Keeping Two Sets of Books

Monday, September 30, 2013

Page 6

IN MY OPINION (Column)

Keeping Two Sets of Books

By JON COUPAL

It’s been said that after Al Capone was sentenced to prison for tax evasion in 1931, his chief financial and legal advisor, Jake “Greasy Thumb” Guzik, told other mobsters how to avoid Big Al’s fate. They must keep two sets of books. One set, that could be made public, would show “honest income” from a legitimate business and would be maintained to satisfy the IRS and other government types. The other? Well, that would show the real income.

This story comes to mind now that new, strict Government Accounting Standards Board requirements have forced the revelation that the unfunded liability being carried by the California State Teachers Retirement Fund is more than double what was previously disclosed. The GASB rules compel state and local governments to stop hiding their pension costs in their financials and to report more realistic rates of return on investments.

What had been presented to the public as a $71 billion liability has been newly calculated to show that the teachers retirement fund’s net pension liability is $166.9 billion. No one is suggesting CalSTRS is involved in criminal activity, but like numerous other agencies, it has engaged in an effort to downplay the extent of its debt. The impact of the implementation of the GASB requirements is similar to the IRS finding a mobster’s second set of books, the one that reveals actual income, only in the case of these government agencies, what is being exposed is actual debt.

This is important for several reasons. First, it has been revealed by respected reporter Ed Mendel in Calpensions that if CalSTRS “Net Pension” liability is distributed among school districts, the share of debt for a typical smaller district might jump from $21 million to $49 million, and for a larger district it could go from about $280 million to $728 million.

To investors, this increased liability implies risk and would make it more expensive to sell school bonds. Ultimately, this higher cost is borne by property tax payers.

Second, CalSTRS has already been projected to run out of money in 30 years. While the retirement fund may go broke, the obligation to retirees will continue and taxpayers will be on the hook for the full amount.

Expect much more bad news like this in the coming year as other government entities are forced to come clean. Cities expect to be shown in serious financial trouble include San Francisco, San Jose, Los Angeles, Azusa and Inglewood, and cities already declared bankrupt, like Stockton and San Bernardino, will be exposed as being even deeper in the hole.

When the full amount of the unfunded liability—a debt that taxpayers will be forced to cover—is revealed by the new, more honest accounting standards, expect voters to demand the heads of the politicians and government officials who created this crisis by approving unsustainably high pensions for government workers.

Unfortunately, many of those responsible for these past decisions are themselves now enjoying these rich benefits themselves in luxurious retirement settings.

Such is politics in the People’s Republic of California.