Financial reports can be a mind-numbing maze of mathematical madness. Citizen budget analyst John Marshall Lee makes it his business to ask questions about what it all means. In his latest commentary he raises the subject of city pension liabilities and the latest proposed capital plan by Mayor Joe Ganim in light of the city’s borrowing history. From Lee:
The Comprehensive Annual Financial Report was published by the City Printing office and promptly distributed by Finance Director Kenneth Flatto to members of the City Council attending a Budget and Appropriations Committee meeting on February 16, 2016. There is a wealth of information contained in the report on the Fiscal Year 2014-15 and the standing of the City as of June 30, 2015. How many folks are reading it and asking questions? It is available on the City of Bridgeport web site here.
A major change in City accounting guidance, GASB Statements No. 68 and No. 71 having to do with reporting of Pension obligations was adopted for the FY 2014-15. Pages 54-73 of the report present Note 11, information on Pension Plans of all kinds. The narrative may be very specialized and dense for most readers but on its face it would appear to positively answer the questions, Open, Accountable and Transparent. However, how Honest is the presentation?
On Page 57 there are eleven “asset classes” listed with potential “target allocations” and “long-term expected real rate of return.” The rates of return vary from 0.4% annually up to 8.3% for Emerging Markets (non US). The discount rate in the narrative on this page and the next is stated and assumed at 8.0% annually. If you “do the math” by multiplying the allocation percent by the rate of return and then summing the results, the rate of return indicated is 4.886%, significantly short of 8.0% used to indicate our current liability.
Turning to Page 58:
Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the City’s proportionate share of the net pension liability, calculated using the discount rate of 8.00%, as well as what the City’s proportionate share of the net pension liability would be if it were calculated using a discount rate that is 1 percentage point lower (7.00%) or 1 percentage point higher (9.00%) than the current rate: Current 1% Decrease Discount Rate 1% Increase (7.00%) (8.00%) (9.00%) City’s proportionate share of the net pension liability $ 157,559,355 $ 63,021,443 $ (16,459,371).
If we earned an actual 7.0% return, a decrease of only 1% in the discount rate, we would increase our pension liability by almost $95 Million. What would happen if 8.0% was decreased to 4.886% actually?
A chart similar to that of page 57 appears on page 60. It is not certain to which this chart may apply, for example Board of Education employees, or MERS or ?. When you do the math for this chart the rate of return calculated is 11.236%, rather amazing isn’t it? It was caused by the entry of Alternative Investments with a Target Allocation of 8.0% and a 70.0% Rate of Return. Will someone solve all of our City and State problems with those Alternative Investments returning 70.0%? An error? Probably and likely?
Is the Pension Liability serious now that it is recorded on the City balance sheet and our City liabilities are greater than our assets? What if the Government Accounting Standards Board causes the Other Post Employment Benefits that on July 1, 2014 were underfunded by ONE BILLION DOLLARS (page 77) and where we are currently on a pay as you go basis, contributing less than 50% of the amount required?
Mayor Ganim hit the CT Post today with a presentation of a five-year $178 Million Capital plan, a prospective shopping list for the community. Do you think large-scale City borrowing makes sense in face of responsibilities already agreed to by past mayors and City Councils? Should we be looking at additional borrowing when liabilities are already greater than City assets? Should we be looking for “long-term solutions” to spending too much for too many years and being in the hole today? Should we re-budget from the past where a lot was promised in the future without solid plans to make the promises possible? What must Mayor Ganim do to gain your trust and support as a taxpayer? Do you expect your Council person to read the CAFR and adjust their “yes” votes to today’s fiscal environment? Time will tell.
This WHOLE thing has to be slowed down. As I mentioned in another post, Ganim has not submitted his first budget, the reval process and mil rate have not been established. This is a major crazy spending spree that will give the Ganim administration $180 million to play with immediately. This is downright SCARY.
JML,
Thank you for the analysis. I did not trust Flatto from the beginning.
“… Because the cost of internal control should not exceed anticipated benefits, the objective is to provide reasonable, rather than absolute, assurance that the financial statements are free of any material misstatements …”
CITY OF BRIDGEPORT, CONNECTICUT
NOTES TO THE FINANCIAL STATEMENTS
JUNE 30, 2015
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13. LANDFILL CLOSURE AND POSTCLOSURE CARE COSTS
A portion of the Bridgeport Seaside Landfill was used for disposal of materials classified as hazardous waste from 1974 until late 1981 when it stopped accepting waste. The hazardous waste area of the landfill is subject to federal and state laws and regulations that required that the City close the facility in a manner that minimizes the need for further maintenance; and controls, minimizes or eliminates, to the extent necessary to protect human health and the environment, postclosure escape of hazardous waste, hazardous constituents, leachate, contaminated run-off, or hazardous waste decomposition products to the ground or surface waters or to the atmosphere. In addition, the City is required to perform certain maintenance and monitoring functions at the hazardous waste site for 30 years after closure. The estimated total current cost of the postclosure care of $54,946 is based on the estimated amount to be paid for all equipment, facilities and services required to close, monitor and maintain the site as of June 30, 2015. The actual cost of postclosure care costs may be higher due to inflation, changes in technology or changes in federal, state or local laws and regulations.
The nonhazardous waste portion of the landfill is not subject to any federal, state or local laws and regulations requiring closure or postclosure care.
JML, how much is the city getting for the Landfill Lease to the Solar Panel Co? What’s the truth regarding the collection/payment of rent to the city by Bluefish, Captain’s Cove and others?
Joel,
Where are agreements such as Bridgeport and the UI kept? And leases or agreements with O&G to manage processes for the City? And those with Webster Bank property, etc. and where are other line items on revenue monthly reports for each leased property?
But none of this is specifically in the CAFR and that is today’s subject, for anyone who cares. Time will tell.