By State Senator John Moorlach.
Get ready California. Without very much fanfare, the proverbial one-ton Government Accounting Standards Board gorilla has entered the room.
As the result of years of discussions over how best to account for the growing unfunded liabilities owed by government pensions systems, municipalities for the first time ever must include the unfunded actuarial accrued liability of their defined-benefit pension plans in their annual financial reports.
Orange County is one of the first municipalities to release its audited financial statements under the new rules. It is provided in a document known as the Comprehensive Annual Financial Report (see ac.ocgov.com/info/financial/cafr/2015).
The latest financial report is historic, and every resident should be interested in what it has to say. Although the county had a relatively stable year financially, the bottom line dropped like a rock when accounting for the pension liability. In fact, the bottom line fell to depths it has never reached before.
That’s what the GASB can do, and that’s why I’ve been warning Orange County taxpayers for over a decade that we must address our unfunded liabilities.
Orange County got a good start by reforming its retiree medical liabilities in 2006. Working with the public employee unions, the county reduced its unfunded liability by $1 billion and is now saving taxpayers $100 million a year. This is an achievement that I am very proud of. But it’s a small drop in the bucket compared with the arrival of the one-ton gorilla in the latest financial report.
With the inclusion on its balance sheet of the county’s unfunded accrued liability for its defined-benefit plan, the positive Unrestricted Net Assets – at a historic high of $331 million last year – went to a historic low negative Unrestricted Net Deficit of nearly $3 billion for fiscal year 2014-15, which ended June 30. This is a swing of $3.3 billion, resulting in the worst documented financial position in Orange County’s 126-year history.
We’re talking a gorilla twice the size of the bankruptcy losses Orange County incurred in 1994. Communicated a different way: If every one of Orange County’s 3.1 million residents chipped in $1,000 each, the county would be at the break-even point.
Fifty-seven other counties soon will be reporting their audited financial statements, and we can expect the same results on their balance sheets. The pension liabilities are that massive. This gorilla is no respecter of location or size. Cities will also be rocked into financial reality within the next few days or weeks.
GASB should have required the reporting of these unfunded liabilities for the past three decades, but failed to do so. Now they are being dropped in, and the wake of the splash is truly of tsunamic proportions.
It gets worse. California will be releasing its own CAFR in April. The Unrestricted Net Deficit last year already was $117 billion. Once the state’s unfunded liabilities are revealed and accounted for, expect the deficit to hit the $250 billion area. A quarter of a trillion dollars – that’s roughly $6,400 for every man, woman and child in California.
And we haven’t even thrown in your city, your school district, your community college district and your utility districts, like water and sanitation. The numbers will be so dramatic that you’ll see newspaper articles announcing the sad news.
Since public employee pension plans are reliant on the performance of the nation’s stock markets, the past few weeks on Wall Street mean that future audited financial statements may have even worse news to share.
I’m an accountant and a CPA. I’ve counseled for years that, just like spending more than you receive is irresponsible, so, too, is making unaffordable commitments to pay something in the future. The debts of maintaining a bloated government and providing overly generous pension benefits to government employees has a cost. And for the first time ever, governments must quantify that cost in their annual audited financial reports.
GASB is finally allowing municipalities to come closer to telling the truth about their total financial pictures. And those municipalities can tell their constituents that they will be tightening their belts, setting aside a larger rainy-day fund or, as government prefers to tell you, that more taxes are needed.
Taxpayers, we have a problem. And it needs to be addressed. It is now staring us straight in the face in the annual audited financial statements. The pension debts are no longer hiding in the shadows. The GASB gorilla has arrived.
What is there for our municipalities to do? More cuts and benefit modifications should be pursued. Outsourcing should be expanded. The public employee unions should negotiate to reduce pension benefit formulas for current employees, which is the best alternative. If municipalities experience unforeseen financial calamities, then it may even require a bankruptcy judge to approve a reorganization plan. Ask the city of Detroit how that worked for them.
The sooner these ideas are pursued, the better. Or expect continued pressures to increase car, gasoline, sales and income taxes.
Originally published in the Orange County Register and cross-posted at Fox & Hounds Daily.