Notes on the ’03 CAFR

I know you won’t be going over the 310 page single spaced “draft, unaudited, CAFR for 2003, recently released by the Mayor’s Office. This is a ponderous document.

Not wanting to do all the work myself, I have “skimmed” through much of it, just to give you a flavor of what it contains.

The document does one thing well. It confirms that virtually every public number previously developed by city management, and orchestrated with the electeds and the pension gang, was a complete fraud. What is remarkable about this is I mean every number. The big ones, sure. But, all the little ones, too. Every number was shaved or cooked for a specific purpose. The people involved actually e-mailed each other openly discussing the fact that the numbers were phony and real numbers had to be hidden from the rating agencies, markets, and you. Amazing.

So, I’ll take a crack at some bullet points you might find amusing:

• The ‘book’ starts with a letter from the mayor to the council giving them two weeks to review this tome which probably took the better part of this past year to construct. The council is supposed to vote to “vouch” for all these numbers in one week. That could be based on Emerson’s approach that when skating over thin ice, safety comes from speed.
• There is no discussion of the city’s financial “plan” on how it will address the humongous pension problem, let alone its Kong-like brother, the retiree health care deficit. There is no financial plan anywhere in this draft. You would expect some discussion of this, wouldn’t you?
• There are no forecasts of the pension deficit or its corresponding required annual pension contribution into the future.
• Amusing graph on page 176 showing the growth of the pension unfunded liability over the early years of this decade, back when we were told we really didn’t have any big problems. Reads like this: UAAL for 2001, $340 million; UAAL for 2002, $777 million; UAAL for 2003, $1.2 billion. Yikes!
• In the September 2003 “Preliminary Official Statement” relating to the Sewer Bond Offering (which got pulled), the city blended the port and airport authority assets in order to inflate its funded ratio and diminish its UAAL. As a result, the Preliminary Official Statement reflected a funded ratio of 77.3 percent and a UAAL of $720 Million. Now that they have been caught and had to back out the money that isn’t theirs, the funded ratio is restated to 75.9 percent and the UAAL increases to $777 Million.
• It shows retiree health care expenditures (paid by the city) for the period from 2000 n 2006 as follows: 2000, $5.4 million; ’01, $7.2 million; ’02, $8.9 million; ’03, $11.5 million; ’04, $12.8 million; ’05, $14.9 million; and “06, $17.5 million. Over that brief period, the retiree health care expenditures have increased by over 224 percent (I could not determine if these numbers include the amounts reimbursed to retirees that do not have their healthcare premiums paid directly by the city/SDCERS.)
• Remember, the February 2003 SDCERS report to rules projected that this annual retiree health care premium will balloon to $60 million per year by 2009. (Not reflected in this report).
• According to a June 7, 2005, report from SDCERS, the retirement system pays for 79 different health plans for its 3,325 enrollees, including union plans. (Not reflected in this report).
• The capitalized Retiree Healthcare Liability is $1.4 billion. To fund that obligation annually would require an annual payment from the city of a full 25 percent of the entire city payroll (about $160 million/year).
• There is a brief “Management Discussion and Analysis” section which sort of superimposes itself over all the rest of the report. You need to understand this section to make any headway on the rest. Among other things, you are cautioned that there is no overall picture of the “where are we going financially as a city,” because the city uses a category known as “Governmental Funds,” which is narrower that that of the government wide financial statements. You need to get into these narrower categories to understand the “long term impact of the government’s near-term financing decisions.” This has historically been where the greatest mischief has occurred. Financial decisions were made with only the shot-term impact disclosed (like when the pension amortization discussions would disclose just the first five years and not show the monster ballooning at the end.) So, you need to mine this stuff out because it isn’t just out there to see. Somebody needs to get into the Governmental Fund Financial Statements to see what is really going on.
• Of the city’s $6.5 Billion in “Total Net Assets,” 89 percent or about of $5.7 billion are invested in “capital assets” not available for future spending because these capital assets are used to provide services to citizens. Even though the capital assets are reported “net” of related debt (what you borrowed to buy these assets) the money needed to repay this debt has to come from other sources (not identified) since the assets themselves are not used to pay off these liabilities. Of the Total Net Assets ($6.5 billion) 7 percent, or $466 million, are subject to external restrictions on how they may be used, which leaves only 4 percent, or 281 million of assets available to finance ongoing services and obligations. So, if you think we’re getting out of the muck by “selling off our jewels,” you may need to re-think that one.
• Between 2002 and 2003, our unrestricted “net assets” decreased by 56 percent or $351 million (to the $281 million dollar number.) Why? Because of increased annual pension costs, increases in workman’s com, losses in pending litigation (no reference to the de la Fuente case – so that situation have improved somewhat of late), and acquisition of capital assets.
• The retirement deficits continue to not include numbers on liabilities considered “contingent” in nature, like the Corbett settlement obligations to the retirees. This amount is owed every year and accrues if not paid.
• They recognize the liability to those lucky folks in DROP at $227 million. The retirement system says that there are assets to offset this liability, and they may be right. I would imagine that with massive deficits everywhere, the only obligation to be fully funded would be the DROP account. (This assumes the IRS blesses this whole city of San Diego “hybrid” version of a DROP thing – and that is pending. For example, San Diego is supposedly the only municipality that continues to make contributions to the DROP accounts after the employees have “dropped,” i.e. retired.)
• In the disclosure of the city’s long term debt it shows total debt outstanding of $2.8 billion. No mention there of the “other” $3 billion of pension/health debt we carried off book.
• There is an interesting graph on page 34 that displays the demise of the city’s credit rating over time. S&P just gave up in September, 2004 and suspended the city’s rating. The other agencies were a bit more collaborative but even still, have tucked their tails under and slunk away.
• There is a good section at page 28 on new dollars in and out in 2003. The city got $16 million more in property tax revenue and $18 million more from building related fees. But the city spent $23 million more on expenses, like salaries etc, $53 million more for police, $20 million more for fire, and $21 million more for parks and rec. You do the math.
• The draft CAFR has 54 specific “restatements.” This is essentially a list of the stuff that was just wrong in its prior financial statements. There are scams at big and small levels.
• The draft includes 33 single spaced pages dedicated to explaining the illegal pension scams, the violation of pension laws, the use of the “waterfall,” MPI and MP II, Violations of IRS provisions, disclosure failures and violations, wastewater and other fund misuses, violations of law related to increases in user fees for sewer charges, GASB deficiencies, accounting failures related to the NPO [Net Pension Obligation], wastewater bond disclosure deficiencies, etc. If it could be done illegally, that’s the way we did it.
• There are questionable representations (surprise) regarding the “Funding Commitments Related to Legal Settlements” which continues to reflect the massive backloading scrams the city pulls off thorough “private legal settlements.” For instance, the draft highlights the change in 2005 of Charter section 143 which, according to this document, “stipulates that under no circumstances, may the City and the Board enter into any multi-year funding agreements that delay full funding of the retirement plan.” The statement is just wrong. The Charter provision specifically provides for backloading deals by the very same characters that did them before, as long as they are part of a private lawsuit settlement. That is what the Gleason settlement was all about and why it is known as MP-3. And, doing it this was is just as easy as it was for those that cooked the backloads before.
• There are some other representations like “the City is paying its full ARC,” and the city “repealed the contribution obligations under MP-2” that did not happen. Are these material?
• The report criticizes the use of “surplus earnings” but reflects that they are still being used.

Well, that’s it for now. I may find some more nuggets later.

To me the big question is, with all these confirmed massive irregularities, deficits, liabilities, illegal practices, etc., which are now oozing up to the surface for public review, has anything really changed?

– PAT SHEA