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Thursday, March 16, 2006 | After more than three years of enduring the pension crisis, the city of San Diego and its leaders have undergone an incredible evolution.
Those who spoke for city government used to deny that City Hall had any big unpaid bills and they discredited any suggestion that it would have to go out of its way to prepare for them.
Now it admits it has big bills.
But it still doesn’t want to pay them.
On Tuesday, Mayor Jerry Sanders, City Attorney Mike Aguirre and Council President Scott Peters announced that the city should be paying more than $115 million this year into a fund for the health care needs of its retirees.
But then the mayor said the city just won’t be doing that. Too hard, he said. We’ll plan on doing it sometime in the future, he said.
That’s a big deal and an amazing thing for him to say. I don’t know how what he said means anything other than that the city is flat broke.
As always, the staff here at Scott Lewis on Politics, or SLOP™, has come prepared with some background.
Like a multitude of companies and other similar local governments, the city many years ago began promising its workers that when they retired, the city would pay for their health care. Why? Well, workers periodically deserve, or successfully demand, raises in their levels of compensation. But if you just give them a raise, that means you have to either bring more money in – raise taxes – or cut services and other employees out of the budget.
Companies like United Airlines and General Motors and cities like San Diego decided that they didn’t want to raise more money through plane fares, taxes, bake sales, etc. But they didn’t want to cut back in other areas: plane maintenance, beach cleaning, new stadiums, etc.
So they decided that one way they could raise the compensation levels of their employees without all the potentially distasteful consequences of raising their compensation levels would be to make promises. Promises are awesome. Unlike money, promises do grow on trees.
The city looked into its bag of promises and pulled out one that looked good: It promised employees that when they retired, the city would pay for their medical care until they died. The employees knew how valuable that was and were happy. That made city leaders happy too.
General Motors and United Airlines did the same thing. Everybody was happy.
That is, until people started retiring. Now, because technology – and maybe good old fashioned capitalism – has made health care so expensive, fulfilling those promises is getting kind of difficult.
For many years the city was able to pay its retiree health care bills by siphoning off money from the earnings of its wildly successful pension fund. In other words, if the investments in the city’s pension fund made a lot of money in one particular year, rather than saving that money to make up for bad investment years, the city took that money and used it to pay for retiree health care costs.
We all know how well that, and other decisions, worked out for the pension system.
Just in case you’ve had your head in the sand, the pension fund’s health dropped to incredibly worrisome levels. And city leaders set up a commission to investigate what happened.
The Pension Reform Committee, as it was called, came to the conclusion that, among other things, the city needed to stop robbing the retirement fund to pay for retiree health care costs. They were separate costs and should be funded separately, they said. And noted whistleblower Diann Shipione and the Pension Reform Committee both warned of something that was barely peeking its head over the horizon: Changes to government accounting standards.
In a few years, they warned, the city and all other governments in the country were going to have to figure out just how much all of those promises they made were worth. If it promised employees health care until they died, the city should be able to count how many employees and retirees it had, estimate when they might die, factor in how much health care costs will rise and treat the resulting number as any other kind of long-term debt.
Cities like San Diego, it was determined, owed it to investors to disclose exactly how many promises they had made.
The advantage, of course, of treating promises like debts instead of just plain promises is that you can prepare for their cost – you can face reality and save for it. The city like everyone else, would finally, for once, see how much money it would have to pay in retiree health care costs. It could finally make good on the promises it had so easily handed out.
At least that was the theory. On Tuesday, the city finally got a report back from the bean counters that is supposed to finally put the speculation to rest as to how big that big deficit really is.
A report by the firm Towers Perrin showed that the city will have to pay its current and future retirees $978 million. If it were to start paying for that obligation in a responsible way this year, it would cost the city more than $115 million this year alone and even more in the coming years.
The city will not pay that much money this year, because as the mayor said, it simply can’t. Instead, it will pay $21 million just to make sure the retirees out there now have health care for one more year.
The most ridiculous thing was the suggestion from the mayor that sometime soon, he will be able to make that $115 million-plus payment. But the city, he has said, is in a fiscal crisis this year. Where is it going to find close to $100 million to make the payment next year, or even in the following year? The mayor was optimistic that the city would be able to get there someday.
Tuesday’s announcement that the city has a big bill that it is completely unable to pay was a refreshing moment for those who have long been frustrated by the lack of candor about these issues from local elected leaders.
But its promises are coming due. Just like they did for United Airlines, and look what happened to that once great company.
Scott Lewis oversees Voice’s commentary section. Please contact him directly at