The Morning Report
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Friday, September 09, 2005 | The City Council can temporarily reach its funding goal for its troubled pension fund within two years if it raises $600 million through selling land and borrowing cash, according to a city report issued Thursday. However, obligations to retirees would drag the fund’s standing back to sub-par levels only three years later, the report said.
In June, three council members requested that city administrators study possible ways to improve the San Diego City Employees’ Retirement System’s financial health by fiscal year 2008. In its response, the City Manager’s Office weighed the positives and negatives of options ranging from levying a pension tax on San Diego property owners to transferring management of city workers’ pensions to a behemoth statewide plan.
The study gives the council members more concrete details on the options available to them in combating a pension deficit that is estimated to be at least $1.37 billion and threatens to dominate city budgets for years to come.
While Councilmembers Toni Atkins, Jim Madaffer and Scott Peters requested information, they stated in the June letter to City Manager Lamont Ewell that they did not endorse any of the specific actions.
However, the study does provide a glimpse of how council members may choose to attack the deficit. City Attorney Mike Aguirre has staked out his own course, choosing to challenge the legality of pension benefit enhancements granted in 1996 and 2002 and pushing for an increase in taxes and revenues.
The city’s financial staff reported Thursday that the city could boost the retirement plan’s current funding level from about 66 percent to 80 percent within two years by borrowing $500 million and selling off $100 million worth of real estate over that span. Such a plan would allow the city to contribute about the same amount in day-to-day funds it paid this year – about $165 million.
But the city would quickly fall back under the 80-percent funding threshold by fiscal year 2010 under the report’s scenario and would remain under that benchmark unless more cash was poured into the retirement system.
Among the retirement plans of the 10 largest cities in California, San Diego had the lowest funding ratio – which compares the plan’s assets to its total obligations – at 66 percent, according to separate snapshots of funds taken between 2003 and 2004. None of the other nine cities had funding levels for general members, which excludes firefighters and police officers, below 82 percent, the report showed. The financial standings of each plan were calculated using different assumptions that affect the estimates.
Aguirre said the report’s hypothetical plan to sell land and borrow money falls short in providing the pension fund a clean bill of fiscal health.
“What a great idea – if we sell $600 million worth of pension obligation bonds and public land, and raise the city’s contribution to 42 percent of total payroll by 2013, we’ll still be back below 80 percent,” Aguirre said sarcastically.
In the current fiscal year, the city’s contribution will be about 27 percent of its payroll costs, an increase that placed considerable strains on other parts of the budget, resulting in less park maintenance, shortened library hours and recreation center closures. Read more about the pension’s effect on this year’s budget.
“What this proves is that it’s hopeless to feed the insatiable appetites to those who want the illegal benefits,” Aguirre said. “The city manager’s report should be sold in Disneyland, because it’s make-believe.”
Aguirre said he believes that between $700 million and $800 million can be knocked off the pension plan’s $1.37 billion-plus funding shortfall, and he said his office will release a report responding to Thursday’s report later this month.
If the city were to borrow money to help finance its pension, it would have to seek non-conventional loans on the private market because its suspended credit rating blocks it from selling pension obligation bonds through public securities markets.
According to the report, staff members have developed a list of city-owned property that “is not part of the city’s core assets or public amenities” that totals an estimated $250 million in worth. The city could reasonably raise $100 million through land sales by the 2008 goal, the report states.
The city charter mandates that the funds generated from the sale of city property can only be used to purchase other land or for construction or infrastructure improvements, the report said. Land sales can, however, displace money from the city’s budget that could, in turn, be used to pay down the pension deficit instead of building sewer lines, for example.
The report addressed other options Atkins, Madaffer and Peters requested in June, such as how a pension tax would work; if transferring administration of the SDCERS over to the California Public Employees’ Retirement System, which handles pension management for more than 1,200 public agencies, would benefit the city; and what other revenue-raising options, such as taxes and fees, the council could study and present to San Diego voters for approval.
The council approved a payment of $163 million to the pension system in the current year’s budget, an increase of $30 million from fiscal year 2005. Union concessions, which included worker payments into SDCERS for some and salary cuts for others, amounted to $17.3 million in savings for the city this current year.
Bill Kay, an attorney hired by the city to advise its labor negotiations, said that the city aimed to win savings in the latest round of talks, but that selling some of its vast public land or infusing cash through bonds would be a more viable solution to paying down the pension debt.
“The council is well-served by looking at all the options, including real property sales and lease improvement and pension obligation bonds for when the bond rating is back,” Kay said.
Peters declined comment Thursday and phone calls placed to the offices of Atkins and Madaffer were not returned by press time.
Ann Smith, the attorney representing the 6,000-member Municipal Employees Association, pitched the idea of selling the city’s “jewels of real estate” to raise cash. She also asked the council to invoke the little-known “pension tax,” which allows the city to levy a tax against property owners specifically to cover pension costs.
Smith said the tax would be unpopular, but practical, and that it could probably only apply to benefit levels that were approved before 1978, when tax increases were essentially curbed by the passage of Proposition 13. Smith was unavailable for comment on Thursday.
City officials have begun the “preliminary stages” of exploring how transferring pension obligations to CalPERS would work, the report said. A number of questions need to be answered, the report said, such as whether the city can join CalPERS without a vote of the public, if city workers can choose between joining the city or state plans, and if the SDCERS needs to be at a certain funding level before management can be transferred.
The report also identifies possible fees and taxes that could be levied, if approved by voters:
– If a trash collection fee of $9.24 a month per household were passed, the city could raise $35.5 million annually.
– An increase on a hotel room tax from its current level of 10.5 percent to 13 percent could generate $30.6 million.
-Increasing the property-transfer tax by $2.75 per $1,000 would raise $59.6 million annually.
– Doubling the business license tax could create $5.2 million in new annual revenue.
Read more about how San Diego’s fees and services stack up to comparable cities around the state here.
San Diego County Taxpayers Association president Lisa Briggs said the city would be hard-pressed to find public support for tax increases.
“There are steps they need to take before voters are ever going to agree to taxes or fees to pay for pension benefits,” she said.
Briggs said the city would be better off by holding onto its land, but that taxpayers should be open to allowing the city to refinance its pension debt using pension obligation bonds if the benefits were created legally.
“That question is now with the courts,” she said.