Friday, November 18, 2005 | A recently released opinion from the California attorney general may void a city law that requires San Diego to begin paying down its massive pension deficit much more quickly than it had planned.
On Monday, Councilman Scott Peters sent a memo to City Attorney Mike Aguirre asking Aguirre to consider the effects on the City Charter of an opinion released in October by Attorney General Bill Lockyer.
The opinion determines that cities are not allowed to pass laws that require their independent pension systems to pay off deficits on a specified time frame. A provision in the City Charter – put into place by voters last year as part of Proposition G – forces the city to switch from a 30-year plan to pay down the pension deficit to nothing longer than a 15-year plan. It does not, however, specify the plan – or amortization schedule, as it is known – that should be put in place.
Defenders of the law say that nuance should protect it. But even if the law is thrown out, some pension experts believe the pension system should still feel obligated to follow the principles that led to its creation.
The tighter timeline for paying down the large deficit – estimated at more than $1.37 billion – means the city must make much higher payments to the pension system than it has. And it is scheduled to do so beginning in 2008. But many city officials, including Peters, have openly expressed worry about the cost to city services that such large payments would cause.
Peters, who is poised to become council president in a month, said in his memo that Lockyer’s recent opinion “appears to overturn” Proposition G.
Peters has long questioned the law. From the time it first appeared as an idea to help reform the pension system, Peters has said it may place inappropriate restrictions on the retirement board and unnecessary burdens on the city’s budget.
Regardless, the city pushed forward with Proposition G, which was conceived by the city’s Pension Reform Committee and approved by voters in November 2004. In addition to requiring the city to pay down its massive pension debt more quickly, it also requires the city to pay off the cost of any benefit enhancements it offers employees within five years of making such deals.
Pension reformers argue that the pension deficit should be paid off as soon as possible so that the burdens of today’s expenses are not borne by tomorrow’s taxpayers. Extending the amortization period would further push current expenses onto future budgets.
In his opinion, Lockyer said that no city could require the board of trustees of a retirement system to adhere to a specified amortization schedule.
“Such a mandate in the City Charter would directly undermine a board’s ‘sole and exclusive power to provide for actuarial services,’” Lockyer wrote, quoting from a relevant section in the California Constitution.
Peters said Wednesday he merely wants to know if the state’s most powerful lawyer has indeed determined that the provision in the City Charter is illegal.
“I just want to know what it means,” Peters said of the attorney general’s opinion.
He did, however, repeat his concerns about the upcoming payments that will be required to pay off the pension system’s deficit under the law in question.
“I understand there are people who think it would be better to pay it off in 15 years but we now have a better feel of what choices we have to make as taxpayers to be able to afford those payments,” Peters said. He said that the city’s fire and police departments may suffer as a result of the city making larger payments to its pension system.
The city will pay $165 million to its pension system this year. But because of Proposition G, that payment will jump to $229 million in 2009.
Two former members of the Pension Reform Committee were immediately alarmed by the attorney general’s opinion or any suggestion that the city should not have to conform to the minimum payment schedule required by last year’s ballot measure.
Bill Sheffler, who was a member of the Pension Reform Committee and now sits on the board of administration of the San Diego City Employees’ Retirement System, said the attorney general’s opinion “did not address the actual facts of Proposition G.”
While the attorney general says cities like San Diego cannot mandate that a specific schedule be used for paying down pension deficits, San Diego’s charter does not mandate a specific schedule, just a minimum, Sheffler said.
Unlike mortgages, pension amortization schedules do not mandate a regular annual payment but rather they require a payment equal to a percentage of the entity’s payroll. Because payrolls usually grow, so do the payments. But with any longer schedules than a 15-year amortization, the payroll is too low to force a payment that equals even the interest on the massive deficit, let alone the true costs.
The shorter the amortization, the higher the percentage of payroll contributed annually into the pension system.
In other words, if cities like San Diego pick schedules longer than 15 years to pay off their pension debt, for several years they don’t actually begin paying off even the whole interest that accumulates because of that debt let alone any of the principle itself.
“It’s only prudent financial practice to pay all the interest on your debts annually and not defer them into the future – making your children pay the cost of retirement benefits that the city is providing today,” Sheffler said.
April Boling, the former chairwoman of the Pension Reform Committee, said the minimum requirements of the charter change do not restrict the independent retirement system’s trustees from deciding the best way to ensure the health of the pension system.
“My position was that I could see no circumstances under which adopting a longer amortization schedule than 15 years would be a financially responsible position for the pension system to take,” Boling said.
Boling also was one of the chief advisors on whom Mayor-elect Jerry Sanders relied for advice in dealing with the city’s pension crisis. He said repeatedly during the campaign for mayor that he was committed to upping the city’s payment to the retirement system to the levels mandated by the City Charter and even higher.
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