Executive Summary Financial Reports

MOFD produces an annual financial report which they call a CAFR (Comprehensive Annual Financial Report), which is an industry standard.  The latest report, for the fiscal year ending June 30, 2021, is attached.  It is 112 pages and includes a statement by the District’s independent auditor that it’s numbers are accurate.

 

With one (major) exception, this web site does not argue the accuracy of the report.  However, for anyone other than an accountant, and even for an accountant, it does not present a clear picture of MOFD’s finances.  This web site presents an alternative presentation of revenue, expenses and balance sheet that attempts to make MOFD’s finances more understandable.

 

Attached are a suite of three reports

 

1) An historic revenue and expense statement comparing revenue and expense from 2010 through the latest (2022/23) proposed budget.  The CAFR has a similar report, but this report differs in the following ways:

            A) The CAFR report is only for the current year., not in comparison with prior years.  In the District’s budget document, the budgeted amounts are compared with the prior year’s projected actual revenue and expense, but it only looks back one year.  This report compares 17 years of operations.

            B) Over 80% of MOFD’s expenses are for employee compensation.  This report segregates out these expenses.

            C) One revenue source is the money MOFD gets from the State when MOFD firefighters go out-of-district to fight wildfires.  MOFD pays the firefighters overtime and the State compensates, in fact overcompensates, MOFD for this expense.  The CAFR shows the compensation as a revenue item and the overtime as an expense item.  This report nets the two and only shows the net revenue as a revenue item (part of Other Revenue).

            D) In 2005 the District borrowed $28 million to fully fund its pension.  It has been paying off that loan (called a Pension Obligation Bond – POB) ever since.  The CAFR shows that payment as “debt service”.  This report correctly identifies it a pension expense, part of employee compensation.  The final POB payment will be on 7/1/2022.

            E) The District also borrowed money to reconstruct Station 43 in Orinda and entered into equipment leases.  The CAFR shows these as also as dept service.  This report shows them as capital expenses.

            F) About 20% of the firefighters’ base pay (not overtime) goes to the pension fund.  This report shows this portion of base pay as an employee retirement expense.

 

2) A balance sheet for the latest fiscal year.  Again, “similar” to the balance sheet in the CAFR but with three major differences.

            A) MOFD’s largest balance sheet items are its pension’s assets and liabilities.  These are “the elephant in the room” for MOFD.  But the CAFR “hides” these values, only reporting the net value (liabilities minus assets).  This does not correctly reflect the nature of these balance sheet items and is a dangerous practice (sticking one’s head in the financial sand).  The District owes these pension benefits to its employees and former employees no matter what.  If it’s offsetting assets become worthless, it still has to pay the benefits.  While is instructive to understand if the benefits are fully funded or not; just showing the shortfall (or excess) is not enough.  And the total assets and liabilities are significant.  Retirement plan (including retiree medical benefits known as OPEB) liabilities, including the POB, are $242 million.  Retirement plan assets alone are $181 million.  The danger in showing only the District’s net retirement plan liabilities is hiding the vulnerability of financial reverses to the asset pool.  This happened after the 2008/09 recession.  In the first six months of 2022, the stock market has lost 20% of its value.  The CAFR shows the pension net liability as $29 million.  If this increased by 20%, that would be an additional $6 million liability.  But the total retirement assets are $242 million.  A 20% loss is $48 million, not $6 million.  Fortunately, all of the assets are not in the stock market and this “loss” will probably reverse itself over time but when it is accounted for by the County pension plan, the plan will start charging MOFD for the shortfall.  When this happened after the 2008/09 recession, MOFD was forced to draw its general fund reserve to zero.  MOFD should understand its true position.

            B) The District’s pension plan liabilities stretch out 50 years or more.  In order to determine what the value is “today”, the future liabilities need to be discounted back at some rate.  The higher the discount rate; the lower the “today” value.  The County pension plan (CCCERA) uses a rate of 7.00% which it considers the rate its assets will earn over the long term.  Unfortunately, it’s assets have not been earning rate that which is why every participant in the plan is underfunded.  In 2018 MOFD agreed that it would use a more conservative assumed rate, 6.25%.  It could not force CCCERA to use this rate so it started creating its own fund (the Pension Rate Stabilization Fund) to make up the difference.  By using this lower rate, MOFD’s pension liabilities increase $21 million, from $207 million to $228 million.  The CAFR does not include this increased liability but only reports the net liability provided by CCCERA.  This balance sheet includes the additional $21 million.

            C) This web site believes that MOFD should be looked at as two separate “businesses” which are reported separately and then consolidated.  One is the business of providing emergency services.  The second is funding and maintaining the employee’s retirement plans, both pension and health.  From a balance sheet perspective, the retirement plan “division” is the tail that is wagging the dog.  The detailed balance sheet shows the two businesses/divisions separately and consolidated.  Where the operating division has $31 million in assets, the retirement plan division has $181 million.  Where the operating division has $5 million in liabilities, the retirement plan division has $242 million. 

Where the operating division has a respectable $26 million in net assets, the retirement plan division has $61 million in net liabilities (over $4,000 per household).

 

3) The final report is a history of MOFD’s balance sheets going back to 2010.  It is gratifying to see the “operations” assets have improved significantly since their low in 2013.  At this point the general fund reserve was zero but there were restricted reserves, capital project reserves, and capital assets.  The retirement plan assets and liabilities were more difficult to “track”.  Both pension and OPEB were “off balance sheet”, in the footnotes, and only the net liability was reported before 2014.  Then, new accounting procedures put the pension “on balance sheet”, but it still only reported the net.  This report set had to dig through pension reports to determine the actual assets and liabilities.  The on-balance-sheet reporting of the retiree medical benefits (OPEB) lagged the pension reporting.  They were not fully reported until 2017.  While retirement plan assets have increased significantly ($59 million) since 2013, liabilities have also increased ($29 million), even as MOFD paid off $20 million of the Pension Obligation Bond.  And the recent increases in salaries (27% over six years), will have a further negative impact on pension liabilities as the 4.5% average annual increase is greater than the 3.25% CCCERA assumes when calculating future liabilities.