Wednesday, February 3, 2010

MMWD; Marinites Meet Your Master

“Tip” O’Neill once said “All politics are local.” I have reported in the past on national and state issues. When I received a notice in the mail of a proposed increase in my water rates I decided to do some research at the local level. If you are a regular reader of this blog you will not be surprised at what I found.

The Marin Municipal Water District (“MMWD”) recently issued a public notice for a proposed increase of 9.8% in the average water rate and service charge to go into effect March 1, 2010.[1] The previous increases in 2008 of 9.7% and 2009 of 7.3% were effective May 1 of their respective years, not in the following fiscal year.[2] MMWD’s fiscal year ends on June 30. The effect of this is to accelerate revenue from the rate increase into the ending year increasing revenue that was not budgeted. The process is gathering speed. This proposed increase reduces the interval between rate raises to less than twelve months (in this case from the earlier implementation date of May 1 to a new date of March 1 so on an annual basis the magnitude of last year’s increase is misrepresented. In this case the increase implemented for FY 2009 actually becomes 8.93% [(12x7.3+2x9.8)/12=8.93]. If MMWD returns to an annual cycle and there is not another increase prior to May 1, 2011 (I wouldn’t bank on it) this is an average increase of 9.5% per year. Over this same time the annual increase in the Consumer Price Index has been 1.47%.[3]

In calling for the increase the first reason cited was increased cost of purchased water, increased cost of treatment chemicals and new capital projects to increase supply.[4]

In the next paragraph the letter reads, “Water consumption continues to drop. While this decrease helps our supply picture, it hurts our financial picture. We had planned for a 5% reduction in water use due to conservation, but water use dropped 8.5% in fiscal year 2008-09, resulting in inadequate revenue to cover operating expenses. To complicate matters, most of the costs of providing water are fixed and do not fluctuate with the sale of water. Even so, we cut operating expenses by $5.3 million in 2009-10 and will eliminate at least $2 million in 2010-11.”

In the Preliminary Budget for 2009-11 actual 2008 operating expenses were $60,583,391 and the revised (upwards) operating expenses forecast for 2009 are $70,754,312, an increase of 16.7%. The preliminary budget for 2010 is up 1.97% at $70,768,416 and increases in 2011 by 5.15% to $74,414,772.[5] I am struggling to find the $5.3 million cut in operating expenses and taking $2 million out of 2011 still increases the budget by 3.4%. If “most of the costs of providing water are fixed” why do our bills keep going up even as water sales revenue continues to increase?

Here’s one reason. On August 8, 2005 the Government Accounting Standards Board (“GASB”) published its Implementation Guide to Statements 43 and 45 on Post Employment Benefits Other Than Pensions.[6] GASB establishes accounting standards for the preparation of audited financials for government entities. The implications of changes in accounting standards can be quite profound as in the example of General Motors seen in an earlier blog. These changes are designed to better inform management and stakeholders of their future liabilities and the funding status of those liabilities. In this particular case it is to clarify the obligations made by MMWD to its employees for retirement benefits not included in their pension plan also known as Other Post Employment Benefits (“OPEB”). For MMWD it required an increase of almost $2.3 million or 167% in the line item “Retiree Benefits”. Note 10 of the audited financials, which discusses OPEB at MMWD, is worth a read. In part it states, “As of January 1, 2007, the most recent actuarial valuation date, the plan was not funded. The actuarial accrued liability for benefits was $33,973,000, and the actuarial value of assets was $0. The covered payroll (annual payroll of active employees covered by the plan) was $18,850,000, and the ratio of the Unfunded Actuarial Accrued Liability (“UAAL”) to the covered payroll was 180%.” 2009 is the first year in which a contribution to this UAAL was ever made.

While this may come as a surprise to its customers, the MMWD Board was well informed. In a Grand Jury report entitled, “Retiree Health Care Costs, I Think I’m Gonna Be Sick” released March 19, 2007 finding F8 states, “Unless government employers prudently manage the liability for retiree health care benefits, they will be forced to cut services, reduce benefits, and/or raise taxes to satisfy credit agencies.”

To which MMWD responded, “MMWD believes that public agencies should always be prudent when managing public funds. However, MMWD does not think it is beneficial to speculate on what might occur in the future (emphasis added).”[7] We are now clear on what that future holds.

But this is only the tip of the iceberg. Note 8 of these same audited financials discusses the contributions made to the employee pension plan. Like most public plans this is a defined benefits plan, meaning that no matter what the performance of the assets of the plan or the contributions made by the plan sponsor, that plan sponsor is on the hook for the promised benefits. Like the OPEB this plan is managed by CalPERS. The actuarial methods and assumptions used are those adopted by the CalPERS Board of Administration. Employees are required to pay 8% of their covered salary into the Plan. Beginning January 1, 1999 the District began paying 1.5% of the covered salary for all employees and at January 1, 2001 an additional 1.5% bringing the total to 3% of covered salary. Employees now only pay 5%. The District pays the entire 8% requirement for senior managers. CalPERS assumes they will earn 7.75% on contributed funds. What unfolds next is not a pretty picture.

At the end of the financials under the title of “Required Supplementary Information” is the unaudited “Funded Status of Plan” or what I would re-title the “Unfunded Status of Plan”. At the end of FY 2008 the Actuarial Value of the Plan was $116,111,118 with an Actuarial Accrued Liability of $133,294,684 leaving an unfunded liability of $17,183,556 and a funded ratio of 87.1%. It is interesting to note that over the reported five years, a period when all investments were making superior returns, the funded ratio remained roughly the same. Of greater concern, the Unfunded Liability as a Percentage of Payroll grew. In other words those taking out are beginning to overwhelm those paying in.

And it gets worse. Between June 30, 2008 and June 30, 2009 CalPERS lost 23.4%[8] of the value of its co-mingled portfolio. According to the MMWD 2009 financials the Covered Payroll for the plan was $20,400,000. There is no valuation yet for the fund at June 30, 2009 but if we apply the known percentage loss to the 2008 balance and assume the contributions made in 2008-09 neither lost nor gained we can come up with a rough approximation. The results of these calculations appear below.

With an unfunded liability between the defined benefit pension plan and other post employment benefits standing at an estimated $92,000,000 or 450% of covered payroll and 131% of the entire operating budget is there any hope?

On September 24, 2009 the Marin Managers Association released Draft Version #7 of a report with the "Subject: Proposal for Regional City and County Pension Standard".[9] It highlights the chronic problem with funding defined benefit plans, explaining why they are becoming increasingly rare in the private sector. It goes on to say “There exists an increasing opinion amongst the public at large, and opinion leaders, that State and local government workers should be forced solely into defined contribution plans.

“We feel this would be mistaken for several reasons. First and foremost, defined benefit plans have proven to be more efficient than defined contribution plans for delivering pension benefits…” It goes on to describe all the benefits paid by defined benefit plans and concludes… “Defined benefit plans are funded from three sources. (First) employees are required under law to contribute rates established for each plan tier…The second level of funding comes from investment returns. These are established by the MCERA and CalPERS Boards, with extensive input from actuarial firms. These investment rates have always taken a long view-and are currently expected to generate 7.75% to 8.0% annual rates of return. To the extent these rates are not achieved, the final funding comes into play - employer contributions.” Please read “TAXPAYER CONTRIBUTIONS”

It is easy to see why recipients would like defined benefits. It is much more difficult to understand why taxpayers would tolerate them. But if the taxpayers are willing to assume this liability, what exactly are these benefits?

Let’s start with the General Manager. His monthly salary is $15,813.[10] This doesn’t include perks. As a member of the California Public Employees Retirement System (CalPERS) the program is mandatory for all full-time employees. The current retirement formula is 2.7% at 55. What this means is for each year of service the employee vests 2.7% of salary and at 55 with 37 years of service he/she would receive 100% of ending salary for life adjusted for inflation. The employee contribution rate is 8% of monthly salary but for all Senior Managers the District makes the entire contribution. Early retirement is possible at age 50 if an individual has five years’ service credit in CalPERS.[11]

What about mid level managers? The current retirement formula is the same, 2.7% at 55. The employee’s contribution rate is 8% of monthly salary. District employees currently pay 5% on a pre-tax basis and the District contributes 3%. Early retirement is possible at age 50 if an individual has five years of service credit in CalPERS, credit that can come from any other agency that is enrolled with CalPERS.[12]

All of the remaining full time employees at MMWD are members of the Service Employee’s International Union (“SEIU”). The pension benefits afforded to these employees are identical to those of mid level managers.[13]

And what about the unfunded OPEB? The District provides medical and dental benefits to employees if they retire from the District on or after age 50. The medical benefits cover the employee and their one dependent from retirement date for life. Medicare Supplemental insurance coverage is used when a plan participant reaches age 65. The employee and their one dependent receive dental coverage from retirement until the employee reaches age 65. Employees are not obligated to contribute unless plan costs exceed the District’s maximum contribution. For dental coverage, the District pays the entire cost of the dental insurance until the retiree reaches age 65. The retiree at age 65 may elect to continue coverage for themselves plus a dependent at their own cost.

In exchange for this lavish retirement package, particularly when most American’s are working longer, in many cases extending retirement well past 65, and often struggling with medical bills and simply forgoing dental care, are the employees somehow giving up something along the way? Far, far from it.

Salaries are at or above comparable private sector jobs with the security of union termination policies. And the list of perks is extensive at an average cost to taxpayers of over $30,000 per employee per year.[14]

In addition to retirement benefits they include[15] :
  • Vacation of 80 hours after 6 months employment rising incrementally to 200 hours after 20 years (assuming an 8 hour day, that equates to two weeks, increasing to five weeks)
  • 13 paid holidays
  • 15 days annual sick leave (which can be accumulated and sold back at retirement)
  • Health insurance
  • Family dental insurance including orthodontia
  • Group life insurance
  • Long term disability insurance
  • Vision care
  • Tuition reimbursement
But is there just a glimmer of hope? On June 24, 2009 the MMWD Board approved a "Proposal for Classification and Compensation Study Contract".[16] The contract was awarded to Koff & Assoc. The list of Koff’s clients reads like a who’s who of municipal districts. Absent were the rest of us who are neither represented by unions nor have taxpayers to fall back on when revenue projections fall short. By establishing job classifications and compensation levels within only the heavily unionized public sector, where unions hold a monopoly on the labor force, control will move farther and farther away from those who will pay; the taxpayers, who these public servants are supposed to serve.

MMWD is looking more and more like a benefits plan funded by a water district. Bottled water anyone?
Suggested reading:
Dick Spotswood: The Militant Centrist
Steven Greenhut; Plunder: How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation

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  1. I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


  2. Great effort Paul.

    I have additional info from Sonoma County I would like to share with you. Please e-mail me
    with your e-mail address...

    best regards,
    Tom Lynch
    Guerneville, CA.

  3. Paul,

    I live in Marin and attended the rate hike meeting held Feb 24, 2010. I was deeply disturbed by what I witnessed, and your blog regarding pension costs is excellent and relevant. I would really like to talk off-line with you, as you obviously have done quite a bit of homework on this subject. please email me at