The Other Obligation

Tuesday, January 24, 2006 | Plopped amid the hundreds of pages of a consultant’s investigative report into the pension system is a recommendation for how the pension board must remedy the mistakes of its predecessors. The board is obligated, the report states, to recoup from the city the money it has shortchanged the pension system since 1996.

The report comes to the same conclusions as many previous reports and legal opinions have either come to or hinted at: Deals made between the pension board and the city in 1996 and 2002 violated a cache of state and local laws, as the board relieved the city of its debts in deals that also gave the board’s union representatives and city officials increases in their own pension benefits.

“Given the serious under funded status of the Retirement System, the board in its fiduciary capacity should explore methods for and the proper timing of collection of these amounts,” the report states.

But if city officials didn’t believe they had the money to pay their pension bills in 1996 or 2002, finding that money today, with the city stuck in a bona fide financial crisis, will be even harder. Two lawsuits currently in the court system, filed by retirees, seek between $166 million and $600 million to atone for the city’s previous neglect.

Perhaps that’s why the consultants at Navigant Consulting followed their suggested remedy by telling the pension board that it should also prepare for the possibility that the city might seek protection from its debts in a Chapter 9 municipal bankruptcy filing.

To address Navigant’s report and recommendations, the pension board has formed a task force that will begin meeting next Monday. Pension board President Peter Preovolos said the board will have to determine the cost to the city and the best legal method for recovering those funds.

“I’m very concerned about what it means to the task force and the effects and influence it has on [Mayor Jerry Sanders] and his budgeting process,” Preovolos said.

Without the cash to make such a payment, the city faces the prospect of having to either borrow against its real estate holdings or evaluate them for prospective sale. Officials are already preparing for a pension payment that could consume up to one-third of the city’s day-to-day budget.

The two class-action lawsuits are based on legal analyses similar to those found in the Navigant report and are seeking the funds that were diverted as a result of the 1996 and 2002 pension deals. The deals, known as Manager’s Proposal 1 and Manager’s Proposal 2, are the key components of a pension deficit that is projected to soon approach $2 billion and dominate city budgets for years to come.

Each year, the pension system’s actuary calculates how much the city owes to cover the costs of employee benefits incurred that year. The money is then squirreled away to ensure there is sufficient cash to pay employees’ benefits when they retire. However, in 1996 the pension board allowed the city to contribute a set amount into the system, regardless of the debts incurred that year.

The practice began a dangerous cycle in which the city repeatedly shortchanged a pension system at a time in which its liabilities doubled. The deep financial effects were obscured by strong investment returns and revealed when the stock market began its tumble in the early 2000s.

In a suit filed last year, plaintiffs’ attorney Mike Conger seeks the difference between what the city actually owed to the system and what it paid dating back to 1996, including interest. In court documents, Conger pegs that sum at $166 million and proposes that the city transfer a number of real estate parcels into the pension fund in order to recoup the losses.

“I’m trying to make an offer to the city where they would do it in such a way that it would be palatable to the city,” Conger said.

The plots include Sports Arena Village and Fairbanks Ranch Country Club. Although the council rejected Conger’s offer, the man who controls the City Council’s agenda believes that land sales are a viable solution to the city’s pension ills.

Council President Scott Peters has mentioned the Sports Arena property in Midway and the Qualcomm Stadium site in Mission Valley as possible plots that could be used to plug the pension gap.

“We really don’t have any specific comment on these particular issues but we’ll be working on them,” he said.

However, using land sales to cover one-time debt has its critics, including City Councilwoman Donna Frye. Those opposed say it doesn’t fully resolve the pension system’s deficit and is a poor use of important city assets that couldn’t be regained.

Injecting $100 million in city land into a $2 billion deficit would have little effect, they say.

Trustee Bill Sheffler said the pension board is watching the lawsuit, but won’t need to take action if Conger is successful.

“I think we are going to look at it much more closely in the next couple months,” he said.

A second suit filed by Conger on behalf of retirees against the city and pension system seeks another $500 million to $600 million in an attempt to raise the pension fund back up to where it would have been if the pension board would have forced the city to adhere to the terms of the 1996 deal. Instead, the board allowed the city again to forgo its immediate debts, pushing those debts out into the future.

In a court filing, the city has said the case is outside the statute of limitations and fails to state sufficient facts.

The consultants to the pension system found that the two pension deals violated a number of laws, including statutes that guarantee employees and retirees the right to a sound pension system, and require employers to contribute the proper amount annually to their pension system.

Please contact Andrew Donohue at