Tuesday, September 13, 2005 | Members of the City Council on Monday called a staff report outlining how $600 million can be raised over the next three years “the first step” to paying down the city’s sizable pension fund deficit.

None of the council members embraced any of the fundraising options, nor did they view the plan laid out by the city administrators to be a long-term solution to better fund the beleaguered San Diego City Employees’ Retirement System. But they asked City Manager Lamont Ewell to begin digging into a proposal that could include taking out $500 million in loans and bonds and selling $100 million in city land to begin dealing with a potentially crippling pension deficit.

SDCERS has a funding ratio of 66 percent, meaning it only holds about two dollars in assets for every three dollars it owes employees enrolled in the pension plan – a deficit equating to at least $1.37 billion.

“This $600 million infusion is just a start,” said Deputy City Manager Lisa Irvine. She told council members that another significant cash infusion would be necessary in three-to-six years to maintain the council’s desired 80-percent threshold.

“This is not a solution, this is the start of a solution,” she added.

Council members agreed that steps needed to be taken to shore up the fund, however few commitments were made.

“I haven’t committed to any of the options the city manager laid out in the report, but I also haven’t erased anything off the list,” said Councilman Scott Peters, who along with Deputy Mayor Toni Atkins and Councilman Jim Madaffer requested a report looking at new funding methods in June.

For the report, which was made public Thursday, the three council members asked city administrators to look at how an 80-percent funding level could be reached by the 2008 fiscal year. The council members noted that they just wanted more information on the topics and did not necessarily support options listed, such as the sale of pension obligation bonds, borrowing against revenue streams, selling public land or enhancing lease agreements, levying a pension tax, asking voters to approve tax and fee increases, or transferring the city pension plan over to the giant statewide retirement system.

“Clearly we will not be adopting all of these options, but we should carefully consider everything that’s on the table,” Atkins said Monday.

The City Manager’s Office presented a plan that would raise enough to cover its contractual obligation to Local 127, the city’s blue-collar union. In exchange for the union agreeing in May to take a pay cut in its three-year labor contract, the city guaranteed that it would infuse $600 million into the pension system by 2008 or lose the savings created by the contracts.

By paying that amount into the pension system, the city could boost the funding ratio for SDCERS above the 80-percent threshold until 2011. From 2011 onward, however, the funding level dips while the city is forced to pump more money into the system from its annual budget. Read more about how the report’s solution is a short-term fix.

Other public employee unions also forced the city to inject cash into the troubled fund as a condition of the recent labor contracts. For example, the Municipal Employees Association agreed to have employees pay more annually into the system. The savings to the city – which years ago began picking up much of the employees’ contributions into the system as well – are to effectively serve as payments on a $100 million loan to go directly into the pension system. Read more about how the city labor contracts will force larger payments into the retirement system.

The conditions were part of the latest round of labor agreements, which were opposed by Councilmembers Donna Frye and Brian Maienschein. Frye voted not to ask the city manager to proceed with the cash-raising proposal outlined in Thursday’s report, the only council member to do so.

Frye pointed to the projections made by actuary firm hired by the city, Towers Perrin, for fiscal year 2014, the last year displayed in the report’s model. Even with the extra $600 million poured into the pension plan by 2008, the city in 2014 will pay $321 million into the pension system. That scenario continues to increasingly push the burden of today’s workforce onto tomorrow’s taxpayers while allowing the pension deficit to grow, critics say.

“It’s problematic for me to look at these numbers and say I want you to move full steam ahead,” Frye said to the city staff.

For fiscal year 2006, the city will pay $163 million – nearly half the projected amount for 2014 – accounting for about 27 percent of the city’s total payroll expense. Under the above scenario, the city’s annual payment would be 42 percent of its payroll costs in 2014.

And officials from the City Attorney’s Office said the numbers get much worse after 2014.

Maienschein said he was also against selling city land as well as raising fees, and that he wished a defined-contribution plan such as a 401k was studied for the purpose of the report as well. He ultimately voted to proceed with the proposal because it was better than no progress at all, he said.

“I don’t see how anyone can say [the proposal] doesn’t move the ball forward somewhat,” he said. “There’s no single, magic bullet.”

City Attorney Mike Aguirre, who was out of town Monday, joined Frye last week in rejecting the report. He said that no plan should go forward because he has not signed off on the contracts, which he said reinforce the legitimacy of benefits he argues were created illegally in 1996 and 2002. Aguirre has filed a lawsuit attempting to roll back those benefits, which he said will amount to a $700 million cut in the pension deficit.

City administrators should be striving for a 100-percent funding ratio, not 80 percent or 85 percent, because all benefits must be fully funded, Executive Assistant City Attorney Don McGrath said. He criticized city staff’s claim that other retirement systems in the state typically fall into that funding window, or that watchdog groups approve levels that low.

“Comparing ourselves to other cities, it’s like saying like we’re all in quicksand so it’s OK,” McGrath said. “It’s not OK for anyone to be where we are.”

McGrath also asserted that no plan should be approved without the consideration of rolling back benefits deemed illegal.

Frye and McGrath also criticized staff for not including projections through 2024, the final year of a 15-year amortization schedule slated to begin in 2009. The 15-year amortization was approved by voters last November. Irvine and the city’s hired actuary said no such projections existed.


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