Sunday, August 28, 2011

Supervisor: Orange County Could Go Back Into Bankruptcy

Today's Orange County Register has an interesting, if grim, editorial from County Supervisor John Moorlach. According to Moorlach, the Government Accounting Standards Board's recent decision to require municipalities to report unfunded retirement liabilities on their balance sheets could soon reveal that many Orange County governments, including the county itself, are on much shakier financial footing than previously thought. As such, the county may well be heading for a second bankruptcy.

Veteran observers of government incompetence and misuse of tax dollars will recall that Orange County's 1994 bankruptcy stemmed from the investment practices of Treasurer Robert Citron. In order to maintain high levels of spending in the face of the recession that crushed southern California in the early 1990s, Citron essentially borrowed huge sums of money and invested them in risky securities. Many of the investments blew up in the county's face, and taxpayers were understandably unwilling to raise taxes on themselves to pay for Citron's mistakes (he later pled guilty to several felonies in the matter). This time around, the forces driving the county into insolvency are a lot more obvious, at least to those observers who care to pay attention.

As Moorlach explains, GASB breaks a government's net capital assets into three categories: capital asset investment, net of any related debt; restricted resources, or assets on the books that don't belong to the municipality; and unrestricted net assets. Once governments are required to report unfunded pension liabilities on their books, the effect will be higher accounting liabilities and fewer unrestricted net assets. To illustrate the implications, Moorlach provides some examples.

The upper-middle class city of Irvine currently has $2,082,629,000 in net assets; this includes $1,488,021,000 in investments in capital assets, $349,681,000 in restricted resources, and unrestricted net assets of $244,927,000. This sounds pretty good until you consider unfunded retirement benefits. Irvine currently has $3,471,000 in unfunded health care and $91,995,000 in unfunded pensions. As such, Irvine's actually available net assets are only $149,461,000. Things look even worse if you cross MacArthur Boulevard and enter Newport Beach, one of America's wealthiest cities. Newport currently reports net assets of $2,323,822,000, but only $96,223,000 in unrestricted net assets. With $174,347,000 in unfunded medical and pension liabilities, this leaves the city $78,124,000 in the red, as far as available equity is concerned. This means that, with about $175,000,000 in cash currently on its balance sheet, Newport would have to exhaust its reserves just to pay off the promises it's already made.

So how about the County itself? According to Moorlach, Orange County has $4,794,221,000 in net assets, only $311,792,000 of which are unrestricted net assets available to use toward unfunded liabilities. Its unfunded health care promises currently add up to $396,009,000; yes, paying these off would wipe out all the county's unrestricted equity and then some. Even worse, it has a staggering $3,703,891,000 in unfunded pension costs. In other words, its available equity is almost $3.8 billion in deficit.

Moorlach, unsurprisingly, recommends quick and drastic action: "More cuts and benefit modifications can be pursued. Outsourcing should be expanded. The county's public employee unions should negotiate to reduce pension benefit formulas for current employees, which is the best alternative. Otherwise, I don't see any pay raises in the near future for county workers. If the county experiences an unforeseen financial calamity, then a bankruptcy judge may just have to approve a reorganization plan, again."

So does this mean the City Council in Costa Mesa isn't so extremist after all?


Post a Comment