Thursday, January 26, 2006 | (Clarification Jan. 26, 2006: The original version of this story correctly categorized the DROP program when it first introduced the topic. However, because of an editing error, the sentence immediately after the DROP explanation incorrectly stated that employees accrue their salaries – rather than their retirement checks – in the DROP account. Voice regrets the error.)
The two lesser-known public agencies with stakes in the city of San Diego’s retirement system continued Wednesday their low-profile push to distinguish their assets – or remove them altogether – from the city’s in the troubled fund.
While the city teeters on the verge of bankruptcy, officials from the Unified Port of San Diego and the San Diego County Regional Airport Authority met with city and pension officials Wednesday in attempts to safeguard their assets should San Diego’s financial crisis worsen.
A proposal being sought by the port and the airport would shorten the notice they would have to give the San Diego City Employees’ Retirement System if they wanted to pull out of the trust from one year to six months. It would also strengthen the barriers between the different agencies’ assets and make more transparent how administrative costs are divvied up between the city, port district and airport authority.
“We want to make sure 20 years from now that these folks signing on with the Port of San Diego today will have a secure retirement system,” said Port Commissioner William Hall.
About 95 percent of the retirement system’s portfolio is reserved for city employees and retirees. The remainder of the fund’s stake, about $200 million, goes to employees and retirees of the port and airport.
Beginning in 1996, the city annually shortchanged its pension system for a number of years while also granting employees a series of benefit enhancements. As a result, officials estimate the pension fund’s deficit to be approaching $2 billion. The city’s annual payment into the pension fund could consume as much as one-third of the city’s day-to-day budget in the coming fiscal year.
Representatives of the port and airport say they’ve been exploring how to better secure their assets and give themselves more pension options for more than a year. Last year, they successfully pushed legislation that allows the two agencies to create their own pension system if they desire. But retirement officials said they first caught wind of the movement this month.
At City Hall, a few of the key offices were notified in the last week or even just hours before certain SDCERS trustees met Wednesday to discuss terms with port and airport officials.
There were not enough members of the SDCERS board, Port Commission or airport authority in attendance to warrant a public noticing of Wednesday’s meeting. Members of the press were told they were not permitted to enter the meeting initially, but were later invited in. Sources inside the meetings said at least one SDCERS trustee raised concerns that the retirement system could suffer cash-flow problems if the port and airport assets were removed from the fund.
The cash owed to port and airport pensioners represents just a sliver of the fund’s total liabilities, but some made hushed remarks at Wednesday’s meeting that the leeway being proposed for the two agencies appear to have the makings of a “run on the bank” – code for when creditors rush to remove their money from an entity they believe to be going insolvent.
Officials estimate that the city owes the retirement system almost $2 billion, and there is speculation that the other two participating agencies, along with the pension trust’s beneficiaries, may want to cash in now in case the cash-strapped city files for Chapter 9 municipal bankruptcy in the future.
Employees are withdrawing money from their accounts at rapidly increased rates as well.
From July to November 2005, participants in one city retirement program withdrew a total of $25 million – four times more than what was paid out during the same timeframe a year earlier.
The program, known as Deferred Retirement Option Program, allows employees to squirrel away the equivalent of their retirement checks in an account during their final five years of employment at the city if they continue working after they reach retirement age. At any point in those five years, employees can retire and cash out the account.
Retirement trustee Mark Sullivan, a vice detective with the San Diego Police Department, said he supported the concept of their proposals.
“I can understand why they’re doing it,” Sullivan said. “They have some great concerns about the city moving into bankruptcy and what they’re trying to do is secure their assets.”
Local attorney Pat Shea, who worked on Orange County’s bankruptcy filings in the 1990s, said that the two agencies’ requests were “totally predictable.”
“If you’re a creditor, you need to start going out and scooping up the assets before the city’s financial condition collapses,” said Shea, who ran for mayor last year on a pro-bankruptcy platform. “It’s almost reckless not to do this.”
Shea said he thought the city employee unions would start moving quickly to usher city cash and assets into the retirement fund and that retirement-aged workers may start cashing in now as well.
The retirement board is expected to vote on the proposals at its Feb. 17 meeting. Airport authority Chairman Joe Craver said his board will also discuss the proposal at a retreat next month and port spokeswoman Irene McCormack said the Port Commission will consider it at its March meeting. The city must also make changes to the municipal code for the proposal to be enacted.
Hall said the terms of the proposal were supposed to be ready Wednesday, but the retirement system’s staff was unprepared. Some pension officials thought Hall was moving to seal the deal too quickly.
Bill Sheffler, a citizen appointee to the SDCERS board, said he wanted to separate the pressure applied by Hall – who appeared eager at the meeting to get an agreement forged soon – from the merits of the proposal.
“My reaction after being hammered by (City Attorney Mike) Aguirre and being hammered by the mayor is that I want to take a closer look at what’s going on,” Sheffler said, referring to the recent calls by Mayor Jerry Sanders that the citizen trustees resign from the board. Aguirre has called for their resignations several times.
Sheffler said he didn’t think the precautions the proposal calls for were necessary for the two agencies to recover their assets if the city were to file for Chapter 9 municipal bankruptcy, and that pulling out of SDCERS would cost them more in administrative fees because the retirement fund’s behemoth portfolio gains them a discount with investment managers.
The port district had been double-billed in the past for SDCERS expenses, and Hall said that his agency is currently being refunded for those overcharges. He also said a shorter wait to terminate its contract with SDCERS would more easily allow the port district to explore the possibility of creating its own retirement system, a new option the Legislature granted it last summer.
Hall said he was personally intrigued of the port district’s ability to have its own pension plan, asserting that he wanted the port district to eventually turn to a hybrid-style plan that includes characteristics of a 401(k)-style defined-contribution plan.
“Many defined-benefit programs are not sustainable, in my opinion,” he said.
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