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Saturday, March 18, 2006 | A report released Friday pegged the city of San Diego’s pension deficit at $1.39 billion, marking a slight growth in a figure that officials have declared central to the city’s upcoming budget season.

The city will be asked to put $162 million into its pension system in fiscal year 2007, a decrease from the $163.5 it contributed this year, according to an annual report assessing the health of the San Diego City Employees’ Retirement System. Although a payment of that size would cover the city’s legal obligations, a number of officials said it doesn’t take into account a number of the city’s costs and would allow the pension deficit to continue to grow.

Mayor Jerry Sanders acknowledged as much but said he would budget the city’s pension payment at $162 million, although his spokesman later said the budgeted payment would likely be closer to $169 million.

“Is that enough to meet all of our obligations? No, I don’t think so,” Sanders said. The mayor said he will present additional pension solutions, including ways to borrow against a chunk of the coming year’s payment, when he unveils his first budget proposal to the City Council on April 14.

Pension trustee Bill Sheffler estimated that the city’s payment would need to be closer to $210 million to account for its true costs.

“It would be fooling taxpayers to say $160 million would satisfy its obligation to pension plan. If we’re looking at the true bill there’s a $210 million cost,” said Sheffler, a citizen trustee. “It just puts a Band-Aid on the problem and we’ll have to deal with larger numbers in the future.”

He said this year’s bill should include an additional $38 million in interest costs and $10 million for certain benefits that aren’t accounted for.

The report’s release, once largely a bureaucratic exercise, was being closely watched this year as the city attempts to plan around a pension deficit that, if left untreated, threatens to consume city budgets for years to come.

Budget and pension projections offered in recent years by city officials have presumed numbers similar to those in Friday’s report, despite more doomsday scenarios offered in recent months by Sanders and City Attorney Mike Aguirre. A report on possible pension solutions released by the City Manager’s Office last September predicted a $165.3 million pension bill in fiscal year 2007, which begins July 1 this year.

It isn’t until fiscal year 2009, the year the retirement system is mandated by law to change the precise way in which it calculates the city’s annual bill, that the city’s annual payments are expected to rise considerably. That year, city staff projects the pension bill to jump from $173.3 million to $229.2 million.

Sanders and Aguirre had earlier estimated that the city’s pension obligations could consume as much as $300 million in the upcoming budget cycle. However, Aguirre said he had believed that a number changes would be made the pension system’s accounting of the deficit that would have altered the figure.

A number of officials warned that paying the minimum $162 million payment will allow the pension deficit to continue to grow. Such a payment, they said, would continue the city’s past payment practices and do nothing toward actually paying down the deficit.

“Unless the city augments this amount, they will be continuing to fund at a level that does not even cover the interest on the unpaid debt,” said April Boling, former chairwoman of the city’s Pension Reform Committee.

The figures provided by the pension consultants don’t take into account a number of factors that critics of the pension system say artificially decrease its deficit and minimize the city’s annual payment into the system.

Previous consultants have recommended that the pension system take a number of actions to change the way in which it accounts for its liabilities, including lowering its assumed rate of return on investments, fully reflecting the costs of certain vested benefits, and shortening the period in which the city has to pay off the deficit.

Doing so would increase the system’s deficit and, therefore, the city’s annual payment into the pension system. It would also more accurately reflect the city’s liabilities and put it on track to eventually erase its debts, critics of the pension system say.

For example, the retirement system currently uses what’s known as a 30-year rolling amortization schedule. In the first six years of that schedule, the city makes payments that essentially allow its deficit to grow. The city is in the third year of a 30-year amortization schedule. In November 2004, voters approved a proposal to switch the retirement system to a 15-year amortization schedule beginning fiscal year 2009.

Gene Kalwarski, the actuary from Virginia-based Cheiron, said he found several of the retirement plan’s bookkeeping practices to be distorting the pension fund’s true value, but added that the retirement board shouldn’t rush to change the assumptions until after it studies them.

“Staying to these basic assumptions is the smart thing to do and not to have a knee-jerk reaction to any of the changes I suggested,” he said. “My goal is to, by 2008, have a very sound funding policy in place.”

Sanders said he will stick, more or less, with the $162 million figure calculated by Kalwarski, but that he might propose spreading a slightly larger payment out into several installments over the next year.

Sanders said that and other suggestions for raising money to pay down the deficit before the city is forced to ramp-up its payments in 2009 will be made when he unveils his budget to the City Council on April 14.

Jay Goldstone, the city’s chief financial officer, said his office braced for the impact for Friday’s announcement by asking department heads to prepare scenarios for 10-percent, across-the-board cuts – in case there was a behemoth bill due. He said it was not immediately clear how a $162 million pension payment would affect the city budget.

Boling said she expected the mayor, whom she counseled on pension issues during last year’s mayoral campaign, to put in a figure higher than the one recommended Friday.

“I have no reason to believe that he won’t step up and do exactly what he said, which was to pay in an amount that will keep us from going backward,” Boling said.

Others thought the bill would suffice and possibly quell worries that the city would have a tough time paying its bill.

“What we have now is the reality that the number is going to be very similar to the prior year,” said Tom Hebrank, a citizen trustee.

He said that he agreed with actuary’s advice that leaving out the extra costs would not significantly hurt the fund’s health.

“I think what’s not in the numbers is not that material,” he said. “We handed them a good, solid estimate.”

In total, the city’s pension shortfall climbed from $1.37 billion to $1.39 billion, according to the consultant’s report. The system’s funding ratio – the measure of its assets versus liabilities – also increased from 65.8 percent to 68.2 percent.

The full report won’t be available for at least a month. Instead, Kalwarski provided copies of a PowerPoint presentation; last year’s complete report totaled 54 pages, including detailed analysis of the debt and the city’s annual payment.

Council President Scott Peters said the pension deficit was a challenge, but one that the city could manage with time. He said he was relieved that the numbers weren’t as high as some had predicted.

Aguirre, the city attorney, said the report “continues to misrepresent” the city’s pension numbers.

“As a practical matter, are we going to be able to pay the money we actually owe the pension? No,” Aguirre said. “But at the same time we need to know that that number is.”

He has filed a legal challenge to pension benefit enhancements dating back to 1996 on the argument they were created as part of illegal and corrupt agreements between city, pension and union officials. He has said the lawsuit is the only way to begin managing the pension debt, while union leaders have said the benefits are legally protected and have suggested the city raise taxes and sell land to meet its obligations.

City officials already said earlier this week that they had no choice but to continue deferring the costs of another dimension of the city’s pension problems into the future because of tight budget restraints.

On Tuesday, they released a report that put the city’s retiree health care deficit at nearly $1 billion. And, although it is advised that the city pay more than $115 million this year toward the deficit, it will pay $21 million because it has, Sanders said, no choice.

The city’s pension deficit is the result of a historical practice dating back to the 1990s in which the city annually contributed less than was required into the pension system while also increasing benefits to employees. The results of the practice were obscured by robust stock market returns, but revealed when the market dipped between 2000 and 2002.

The pension system’s overall deficit was listed as $1.43 billion. But that figure includes the liabilities of separate agencies that invest in the fund including the San Diego County Regional Airport Authority and the Unified Port of San Diego.

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