumptions are much too high.

This is a posting of an article written by Wayne Lusvardi in Fox & Hounds on Wednesday, January 16th, 2013

Read the post on Fox & Hounds site:


Unedited text of Wayne Lusvardi's article:

To meet new public pension financing rules, six counties in California would have to dedicate all of their existing property taxes to pay for pensions or pursue municipal bankruptcy through the courts. That is the conclusion of an independent pension analyst of the new pension rules established last year by Moody’s municipal credit rating agency. The only alternatives would be to get voters to approve immense property tax increases or undergo deep cutbacks to essential public services.

The six counties listed below affected by Moody’s new pension financing rules all have independent pension plans that are outside the California Public Employees Retirement System (Cal-PERS):

Alameda County

Contra Costa County

Marin County

Mendocino County

San Mateo County

Sonoma County

Back on July 2, 2012, Moody’s announced proposed adjustments on how it evaluates public sector pension data.  Independent public sector pension analyst John Dickerson in Mendocino County recently released his analysis of Moody’s proposed pension fund rating changes for the above six counties. Dickerson has a website –- YourPublicMoney.com –- for public oversight into public pension plan solvency in 21 California counties. The California Public Policy Center website recently posted a summary of Dickerson’s full 10,000 word analysis of Moody’s pension fund changes.

Moody’s proposed changes in evaluating pension funds are:

The assumed rate of return on pension fund investments will be lowered from 7.75 percent to 5.5 percent. The lower the interest rate on pension fund investments, the larger the cash contribution required by employees or counties. Public pension funds have assumed unrealistically high investment return rates based on inflation during the Mortgage Bubble.

Municipalities will be required to catch up on its unfunded pension liabilities in 17-years, not the 20 to 30 year period now used.

Full payment of borrowed principal and interest – called full amortization — will be required in making pension payments. This means that level payments will be required, not graduated payments that start low and rise over time.

Pensions Would Consume All Property Taxes

Dickerson calculated the affects the above changes will have on the above-listed six counties. Pension payments will have to double according to Dickerson.

Catch-up pension payments will have to increase in the six counties by 192 percent. And existing aggregate pension bond payments will have to be increased by a total of $177 million total in the six affected counties to avoid insolvency. As Dickerson states, this will result in consuming 98 percent of all the property taxes in the six counties for pensions only as shown in the table below.

The percentage that each county depends on property taxes for their operating budget is shown in the table below. Alameda County –- with a seaport related economy — relies on property taxes for a low 12 percent of its General Fund. Agricultural-based Sonoma County has 43.6 percent of its General Fund dependent on property taxes.  Contra Costa County relies on property taxes for 21.9 percent of its operating costs; Marin County 25 percent; Mendocino County 14.4 percent; and San Mateo County 22 percent.

Doubling the amount of property taxes dedicated to pensions wouldn’t be enough to meet increased pension payments in two of the counties. Mendocino County would have to raise property taxes by 9 percent and Contra Costa County by 54 percent to meet their pension payments. This would require voter approval unless other funding sources –- such as the county share of sales taxes or income taxes –- could be shifted away from essential services such as police, fire protection, road maintenance, social services and medical care.

Failure for each county to double pension fund payments could result in: a) bad credit ratings; b) much higher interest rates on municipal bond borrowings that would crowd out pension payments in county budgets; or c) even failure of bond investors to buy county bonds for public works projects or for refinancing of existing pension bonds.

Large property tax increases to cover the unmet portion of public pensions is not much of an option in an economic recession. That is because real estate markets will adjust property values downward resulting in lower property values and, thus, a lower property tax base.

Cal-PERS and Cal-STRS: Not Too Big to Fail

As the editor of the website UnionWatch.org sums up the situation:

“The arithmetic, fact-based reality is this: We are on track to spend more money each year to pay public sector pensions than we will spend on social security for five times as many citizens. The average government employee retires with benefits that are five times more lucrative than the average social security recipient… the counties he (Dickerson) evaluated, Alameda, Contra Costa, Marin, Mendocino, San Mateo, and Sonoma, are not unique…“And what they (the six counties) are going to face is unlikely to differ significantly from any of California’s other local government pension funds, or CalPERS or Cal-STRS for that matter.”

The bond markets, not the courts, are starting to push counties into fully funding their pensions that could make many cities and counties in California fall into municipal bankruptcy. Gov. Jerry Brown, the Democratic supermajority in the State legislature, Cal-PERS, and public sector unions are hoping for a favorable court ruling in the pending municipal bankruptcy case of the City of San Bernardino. But the bond market is beginning to overrule whatever decision comes out of the courts.

Fearing an uncontrollable statewide wave of municipal bankruptcies, the California legislature passed a municipal bankruptcy reform law in 2011 –- Assembly Bill 506 – requiring cities and counties to first obtain a neutral bankruptcy analysis except in the case of a financial emergency. But it is difficult to be neutral between unsustainable pensions and essential protective public services when the governor has released criminals back into communities under prison realignment.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

Bob Silvestri January 22, 2013 at 10:23 PM
Thanks, Scott. But the process you suggest is what the Grand Jury did in evaluating the unfunded liability and that is what produced a $2 billion plus shortfall. Also, pension funding obligations don't use 80 year market averages (which I would have to say are more like 11% for the S&P, and not realistic buying govt. bonds in recent years or the next five years at 11% or bills at 5%). 5.5% is being called the Buffet Rule since it's Warren Buffet (nobody's fool) who is advising pensions to use that rate.
Bob Silvestri January 22, 2013 at 10:25 PM
Again, that's what the Grand Jury and all the rest of us have been saying for years: make this your own problem or cut benefits to more realistic levels. The County decided to create their own private retirement plan system. So I'm sure we all agree public employees should live in the same "risk" environment as the rest of us..
Al Dugan January 22, 2013 at 11:40 PM
While I will debate the return issue, just look at 2008 and 2009, I agree 100% with you recommended switch from a defined benefit (DB) plan, where the county guarantees the benefits, to a defined contribution (DC) plan, where the county contributes an agreed amount every year. DC plans in the private sector are commonly called 401k plans. This began in the 1990's in the private sector as companies were running into the exact problem the public pension funds are in now. You are right Moody does not set the rules for pensions but it they can rate the county with a "junk" rating.
Vox Publius January 24, 2013 at 07:19 AM
Ya'll are just 'rearranging the deck chairs on the Titanic'. Actually, worse than that: Ya'll are just TALKING ABOUT 'rearranging the deck chairs on the Titanic'. Actually, even worse than that: Ya'll are JUST BEGINNING to talk about 'rearranging the deck chairs on the Titanic'. And watch out from such non-nonsense you speak. They tried to crucify Scott Walker in Wisconsin actually dealing with this very same obamanation: public pensions!
Kevin Moore January 24, 2013 at 06:26 PM
For 5 years, about break even, plus dividends if you look at the S&P 500. At 7.75% compounded over 5 years, the market should be up 45%. http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbol=%5EGSPC;range=5y Here is the S&P500 over the history. Notice the sharp rise in 1990. You can thank the "digital age" and "easy credit policy". We are heading for a triple peak after two bust cycles. http://finance.yahoo.com/echarts?s=%5EGSPC+Interactive#symbol=%5Egspc;range=my;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=undefined; The "Rule of 72". Take the return rate and divide it into 72. That is how many years it should take for the principle to double. This works for bank loans and investments. 7.75% projects the principle to double every 9.30 years.


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