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Thursday, March 30, 2006 | Mayor Jerry Sanders’ plan to borrow $100 million in the coming months to inject into San Diego’s struggling pension system hit a potential snag Wednesday when union officials raised concerns that the creative financing plan runs afoul of labor contracts.
Labor leaders suggested that the city’s complex deal still might not be going far enough to comply with specific promises made to workers in the most recent round of labor contracts. If so, the city could be forced to quickly find another manner to borrow money before a June 30 deadline or renegotiate three-year labor deals inked last year after much fanfare.
The city, stranded without a credit rating because of numerous financial problems, has been scrambling for a way to make good on promises that it would leverage the $17 million in labor savings for a large bond offering by the end of the fiscal year, which is June 30.
The city’s credit problems have left officials in the Mayor’s Office with few borrowing options. They have only been able to draw up plans for the securitization of $10.1 million of the $17.3 million in savings, using a creative formula to access Wall Street without a credit rating by borrowing against a stream of revenue that investors usually easily confide in – tobacco settlement revenues.
The administration plans to place the additional $7.2 million in savings directly into the pension system this fiscal year on top of its annual required payment. But union officials said they agreed to the $17.3 million in concessions on the understanding that all of it would be used to seek hundreds of millions of dollars in loans, which in turn would go toward paying down the pension deficit.
“In our eyes, it’s clearly not what we agreed to,” said Curt Ostrander, a negotiator for Local 127, the blue-collar union.
Labor leaders want the $7.2 million to also be leveraged, forcing the city to seek another round of bonds by June 30, a move that would have a more immediate impact on trimming a pension deficit that’s estimated to be at least $1.39 billion.
“While I’m not necessarily opposed to this step, I don’t know if it goes far enough,” said firefighters union President Ron Saathoff.
Fred Sainz, Sanders’ spokesman, said the mayor is working in good faith to feed the pension system, and that city officials are designing other funding mechanisms to that end that will be announced at the April 14 unveiling of the mayor’s budget.
“This is all done in good faith,” he said. “It’s not done because we’re trying to be jerks about it.”
A City Council committee heard an update on the tobacco securitization bonds Wednesday morning and the City Council is scheduled to vote on the mayor’s proposal Monday. However, questions have also arisen as to the efficacy and costs of the creative financing method.
The landscape for borrowing based on tobacco settlement revenues appears to be changing as well, as tobacco companies have challenged the terms of the settlement on claims they are being undercut by smaller competition that isn’t forced to cough up its profits to governments around the country.
The city has already been forced to spread the terms of the loan out two years longer than originally planned when the mayor announced the plan on Jan. 31. At that time, the mayor projected the city could pay off the $100 million loan by 2021. Figures released Wednesday predicted the loan would instead be paid off by 2023.
For example, the city originally estimated it would receive $10.3 million from tobacco companies this year, but is now preparing to receive $8.5 million because of the tobacco companies’ challenge.
Andrea Tevlin, the council’s independent budget analyst, questioned whether the challenge would impact the city’s settlement revenues on into the future.
“If this continues to be the case, we could be significantly below the $10.1 million,” she said during the committee hearing.
Although the differences between the city and its labor unions could end in a renegotiation of the current contracts or legal action, in the immediate future it means the unions could force the city to find another creative manner in which to borrow money before June 30.
The firefighters union contract, a one-year deal, requires that the city act by the end of this fiscal year. Under the terms, if the city fails to make the proper contribution into the pension system, the savings freed up by the concessions would instead go to pay a portion of the firefighters’ contribution to the pension fund rather than the city’s.
The Municipal Employees Association and Local 127 have three-year contracts, but the city’s failure to comply with the firefighter contract could trigger renegotiations on the fine points of these two unions’ deals.
Saathoff said it was agreed that the city would leverage some of its real estate lease revenues if more traditional borrowing methods weren’t available.
Under that scenario, the city would essentially sell to investors the right to $7 million in guaranteed lease revenue over a set period of time in exchange for cash upfront to divert into the pension system. The $7 million gap that would be created in the city’s budget would then be backfilled by the savings that came about because of the pay-and-benefit concessions made in the labor contracts.
“That is exactly what was contemplated in the labor contracts last year,” Saathoff said.
Were it not for its credit problems, the city would have likely dedicated the $17.3 million in savings and borrowed approximately $200 million in pension obligation bonds, a tactic used by other municipalities struggling with pension problems, such as the county of San Diego.
Sanders was elected in November on a fiscal reform platform, but inherited labor contracts negotiated by his predecessor, Dick Murphy. The former mayor was forced out of office by ongoing federal investigations and the city’s financial crisis.
Sainz, Sanders’ spokesman, said the administration is busy working on further pension solutions and criticized the comments of Saathoff, who is facing criminal charges because of his prior involvement in the city’s labor and pension issues.
“It’s a little ironic that the man who, in part, got the city into these problems is now sitting before the [budget] committee judging the transaction of the mayor who is trying to get the city out of these problems,” Sainz said.
The new administration has chosen this time to issue tobacco securitization bonds, a method that has been used by municipalities around the nation. However, the city’s bond offering is more exotic because of its financial restraints.
The city would sell to investors $10.1 million a year in its tobacco settlement revenues in exchange for a $100 million upfront loan. Investors would receive that slice of the city’s tobacco revenues until it pays off the loan, which is expected to be in 2023.
If tobacco revenues dip below $10.1 million any year, the terms of the loan would simply extend and the city would be forced to spread out its payments further into the future. If the revenues come in above $10.1 million, the city can keep the excess money or put the surplus toward paying off the loan sooner.
The city then would use $10.1 million of the money saved through the labor contracts to backfill the budget gap that would be created by removing the tobacco settlement revenues. Currently, the tobacco settlement revenue is used largely for general purposes, though some is used for after school programs, parks and the enforcement of smoking laws.
The city would not be on the hook to investors if tobacco settlement funds were to disappear altogether, as investors assume that risk.