The Morning Report
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Monday, August 29, 2005 | As you might have been able to tell, the San Diego City Council meeting on Aug. 9 was so full of small announcements – with big implications – that it has given us many weeks worth of fodder for discussion about the city’s current crisis.
We’ve written about Councilwoman Donna Frye’s effort that day to throw Pension Trustee Peter Preovolos off the pension board. She will try again next week.
We’ve also covered the subtle announcement that day that the City Council had “authorized” City Attorney Mike Aguirre to pursue at least part of his legal wish list in court, though nobody can yet agree on what that means. Since then we’ve finally gotten a hold of the actual legal complaint Aguirre filed in court. Many readers wanted to see it with their own eyes. You can access it here.
We’ve now learned that the largest labor union of city employees plans to publicly pressure the City Council into more fully explaining whether it supports Aguirre’s assertions or not.
Then, earlier this week, Voice of San Diego with some help from our sources, picked up on a rather startling announcement made by the accounting firm KPMG at that same meeting. KPMG is charged with helping the city put out a report of its financial position for the year 2003 – a report that is now almost two years overdue.
KPMG representative William Morris told the packed house Aug. 9 that he had some news not about the 2003 statements but about the 2002 financial statements. The auditors, it turns out, have found that before the city could move on, it needed to restate its assets from 2002 – and not in a good way.
The city made 30 errors on its statements that year. All combined the errors mean the city overvalued its 2002 assets by nearly 10 percent, or $642 million, according to a letter from KPMG.
And Morris told the packed house at City Hall something else.
“We’re often asked why we cannot release our audit opinion. Well, in addition to completing the thorough and independent investigation and determining the financial statement consequences of the findings, the city must also, first, conclude that the 2003 financial statements are complete and prepared consistent with generally accepted accounting procedures,” Morris said.
In the letter to the City Council, KPMG Partner Steven G. DeVetter put it this way: “Due to questions raised by KPMG, city staff and Macias Ginni (the auditors conducting the audit of the city’s 2004 financial statements) the city has not yet concluded that the 2003 financial statements are complete and prepared consistent with generally accepted accounting principles.”
So does this mean the ball is in the city’s court? While most insiders assume the city is waiting on KPMG, is this just KPMG’s way of saying that everybody is really waiting on the city instead?
KPMG, of course, wouldn’t say. A spokesman at its New Jersey headquarters said the firm would not comment any further about its ongoing work.
Stay tuned, news about the Aug. 9 meeting has a way of taking its time to fully come out.
Readers might remember that in February of this year, California Gov. Arnold Schwarzenegger staged an event in San Diego to propose a massive reform to what public employees can expect in post-retirement pensions. His plan was to switch all new state, county and municipal employees over to a “defined-contribution” pension plan, similar to what most people know as 401K plans, where both the employee and the employer contribute a set amount to an investment fund and whatever is left over in that fund when the employee retires will be his or her pension.
That would have been quite a change. California public employees, like most around the country, enjoy a “defined-benefit” pension guarantee, meaning they can expect a certain amount of money to come to them when they retire, regardless of how much cash they put into it or how much the investment market earns.
Local governments, over the years, have used that retirement system to boost the compensations they offer employees without also adding an immediate cost to the government’s budget. In other words, to attract and retain quality employees, governments like the city of San Diego and the county of San Diego have offered enhanced pension benefits in place of, and in addition to, salary increases.
Why not just raise the salary, you ask?
Because raising an employee’s salary means immediate costs to the government. But raising their pension is a cost that some consider a “soft debt” that can be managed over the long term.
After all, much of the debate in San Diego has been centered on the fact that the city has for so long considered its debt to the pension system “soft debt” that officials didn’t immediately need to cover. Had they just offered employees the same amount in salary increases, the debt would have been “hard” and they would have felt an immediate obligation to actually pay it off.
The same maneuver is what many critics are saying the company General Motors engaged in. That company, for years, agreed to boost its employees’ compensation not by necessarily increasing their salaries but by granting pension benefit enhancements and retiree health care promises, which don’t show up immediately on accounting statements as GM debt. Now, however, those pension and health care bills are coming due and GM’s credit rating is in the tank.
The governor, facing a plummeting approval rating of his own, and protests around the state, pulled back from his plan over the summer. Supporters of the change to defined contributions have also pulled their idea off the table. But now they have a new one.
Assemblyman Keith Richman, (R-Granada Hills) has a new bill – ACA 8 – that protects defined benefit plans but puts a maximum limit on how much public agencies can promise their employees.
The city of San Diego and the county of San Diego have both argued that they needed to boost their pension benefits to attract workers who might be lured by other local governments. Richman’s proposal, by setting a limit on the pension benefits an agency can guarantee its employees, supposedly would eliminate that competition.
So if a government wanted to pay its employees more than its rival agencies, it would have to do it the old fashioned way – offer a higher salary.
Specifically, under Richman’s new plan, governments like the city and county of San Diego would be allowed to promise their general employees a pension of 1.75 percent of their highest salary times the number of years worked. And the earliest they could take that full pension is age 65.
That would be quite a cut from the pension benefits earned by San Diego city employees, who right now get 2.5 percent of their highest salary times the number of years they worked. And the earliest they can get those benefits is age 55.
To illustrate it: If the bill went into effect in 2007, an employee – who started before then and worked for 30 years with their highest salary being $60,000 – could retire with a basic annual pension of $45,000. But a new employee hired after 2007 – who worked for the same amount of time with the same salary – would retire with a basic annual pension of $31,500.
If those two employees worked side by side, you think they’d ever talk about that?
The bill hasn’t moved out of committee yet and an aide in Richman’s Sacramento office said it wasn’t likely to. But Richman and others have plans, they say, to take this one directly to voters.
It could be quite a battle if they do.
Scott Lewis is a frequent contributor to Voice of San Diego. You can e-mail him at