Monday, March 1, 2010

I Correct a Misstatement; MMWD Kicks the Can Down the Road

On February 24 I spoke at the rate hearing for the Marin Municipal Water District.[1] At that meeting I referred to the total unfunded retirement benefits and said, "If we had to fund it today it would cost $92,000,000 which is 130% of the entire MMWD annual budget. And there is no plan in place to pay for it!”

I was wrong on two counts. First the hole is likely larger, which I will explain in a moment. Second, and of greater significance there is a plan in place. That may be the bad news. The plan is like a game many of us played as kids called kick the can. In this case they just keep kicking it down the road.

This is not the plan of Terry Stigall, MMWD’s head of finance or the Board although there appear to be funding choices and MMWD has adopted the most lenient. It is the plan of accountants and actuaries.

At January 1, 2007 the Unfunded Actuarial Liability (UAL) for OPEBs (Other Post-retirement Employee Benefits than pensions) was $33,973,000, which is the number I used in my calculations for the rate hearing. The plan to fully fund this, supplied by the actuary, spreads the process over 30 years and assumes the assets of the plan are held in trust and earn 7.75% per year.[2] A contribution of $3,497,000 was to be made at the end of 2008. The estimate for the UAL at that point was $35,177,000 which is $1.2 million more than I said. And the 2008 contribution was not required and was not made. Instead only the actual benefits were paid in the amount of $1,355,893. Until the actuaries speak, which will be at the end of this year or the beginning of next, we will not know where we stand. Medical costs were lower than projected and investment returns, at least for the last 6 months, were higher. That is the good news. The bad news is that over the next 10 years, under the “funding” plan the UAL goes up not down.

From the report, “The Unfunded Actuarial Liability in 10 years is projected to be approximately $38.5 million if the District pre-funds. The difference will be more dramatic after 2016/17, with the projected June 30, 2037 Unfunded Actuarial Liability expected to be $0 under the pre-funding approach (Unfunded Actuarial Liability amortized over 30-year period).” And every two years the actuaries will weigh in with a new estimate, again for 30 years. Will therel be a new 10 year period that looks more or less like this one? Rate payers might reasonably ask, how long is the road ?

Actuarial calculations require many assumptions including the direction of health care costs, an inflation rate, in this case 3% and from CalPERS an investment return of 7.75%. The March 1, 2010 issue of the Wall Street Journal carried an article about CalPERS and their prospective investment returns. They may soon drop their assumption to 6%.[3] The impact of that on UALs will be dramatic. At 10 years it will reduce the investment returns by roughly 15% which means a significant boost to required contributions. As we can see from the table above, upward pressure on water rates will continue each year anyway. If the actuaries are forced to lower their investment return assumptions, that upward pressure will increase from rising contributions to both the pension fund and the OPEBs. In 2009 contributions to the two plans amounted to $7,408,610 or 39.3% of covered payroll and 12.66% of the total operating budget.[4] This does not include Social Security, Medicare or any other taxes related to employment or any benefits associated with employment. And the costs just keep going up.

Out-sized benefits are at issue. The rate payers not only fund all these future entitlements for retirement at 55 and early retirement at 50, they also guarantee the investment performance of CalPERS. The average age of MMWD employees is 47. Retirement is in sight and the burden of those retirement benefits will fall squarely on the shoulders of the ratepayers. The Board of MMWD has clearly failed its fiduciary responsibility to the ratepayers it was elected to protect. Unless that changes it will be a long, long road.