On October 15th MOFD presented to its Board of Directors the audited financials for the fiscal year ending June 30, 2014. This 90 page document has reams of numbers, pages of text, and even some pictures. But the one item missing was the answer to the big question: “is MOFD going bankrupt?” This is usually found in the balance sheet but this year’s balance sheet remains the same piece of fiction as it has been since the District went “under water” in 2008.

The District wants us to believe that their assets exceed their liabilities by $10 million. In reality, nothing could be further from the truth. While the District does have $10 million in capital assets, which it needs to provide us service, and $4 million in cash, its liabilities overwhelm these meager savings. (1) It has $17 million in unfunded retiree medical benefits. (2) It has $160 million in pension liabilities with only $120 million in pension assets as an offset. (3) It still owes $20 million on a bond it borrowed in 2005 when its pension was previously underwater. That is $67 million in net liabilities covered by $4 million in cash and it wants us to think it has net assets.

While the “official” balance sheet may follow GASB (Government Accounting Standards Board) guidelines, it does not tell the Board, none of whom are accountants, nor the public, what MOFD’s financial situation is. To do this they need an Executive Balance Sheet (also available in speadsheet format) which really tells the story of where MOFD stands financially.

The Task Force has provided such a document. The major revisions to the balance sheet in the Audited Financials are:

  1. Pension Assets are shown as assets ($126 million)
  2. Pension Liabilities are show as liabilities ($166 million)
  3. The full value of retiree medical benefits (liabilities) are shown ($17 million)
  4. The Pension Obligation Bond loan is shown as a single line item ($22 million)

This shows a true balance of a net liability of $64 million as opposed to the audited financial balance of a positive $10 million; a $74 million difference! With such a huge difference between what they are being shown and reality, no wonder our decision makers make bad decisions.

In addition, this Executive Balance Sheet bifurcates "Operating" assets and liabilities from "Employee Benefit" assets and liabilities.  The employee benefit assets and liabilities, mostly the pension, completely overwhelm the operating assets and liabilities.  This is probably why pension and OBEB have been relegated to the footnotes.  However, elements of them (part of OPEB, the prepayment of the pension resulting from the POB and the POB liability itself) have gravitated into the balance sheet.  This Executive Balance Sheet puts Employee Benefits in their own balance sheet and then consolidates them with Operations.

The revised balance sheet also compares this year’s values, both audited and “revised”, to those of the previous four years.

In addition, the revised balance sheet also shows the full value of the liabilities (not just the discounted present values) and the expected future value of the pension assets (including assumed earnings). The reason for this is that the discounted numbers assume a discount rate which is debatable. For the pension liabilities (and assets) it is currently 7.25% which is what CCCERA assumes its assets will earn over the long term. Many people, including professional fund managers, do not believe this return will be achieved or that the types of assets which would provide such a return create a risk that is not appropriate for a government pension fund. The total undiscounted liabilities, due over the next 50 years, could be as high as ¾ of a billion dollars.

The Task Force has also provided a Consolidated Budget document for 2014-15.  This document combines the Districts three funds: the General Fund, the Debt Fund and Capital Fund.  All money coming into the District should be going into the General Fund and dispersed from there.  In addition, the "Debt Fund" is funding the Pension Obligation Bond which is really an employee benefit expense and should be shown as such in the General Fund accounting.  The attached document does this.  This also compares this year's budget with the previous four year's budgets and actual expenditures.  It is also available in spreadsheet format.

Finally, the Task Force has reviewed the returns actually experienced by CCCERA over the past 11 years

  1. They have been very volatile, ranging from plus 27% to minus 28% indicating a high degree of risk.
  2. Over the past ten years they have averaged 6.8% and over the past eight years 5.9%.

In 2012 CCCERA reduced their assumed rate of return, and thus liability discount rate, by 0.50%, from 7.75% to 7.25%. This increased MOFD’s gross liability by 8%. If MOFD or CCCERA decided that it was more prudent to assume a 6% discount rate, it would increase the present value of MOFD’s liabilities, and thus its required assets, by 20%. That would be over $30 million.

This is information that the Board and the community should have. The fact that the MOFD annual financial statement does not include it is regrettable.

FINAL NOTE: The 2013-14 audited financials failed to disclose the position of their pension plan assets and liabilities, or even the net liability.  Historically this information has been contained in a footnote.  This year, while the footnote exists, the District's current position has not been included in it.  While this may have been an inadvertent omission, since CCCERA did not release the 2013 results until a few days before the MOFD financials were released, this ommission was not noted in the Staff Report nor the Auditor's Statement nor was it commented on during the 10/15/2014 Board discussion of the financial report by any board member.  And yet, they voted to receive the report, without adjustment, 5-0.  This omission is substantial.  The $166 million in liabilities eclipses any other value in the report.  Even the $40 million net liability is twice the size of the annual budget.   In an article in the 11/5/2014 Lamorinda Weekly this omission was noted to which one MOFD Dircetor commented "Those charges affect our liability, Even though they are not required to be in our financials until next year, they should be publicized."  At the last update to this site (11/22/14), the District has done nothing to correct this omission.