MOORLACH UPDATE — California CAFR — March 19, 2016

The State of California released its audited financial statements yesterday (see http://www.sco.ca.gov/ard_state_cafr_2015.html). This is a month earlier than expected.

I had anticipated that the Unrestricted Net Deficit for Governmental Activities would be around $250 billion (see MOORLACH UPDATE — State of the Municipalities — January 24, 2016 january 24, 2016 john moorlach):

"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."

The deficit amount reported in the Comprehensive Annual Financial Report (CAFR) is $170 billion ($175 billion if you add Business-Type Activities). The State Controller disclosed that the $74 billion in unfunded retiree medical would be included in next year’s CAFR. So I was not too far off, as I was early (again).

The Wall Street Journal provides the Associated Press piece below. It was also picked up by the San Francisco Chronicle andWashington Times.

The Financial Accounting Standards Board (FASB) has required that businesses and publicly traded companies report the unfunded liabilities of defined benefit pension plans as liabilities on their balance sheets. This requirement is three decades old. But the Government Accounting Standards Board (GASB) is finally getting to this requirement.

While Fortune 500 companies have been freezing and closing defined benefit plans and converting to defined contribution plans (like 401(k)s), the governmental sector has been improving benefit formulas. Crazy and fiscally irresponsible! And they could, because the debts that were created were not reported in the CAFRs. A vague footnote disclosure was usually the best that one could get, with a few rare exceptions.

GASB has let this nation down (see MOORLACH UPDATE — Financial Restatements — August 29, 2011 august 29, 2011 john moorlach; MOORLACH UPDATE — HRC and GASB — June 28, 2012 june 28, 2012 john moorlach; and MOORLACH UPDATE — GASB — July 21, 2011 july 21, 2011 john moorlach).

BONUS: I received the endorsement of the California Republican Assembly this morning in my re-election effort for this June and November. Thank you to the members in attendance at today’s endorsing convention. Next Thursday we have a fund raising event and the announcement is provided below. It would be an honor to have your participation as we begin the campaign.

California’s State Pension Obligations Are Larger Than Previously Estimated

New accounting rules for determining debt are aimed at increasing transparency

By JONATHAN J. COOPER / THE ASSOCIATED PRESS

California has nearly $64 billion in pension debt that eventually must be paid to current and former teachers and state workers — a figure more than $20 billion higher than previous estimates, state Controller Better Yee reported Friday.

Yee disclosed the higher pension liability for the first time in California’s comprehensive annual financial report, using a new calculation aimed at more accurately reporting the government’s financial responsibilities. It reflects the state’s unfunded retirement debt as of June 30, 2015.

The “net pension liability” reflects the state’s unfunded retirement costs as of June 30, 2015. California had previously reported a different figure, the “unfunded actuarial liability,” which was $40 billion a year earlier.

Under requirements of the Governmental Accounting Standards Board, state and local governments nationwide are using the new calculation to report their unfunded pension debts. They also must now be included on the balance sheet alongside other government debts, such as bonds, claims, judgments and long-term leases.

As a result, California ended the year $175 billion in debt, up from $119 billion the prior year.

The new rules will increase transparency, Yee said in a statement, “which will in turn focus local and state governments on ensuring they adequately plan for these important long-term obligations.”

Yee said she expects other employment-related benefits, such as retiree health care costs, to be reported in future years, further driving up the deficit on California’s balance sheet.

The new reporting requirements allow state lawmakers and local government leaders to make more informed decisions about pension benefits, said Sen. John Moorlach, R-Costa Mesa, a certified public accountant who has been publicly highlighting pension costs as they’re reported by local governments.

“I’m embarrassed that my profession failed to make this requirement 30 years ago,” Moorlach said. “Now most states are in pension-plan debt up to their eyeballs, and the problem is ubiquitous.”

The financial report said California collected $117 billion in revenue during the last fiscal year. That was up 12 percent from the previous year, mostly from a sharp uptick in personal income tax collections. The general fund had enough cash at the end of the fiscal year to pay for 20 days of operations, up from 16 a year earlier, the report said.

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