The public employee unions commonly label every attempt to reel in their escalating wage and benefit costs as anti-labor or anti-union.
But the reality is there needs to be an adult at the bargaining table who knows what the public agency’s true public compensation costs are and what the agency can truly afford.
Public employee compensation costs, particularly pension and benefit costs have gone unmitigated for so long that public agencies are now at a major cross-roads where they either need to bring them in-line or face the decimation of all other public programs and services, and even municipal bankruptcy. This is bad for everyone, particularly public workers.
Kersten Institute Finding Startling Trends in Municipal Finance Across State
The Kersten Institute for Governance and Public Policy has been conducting an in-depth examination of public agency finances in California for the past several years and we are finding dramatic results regarding the ability of public agencies to pay for the current levels of public employee pay and benefits.
It is a little known fact in the public media and within public agencies that there is a significant fiscal storm coming as the result of new accounting standards enacted by the Government Accounting Standards Board (GASB) and Moody’s Investor Services, Inc.
Furthermore, these new standards go into effect for the 2015 fiscal year, which ended on June 30, 2015, meaning they will be incorporated into the independent financial reports or CAFR reports due out in the fall and early 2016.
Whole reports and analyses have been written on the impact of these new standards, but the bottom line is that they are projected to push dozens, potentially hundreds of California agencies, to the brink and even past the brink of balance sheet insolvency. The reason is that the previous accounting standards did not require public pension obligation bond debt, other post-employment employment obligation (OPEB), and other related debt to be counted as liabilities for purposes of calculating a public agency’s total net worth.
Financial Analyst Finds That Many Major California Localities Will Be Financially Insolvent Once New Accounting Changes Take Effect This Fall and Winter
Financial expert John Dickerson completed an analysis for YourPublicMoney.com in 2013 which still holds up as far as projected impacts.
Dickerson completed a study that found applying the new Moody’s and GASB’s new pension financial reporting rules on the 2011 statements of seven California counties with pension funds (Alameda, Contra Costa, Marin, Mendocino, Orange, San Mateo, and Sonoma) would lead to an “overnight” drop of $8 billion in “net worth,” according to Dickerson’s 2013 analysis.
Furthermore, the seven counties reported that they had over $10 billion in assets than debt at the time, but that analysis did not accurately reflect the inclusion of pension and OPEB debt. Dickerson’s detailed and well-founded analysis found that the net worth of these seven counties dropped to negative $7.4 billion—technically “balance sheet insolvent” once the Moody’s changes were applied. Only Marin County was left with positive net assets at the time.
The Kersten Institute has been investigating Dickerson’s methodology and applying it to other public agencies in California and finding the many other agencies are likely to be on the brink or past the brink of balance sheet insolvency when these changes hit public balance sheets this fall.
The Kersten Institute is in the process of notifying California’s public agencies of this impending downgrade in their financial standing and providing consulting on solutions to the problem.
Los Angeles County Projected to Be Balance Sheet Insolvent
In Los Angeles County alone, the Los Angeles County Employees Retirement Association faces an unfunded actuarial liability of $13.3 billion, and a whopping $25.7 billion in unfunded liabilities for other-post employment benefits, primarily retiree health care. Yep, that is billions of dollars folks, no typos, straight from the agency’s own audit reports.
The county’s governmental funds only has about $25 billion in assets, and a declared $9.3 billion net worth in 2014. The county will be well in the red, balance sheet insolvent by a long shot, when that $38 billion in unfunded public employee benefit obligations hits the books officially for the 2015 fiscal year.
Kersten Institute analyses of Sonoma County, Sacramento County and a number of other localities show similar findings—a sea of red ink and the only way out will be a long road of prudent but tough decisions to get back in the black.
Accounting Expert Lobbied for Important Accounting Changes to Unmask Public Finance Problem
Accounting expert and certified CPA Marcia L. Fritz has been involved in lobbying for the accounting changes before GASB when they were first considered back in 2005.
Fritz agrees that the changes represent a significant accounting change and have served to mask a huge amount of pension and OPEB debt from public agency balance sheets.
Fritz stated that the previous GASB rules “provided an environment for pension abuse in California” and have greatly contributed to the current crisis. Fritz notes that if alternate rules were adopted earlier, the state’s pension crisis may have been prevented.
Fritz requested that pro-labor candidates provide evidence that labor union tactics have resulted in more jobs and better service for citizens. Most of the recent evidence appears to indicate that public employee compensation and benefit costs, particularly pension costs, are at a level that are reducing the ability of public agencies to hire more workers and provide better services.
Public Employee Unions Need to Put Health of Public Agencies First
After all, protecting workers and their jobs requires putting the financial health of our public agencies first, something rarely acknowledged at bargaining tables on the union side.
Just because public employee unions have the power to max out pay and benefits for their workers does not mean it’s a good thing. It may not all be their fault, because all public contracts are approved by elected officials and typically negotiated by public managers.
Furthermore, there are major constitutional prohibitions on reeling in public employee compensation and benefits through collective bargaining, so unlike the private sector, public managers have a tough time laying off workers and cannot freeze pension plans.
The reality is that public employee unions have an equal stake at the bargaining table, which gives them an enormous amount of power when it comes to setting pay and benefits. Collective bargaining is built on the principle that to get something you have to give something up, which does not really work if the California constitution locks in escalating pension benefits decades into the future.
It is a somewhat unknown fact that public agencies can, however, reduce or eliminate OPEB obligations and require higher employee contributions without running into any constitutional issues. Although this is rarely done due to political reasons.
Union control of the public sector has reached a breaking point, and things are going to have to change if government is going stay afloat in California.
What is known, is that taxpayers will be furious when they get the bill for this pending disaster, assuming they ever know about it.
Stay Tuned for More Analysis and Discussion
Stay tuned for more analysis and discussion. The Kersten Institute is planning to continue to track this important issue and provide valuable insight and analysis of this looming fiscal storm which has the potential to push many of California’s public agencies over a fiscal cliff from which they may never recover.
It may just take another wave of municipal bankruptcies in California before state and local governments get serious about addressing the pension issue and the root causes of unsustainable public employee wage and benefit costs, which are jeopardizing the effectiveness and long-term sustainability of our public agencies. Furthermore, this trend has also helped fuel public outrage and voter distrust of elected officials to solve the real issues that grip our state and local governments.
Many of the political battles in Sacramento and in local government venues up and down the state are just window dressing and passing distractions, compared to the fiscal storm that will hit this fall and early 2016.
If nothing else, public agencies and elected officials need to be aware of these accounting changes and the far-reaching impact they will have on public sector balance sheets beginning in fiscal year 2015 and beyond.
The Kersten Institute can help provide your agency with a preliminary assessment of the impact of these new accounting rules prior to the release of your agency’s 2015 CAFR in the fall of 2015 or early 2016. Feel free to contact us at firstname.lastname@example.org or (510) 761-8065 for additional information and request a free consultation.
David Kersten is an expert in public budgeting and collective bargaining proceedings. Kersten has been at the table for dozens of major sets of negotiations over the previous decade.