L.A. County’s debt has doubled, mostly because of new accounting rules

Under a required change in accounting practices, Los Angeles County’s projected long-term debt has doubled to $20 billion, largely the result of unfunded employee pension obligations, officials said Tuesday.

Until this year, California local governments were not required to factor their pension liabilities into their long-term debt figures in annual financial reports.

L.A. County’s recently released financial report for 2014-15 — the first to be prepared under the new rules — showed a $10-billion increase in its projected debt. The county’s unfunded pension liability is $7 billion, which was added to the reported debt load for the first time.

Another technical change in pension accounting added $1.3 billion on top of that, county spokesman David Sommers said.

The $20-billion projected deficit also includes unfunded liabilities for retiree health benefits and workers’ compensation. The amount owed for retiree healthcare grew by $1.7 billion from 2013-14 to last year, Sommers said. That increase was not based on the new reporting standards.

But the new figures still don’t reflect the entire debt load. The county’s total retiree health benefit debt is $27 billion, but current accounting rules only require reporting $11 billion of it in the balance sheet, Auditor-Controller John Naimo said.

Beginning in 2018, the county will also be required to report the full amount of that debt in its overall financial figures.

The same accounting standards are reflected in the city’s most recent financial report. City Controller Ron Galperin announced last week that the city’s long-term liabilities had grown from less than $27 billion to about $35 billion because of the new pension-debt-reporting requirement.

County officials said Tuesday that the pension liability was always reported in footnotes to the county’s financial statements, although it was not figured into the balance sheet totals, and that they had been working on paying it down.

“It’s not as though the county was somehow circumventing our responsibility from planning for this and how to reduce it,” Supervisor Hilda Solis said.

Though pension liabilities are similar in some ways to other kinds of government debt — both are long-term financial obligations that generate interest — they differ in important respects.

For example, pension liabilities can shrink, sometimes dramatically, if a pension fund’s finances improve from high rates of return on the fund’s investments. The liabilities can also grow as a result of poor investment performance, as happened after the financial collapse of 2007.

Supervisors pointed to a series of recent credit-rating increases as signs of the county’s overall financial health. Most recently, the rating agency Fitch upgraded the county’s overall rating to AA from AA-minus.

The rating agency noted the large pension and retiree benefit liability but said the county had begun to address these by increasing pension contributions and setting up a trust fund for retiree health benefits, which now has about $500 million in it.

County management also reached an agreement with labor unions in 2014 to trim retiree health benefits for future employees, which Sommers said will trim the county’s liability by 20% over the next 30 years.

In the short term, the financial picture is rosier — the county ended the last fiscal year with a surplus of about $3 billion in its general fund.

The total annual budget is about $28 billion.

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Times staff writer Peter Jamison contributed to this report.