Saturday, September 10, 2005 | The city of San Diego has promised an employee union that it will make a massive payment to its pension system by 2008 and officials now must decide whether pension obligation bonds, the sale of city owned real estate or tax increases will best generate sufficient funds to do it, according to a newly released report.
The city has guaranteed American Federation of State, Local and Municipal Employees Local 127, which represents the city’s blue-collar workers, that it will put $600 million more into its pension system over the next three years. That $600 million is in addition to the city’s annual taxpayer contribution over that time period, which alone will add up to more than $500 million.
While city officials and labor leaders have highlighted the concessions employees made during the most recent labor negotiations, those concessions were secured only with the guarantee that the city would pump millions into the pension system, according to the report released by the city manager’s office Thursday. The agreement with Local 127, the union representing blue-collar workers, ensures that the city will issue pension obligation bonds, sell city-owned real estate or raise taxes on residents to pay down a pension deficit that is estimated to be at least $1.37 billion.
In addition, the city’s agreements with firefighters and deputy city attorneys require it to begin issuing pension obligation bonds by next summer.
If the city does not live up to its agreement with Local 127, the workers will have the right to use the money from their salary reductions to supplement or replace their own contributions to the beleaguered pension system.
Currently, the San Diego City Employees’ Retirement System has an estimated 66 percent of the assets it needs to pay its obligations to current and future city retirees. Councilmembers Toni Atkins, Jim Madaffer and Scott Peters asked city administrators in June to study options for boosting the pension plan’s funding level to 80 percent by 2008, spawning the plan released Thursday.
Yet city staff told reporters Friday that even with the massive investment planned, the effort to boost the funded ratio of the pension plan will require far more.
“The $600 million doesn’t solve it, it just starts us moving in the right direction,” Deputy City Manager Lisa Irvine said.
The city must move on pension obligation bonds as soon as possible to comply with their labor agreements. However, the city remains essentially locked out from the bond market because of a suspended credit rating. Questions regarding its fiscal health have left the audits of its 2003 and 2004 financial statements stalled.
City staff said that because of those lingering credit problems, San Diego would have to use an alternative route to sell bonds to interested investors.
Irvine said that the city can sell directly to private financiers, although the difference owed by the city on those loans “may cost a little more.”
Peters said the council has been aware for many months that it had to find $600 million to pay into the pension fund.
“All that is in the [labor agreements],” Peters said. “We’ve always had the understanding that we had to do more than labor concessions.”
Blue-collar city employees represented by Local 127 agreed to a 1.9 percent reduction in their salaries this year. But the deal was expressly contingent on the city’s commitment to put $600 million “from wherever” into the pension system, said Joan Raymond, president of the AFSCME Local 127.
Although selling real estate, issuing pension obligation bonds or implementing a pension tax have all been mentioned as possible fixes to the estimated $1.7 billion deficit in the city’s pension fund, the labor agreements expressly commit the city to proceed with one or more of those options.
The other city employee unions – including the white-collar Municipal Employees Association, the largest – also came to agreements that obligate the city to pay down the pension system’s shortfall. But the AFSCME deal has put a time limit and specific demand on the city.
And if the city doesn’t comply, AFSCME will have the power to use the money to supplement its members’ contributions to the pension system.
City officials “are required by the conditions of our contract to put $600 million into the pension system to pay down the unfunded liability,” Raymond said. “And, in fact, they haven’t done that yet, so the money they are saving from cutting our salary is currently going to an escrow account.”
AFSCME was the only city employee union to agree to an actual reduction of its members’ salaries. And though it was a salary reduction, it actually went into effect two days after a 3 percent salary increase was implemented.
In the labor negotiations, concluded in May, the other unions agreed not to a salary cut but rather to an increase in the contributions their members make to the pension system.
Councilman Brian Maienschein, who voted against the current labor agreements, said he thinks solving the pension system’s fiscal health will take both a legal determination of the benefits – which City Attorney Mike Aguirre contends are illegal – and higher annual payments to the pension plan.
A year ago, the city’s Pension Reform Committee recommended, among a slew of other proposals, that $600 million of revenue from bonds or some other source be immediately infused into the retirement system
Former Mayor Dick Murphy began the process of issuing $200 million in pension obligation bonds but a long delay of the audit of the city’s 2003 finances finally derailed the plan along with several other public financing schemes that were in the works.
Madaffer said the city staff report issued this week outlining ways to improve the pension fund’s health was helpful.
“I think it’s a really good roadmap to start solving the unfunded liability,” Madaffer said. “We have to raise this $600 million, but I don’t think that’s enough: We’re talking at least a billion or more.”
And if the city must sell real estate to get there?
“That’s going to be the big bugaboo,” Madaffer said. “We need to set ground rules about what land we should talk about and let the public know that we’re not talking about parks or libraries.”
The City Council is slated to discuss the report at 2 p.m. Monday in the City Council chambers, 12th Floor, 202 C St.
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