THE PENSION MESS

By Ian Trowbridge

The most important requirement to restore the City of San Diego to fiscal health is to solve the pension mess and improve policy decision making and efficiency at the city. The first step in solving the pension mess is to understand how it happened in the first place and make sure it can never happen again. The next task is to devise specific solutions to reduce the city deficit.

History

Understanding the pension mess is central to understanding why the city is in such bad fiscal shape. I have spent the last year obtaining documents under the California Public Records Act and attending San Diego City Employment Retirement System (SDCERS) board meetings and City Council meetings. Absent access to the City Council closed session minutes, I have been able to piece together a general picture of how the pension mess evolved and who was responsible.

In my view, four parties played significant roles that have led to a pension retirement fund deficit of at least $1.4 billion and an unfunded retirement health care obligation of at least $800 million.

• The pension board failed to exercise its fiduciary responsibility by allowing the city to underfund the pension fund for the last ten years.
• In violation of the city charter, city management proposed underfunding the pension beginning in 1997.
• In violation of the city charter, the city council voted to allow underfunding of the pension fund and to increase pension benefits without identifying a source of funding.
• City union leadership were aware of these actions by the pension board and city council and acted in collusion with them with at least one union head benefiting personally from these actions. The two agreements that effected most of these deleterious changes have become known as the Manager I Agreement of 1997 created by then manager Jack McGrory, and the Manager Agreement II crafted by deputy city manager Bruce Herring and former city manager Michael Uberuaga in 2002.

Several accounting decisions were made that exacerbated the present funding crisis. The funding ratio of the retirement fund was calculated using an accepted but more favorable accounting method (the PUC method) than the commonly used EAN methodology. The actuarial calculations to predict funding needs in future years used an optimistic 8% return on capital. Additional regular obligations such as the payments to satisfy the Corbett lawsuit settlement and health care payments were excluded from calculations of the funding ratio.

The Manager Agreement II in November 2002 increased retirement benefits once again and allowed the funding ratio of the retirement fund to fall below the floor of 82.3% despite the fact that key city managers, the pension board, and almost certainly Mayor Murphy knew of the underfunding crisis no later than April, 2002. At least some of the city council had the same information and understood its significance before they voted to approve the Manager II Agreement.

As part of this deal, Ron Saathoff, president of Firefighters Local 145 and a member of the SDCERS Pension Board, and Judy Italiano, head of the Municipal Employees Association (MEA) benefited from an ordinance passed by the city council in October 2002 related to the terms of presidential leave (basically this agreement allowed the presidents of the three major unions to accumulate retirement benefits based on their union salaries. The president of Local 127 representing blue collar workers is an unpaid position.)

This brief description of the key events leading up to the present fiasco only became publicly known after Diann Shipione , a member of the pension board in 2002, blew the whistle on the underfunding of the pension fund.

As most San Diego residents know, the pension fund is now the subject of several different civil and criminal investigations by different entities including the Securities and Exchange Commission (SEC), the U.S. Attorney, the District Attorney and the City Attorney.

I disagree completely with reports issued by Vinson & Elkins, the first of four sets of consultants hired by the city council, that state that mistakes were made but that this incompetence did not rise to the level of violating SEC rules or state and federal laws. I also believe there is a significant possibility that some illegal actions still to be made public involve the cover-up of the original misdeeds, including the offering of city bonds on the public market without disclosing the true fiscal condition of the city.

How to Solve the Pension Mess and Return the City to Fiscal Health

It is not possible to evaluate the city's fiscal condition until the 2003 and 2004 audits are completed by KPMG, and that will not happen until SDCERS waives client attorney privilege and responds to federal subpoenas.

I support taking any actions necessary for SDCERS to comply with the subpoenas including placing the pension board in receivership.

Because the extent of the city's fiscal problem is unknown it makes no sense not to consider all options.

I support keeping all options to reduce the city deficit on the table.

These are listed in order of which options to reduce city debt I would consider first based on incomplete information currently available: 

• Reduce the future cost to the city of retirement and healthcare benefits.
• Improve the efficiency of city operations.
• Upgrade and streamline information technology to save costs and provide better service to the public.
• Aggressively seek out state and federal funding so that San Diego gets its fair share.
• Evaluate the overall efficiency of all city departments and where possible:
• Reduce consultant costs.
• Reduce police and fire overtime costs.
• Reduce the number of city employees by attrition and if necessary by layoffs.
• Make better deals when selling or leasing city land that reflect the true market value of the properties.
• Renegotiate existing land leases and cost of public services.
• Reduce or eliminate funding of selected corporations, agencies and business entities, for example the International Sports Council, and seek repayment of city loans made to CCDC and other redevelopment agencies.
• Require developers to pay the full cost of infrastructure costs and services.
• Issue pension obligation bonds when the city can re-enter the capital markets.

• Sale or lease of city land.
• Across the board increase in the fees for city services.
• Consider new sources of revenue.

According to Pat Shea, bankruptcy

• Demonstrates to creditors and Wall Street that the city is willing to solve its problems all at once.
• Gives the court the ability to compel the city to disclose all of its financial information and makes any failure to do so a federal crime.
• Allows the city to start from scratch with clean financial and accounting statements.
• Lets the city establish a viable payment plan for competing creditors.
• Gives unions the opportunity to renegotiate agreements the city can afford and allows for subsequent negotiation as soon as the city emerges from bankruptcy.

One option I will only support in exceptional circumstances is the outsourcing of city jobs. Outsourcing often leads to underbidding of the contract by private companies that then create their profits by renegotiating higher rates for the services rendered or reduce the quality of the services. Political influence may be used to obtain contracts and benefits of outsourcing are frequently oversold by proponents of privatization like the county Board of Supervisors.

Each of these possible options has many different variations and these details will be crucial to developing an effective recovery plan.

It is essential to realize that city workers represent valuable human capital that should be preserved if at all possible, and I will oppose any recovery plan that irreversibly degrades city infrastructure, human capital or core services.