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Monday, June 27, 2005 | In July 1996, one of the trustees on the board of the San Diego City Employees’ Retirement System asked an interesting question.
As pointed out in City Attorney Mike Aguirre’s latest thick report, trustee Ann Parode questioned how bad a pension system can get before its management became susceptible to a “challenge.”
Meaning, of course, “At what point does a retirement fund get so bad that people may ask us what the hell were we thinking?”
She didn’t get an answer and none of the rhetoric then was good enough to persuade her to go along with the now notorious 1996 pension arrangement said to be the origin of all that is wrong with San Diego today.
But what is the actual answer to her question? When is a public pension plan in trouble?
Let’s narrow it down: The answer lies somewhere in between the position San Diego’s pension fund is in now – bad – and the position of a fully funded plan – good.
That’s a lot of ground to cover. Let’s try again.
One of the major differences between public pension plans like the one sponsored by the city of San Diego and private funds sponsored by, say, United Airlines, is that there is a lot more ambiguity about what constitutes a troubled fund.
Here’s how it works: The minute a long-term employee begins working for a company or government, he begins to earn his retirement in actual dollars. He doesn’t collect it, he just earns it.
Added all up, those costs constitute a pension fund’s “liabilities.” Even though they don’t have to write actual checks to cover those liabilities that minute, pension fund administrators have to acknowledge that those liabilities exist.
A private plan like United Airlines’ is considered to be making a bit of a gamble the moment it doesn’t have enough assets in the bank to cover those liabilities. After all, as we’ve seen, these companies can just up and throw in the towel one day. If a company doesn’t have enough assets in the fund to pay the promises it made to its workers and that company goes belly up, the workers will only end up with a portion of what they’ve actually earned.
Ask a United Airlines employee how much fun that is.
For public pension plans like those run by the city of San Diego, the county and the state, the playing field is a little different.
A city is not ever going to disappear, the theory goes. No matter what happens to San Diego, there are very few catastrophes imaginable that might actually eliminate the city (See: Fresh Water, Supply of). So public retirement funds can run with a bit more of a shortfall because, if things go bad, they aren’t going to just cease to exist someday.
And, don’t forget, cities, counties and states can always just levy a tax if they get in trouble.
So while the federal government actually forces companies to pay dues into the nation’s Pension Benefit Guarantee Corp. and the feds even, in some cases, require companies to infuse massive amounts of cash into a troubled fund (defined as those with less than 90 percent of assets compared to their liabilities), cities, counties and states have a lot more leeway.
And, not surprisingly, they have a different interpretation of when things become troubling. The state of California generally worries about the status of pension trusts when they reach only 80 percent funded. The county of San Diego thinks a ratio just above 80 percent is not only healthy but commendable. Others say 70 percent is the line.
The thing that separates San Diego from the rest of this pack is that in 1996 it actually defined a point that, if it were ever reached, the city would have to come to the rescue of its pension plan. City officials implemented this “trigger,” not necessarily out of an overarching desire to protect the health of their pension system but more to respond to questions like Parode’s – to provide an answer to the worry that paying less into the pension fund than was required might actually cause a problem someday.
So they said, “OK, if it ever reaches a point where San Diego owes its current and future retirees 17.7 percent more than it actually has in cash and reserves, we’ll contribute a balloon payment to fix it.”
Obviously, San Diego reached that point eventually and now at least six officials will have to defend in court their decisions not to force the city to pay off back bills. Some who were on the board in 1996 have said it shouldn’t have been a surprise – it was obvious there was going to be a balloon payment due and that there was no evidence the city could actually pay it.
What could they have done to stop the deal then? John Kaheny, an assistant city attorney at the time, said in an interview that the only thing the board could have done to stop the deal was raise a “legal stink” over it. The board would have had to sue the city. But Kaheny said, “They weren’t even thinking along those lines in 1996.”
At least three pension trustees, though, were thinking about the consequences of the deal. As a minority on the board, the only thing they could force the city to do was include the trigger as a small clause in the gigantic agreement. Most of the other city officials must have thought the trigger was just a metaphor describing something that would never happen.
That would be the only way to explain the great scurrying that occurred when, in 2002, the gun went off.
Editor’s note: Parode’s husband is Buzz Woolley, founder and director of Voice of San Diego.
Scott Lewis is a former reporter at The San Diego Daily Transcript. You can e-mail him at