On Friday November 13th, MOFD released its audited financials for its fiscal year ending June 30. This 117 page document, which it calls a CAFR (Comprehensive Annual Financial Report), includes the District’s balance sheet along with other information. It is the balance sheet which the Task Force takes issue with as it has in the past. The balance sheet may meet government standards, but it understates its net position by $23 million and it drastictly understates it gross liabilities and assets.  MOFD needs to create something different than what the law requires in order to truly understand its fianancial position.

The balance sheet for MOFD’s fiscal year ending June 30, 2015 (on page 5 of the report) shows that the District has $40.8 million in assets and $63.7 million in liabilities resulting in a NET LIABILITY of $22.9 million. This value ($22.9 million) is reiterated six more times throughout the report. This is a significant change from the previous year’s report of $9.8 million in NET ASSETS because, for the first time, MOFD is showing its pension net liabilities on its balance sheet. In the past, it has only reported the condition of its pension in the footnotes and last year it did not even do that.

Every year since at least 2008 MOFD has shown about $10 million of net assets (not liability) on its balance sheet. Even when the pension plan assets lost $30 million in value the prior year, MOFD’s 2009 balance sheet showed only a $1 million decline, from $12 million in net assets to $11 million. At its worst (2013), MOFD had $75 million in net liabilities but its balance sheet for that year showed net assets of $9 million; $41 million in assets and $32 million in liabilities. In reality that year MOFD actually had $139 million in assets and $214 million in liabilities. The official MOFD balance sheet has been a fantasy; in no way reflecting reality.  And it still is.

This was not totally MOFD’s fault. They were obligated to follow GASB (Governmental Accounting Standards Board) protocol and their balance sheet did that. It was just that the “standards” produced a document which was all but worthless. Even if someone knew how to weed through the 21 pages of footnotes and add or subtract items not included “above the line”, the truth was elusive. However, an agency which was searching for the truth and honest and good management would have made an attempt to produce, in addition to the “official” GASB balance sheet, an “executive summary” balance sheet for the use of management and the community. This was never done.

This year, however, MOFD claimed that "the truth would shine through” with an honest accounting of assets and liabilities. This year GASB changed one major provision and that was moving the employee pension liabilities and assets from a obscure footnote to “above the line”; into the balance sheet. This is a major change but, unfortunately it still allowed major obfuscation of the true condition of MOFD (and every other governmental agency in America). The reasons being: (A) on the "net" condition is reported (so MOFD coud have a billion dollars in liabilities and 999 million in assets and it would only show a net liablity of one million dollars even though 30% of the asset value could disappear next year as it did in 2008).  (B) GASB prescribes that MOFD include two assets and one liability on "the books", which do not reflect reality but are merely acounting "smoke an mirrors": (1) a $22 million asset called "pre paid pension" which is already included as an asset in the pension's net value (thus double accounted); (2) a $400,000 asset which has something to do with the pension's net value being put on the balance sheet which is not fully explained but which is not a real asset; (3) a similar $6 million liability which is also not really expalined and is not a real liability. (C) MOFD has about $12.5 million in retiree medical benefit liabilities.  GASB "allows" MOFD to slowly but these on the balance sheet and, to date, MOFD has put $6.5 million on, leaving another $6 million remain "hidden".  GASB doesn't want to "shock" the balance sheet (net liabilities went up $33 million this year but they are afraid of an additional $6 million).

The net results: MOFD now claims that it has $41 million in asset (virtually the same as last year), but it now has $64 million in liabilities (up from $30 million last year), producing a net liability of 23 million (instead of net assets of $10 million). This is a step in the right direction; but only a step. In reality, MOFD has $162 million in assets and $207 million in liabilities and a net liability of $45 million.

This is a great ($30 million) improvement from the $75 million net position (which was never demonstrated nor admitted to) of only two years ago, but it will take something other than a GASB compliant balance sheet to show MOFD’s true financial condition.

Any financial professional, and most non-professionals, know there is a big difference from owing nothing (a zero net) and having a fixed obligation of $170 million (our pension plan’s gross liabilities) offset by a highly volatile (they lost 28% of their value in 2008) asset of equal value. Right now the assets are not equal to the liabilities but if they are someday, GASB policy would be to show a zero on the balance sheet as opposed to a $170 million liability with an offsetting $170 million asset. This is not only not very smart; it’s dangerous. Thus, MOFD needs its own balance sheet in addition to its GASB balance sheet.

The Task Force has produced what it believes would be a useful, and honest, balance sheet for MOFD management and the community. It is fully described in a letter to the MOFD Finance Subcommittee but its major elements are:

            1) All assets and explicitly noted. There is no “behind the scenes” netting of assets against liabilities or visa versa.

            2) Operation assets and liabilities are bifurcated from retirement benefits because those benefits and the assets needed to fund them are the tail that wags the dog. Rather than hiding these massive liabilities in footnotes, the balance sheet segregates them and then consolidates them.

            3) MOFD’s largest assets and liabilities, pension and retiree medical benefits, stretch out for a long period of time (sixty years or more). When these liabilities have not been hidden completely, they have been shown only as a discounted present value. The year-by-year value actually is unknown to the District. This is akin to a homeowner knowing only the current balance of his home mortgage but not know what payments he is obligated to make or for how long. There is one major difference and that is the homeowner can actually pay off the mortgage balance; the District cannot pay off the discounted present value of its liabilities. It has to pay them, year-by-year, for the next 60+ years. Shouldn’t it how much it is obligated to pay? The Task Force’s balance sheet shows an estimate for the total and at the end shows how it estimated the number (as the actual data, while in existence, is not available to anyone).

            4) MOFD management should understand how its financial position has changed over time. The Task Force balance sheet compares it to the balance sheets (similarly reformatted) going back to 2010.

In addition, the Task Force has reformatted the MOFD budget document (the second leg of the financial three-legged stool; the third being the long range financial plan which is just a future projection of the budget and should be in the same format). It has reconsolidated certain expenditures (the pension bond is an employee expense and should be aggregated with other employee expenses), and it has the Capital Fund and Debt Fund funded by the general fund so that all revenues come into general fund (the Fire Flow Parcel taxes were never created to be used solely for capital expenses). In addition, the Task Force budget report compares the current year’s budget to the budgets of many prior years (back to 2007); not just one or two years. The Task Force believes that a functional “Comprehensive Annual Financial Report” would include such a document (the current CAFR does include the current year’s budget; operating and capital budgets described separately).

The Balance Sheet and Budget reports are available in both PDF and SpreadSheet format.