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Monday, April 17, 2006 | Any taxpayer should have the right to clearly see the following line items in the City’s budget: payroll, annual pension contribution, health care costs, and other related retirement benefits. We haven’t been able to do that in the past. The latest proposed budget is a bit easier, but this may help even more.
The new budget reflects $747 million of “Personnel Expenses” (like payroll with some other stuff). It also shows $374 million of pension/retirement benefits listed as “Citywide Program Expenditures” (?). Those two expense items alone total over $1.121 Billion. That’s just for this year.
If you do not include the proposed $374 million of revenue from pension obligation bonds, the city only reflects general fund income of $1.013 billion.
In other words, without borrowing a third of a billion dollars this year, the city does not have enough revenue just to pay all its salary and benefits obligations. And, it has zero for electricity, police cars, fire trucks, road asphalt, paper, new libraries, pens, services, etc. You get the picture. We are broke.
The only way this is not the case is if the $374 million is really not the amount due the pension plan this year, but instead is a substantial additional payment over the amount actually due. That is not the case as the calculation of the real amount we owe this year (the “ARC”) will show.
So, when you hear the city has enough money to pay all its bills and there is no financial crisis, you know that is not correct. It’s in the numbers. Which, is what most of us have thought for some time.
How are we going to deal with this situation? Go into Chapter 9 bankruptcy and “adjust” our financial condition? No. Raise new revenue by seeking new taxes? No.
The “plan” is to do what millions of Americans do: Get another credit card and start charging the rest of what we need. We will then make the “minimum payments” on this card. Next year we will need to do this again. So we are planning to get another card then, too, and start making more “minimum payments.” How does this story usually work out?
In the end, we are going to be hit with a huge bill, and a “crisis” will be created to force us to pay it, or go bankrupt after we have committed all our revenues, sold all the discretionary assets we own, and collateralized all the stuff we need to keep.
Numbness is setting in on the dialogue of the city’s financial condition.
As we wait for the tough news from the Mayor and his financial crew about our fiscal reality, we hear a familiar refrain: there is no fiscal crisis at all, just an over exuberant press corps.
In fact, now we’re told the amount we need to pay into the pension system isn’t the over-$200-million the Pension Reform Committee told us we owed two years ago. Instead it is just $162 million, a number divined by the same pension system that has pumped out phony numbers for a decade. The mayor acknowledged the $162 million number is not the accurate number nor does it even keep the deficit from growing. (This fabricated number is now deceptively called the “Actuarially Required Contribution,” not to be confused with the “Annual Required Contribution” – the “ARC” – which is the real, legal standard under the Governmental Accounting Standards Board. More on that later.)
And even better than that, of the artificially low $162 million, we will only actually contribute $81 million July 1 from this year revenues (more than $50 million less than last year). That’s so we can use $30 million for Pension Bonds (the “minimum payment” on the new card) and the other $50 million will be held aside for other necessities, unless this adventure fails in which case, if it has not already been spent, it will be contributed to the system. In other words, we aren’t paying from this year’s revenues even the skinnied-down pension bill because we need that money for other expenses. Council members are already in animated discussion about where they can spend their “new” money. Doesn’t this all sound vaguely familiar?
To disguise the fact that we are broke on a cash-flow basis, and unable to pay annually what we must from our annual revenues, the city is understating its pension contribution obligation by hundreds of millions and promising to borrow over $374 million from pension bonds to deposit into the retirement system.
This assumes we get audits pronto; that the Securities and Exchange Commission is OK with the new way we are going to pay current pension obligations with the “little money now and more on Tuesday approach;” and, that the capital markets will snap up our pension bonds at substantially less than the assumed 8 percent rate of return we owe now to the pension system for “in arrears” payments [otherwise, why do it?]. Oh, and also that it is legal to issue bonds to pay questionable obligations that were secret and unfunded when they were promised.
Oddly enough, it’s hard to know whether to cheer this one on, or give it the Bronx cheer. If all these stars don’t line up just right, we just underfunded the pension system (again) by several hundreds of millions of dollars (again). But, if we are successful, we will pay tens of millions of dollars every year for the next 20 years (at least) to pay for the amount we should have put in for just this year. And, we’ll need to do it again next year. And so on. Is that a good deal?
All of this is probably a bit over the heads of the average person, so it has that numbing effect that could allow for its success. Even The San Diego Union-Tribune recently found “much to like about the financial recovery” plan, with the possible exception that the numbers might not be quite right, a uniquely San Diego affliction.
This brings me back to the city’s real “Annual Required Contribution” to the pension system which is the second largest item in this City’s budget next to payroll. Lots of cities, counties and states correctly calculate this number every year. So, it’s likely we do not do a good job of this only because we do not want to face up to the reality of it. I’ll tell you why.
The real pension contribution amount is pretty simple to calculate. In fact, you can pick up the phone and call your friendly Governmental Accounting Standards Board (GASB) in Washington D.C. and they will walk you though it.
It’s easy to estimate. The real pension contribution for this year should be this year’s cost for benefits accumulated this year (known as the “normal cost”), plus one year’s amortization payment on any deficit, and the annual amount required to keep the deficit from growing, i.e. one year’s interest payment on the deficit. That’s it.
Let’s go with the Mayor’s assumed normal cost number of $81 million. You would then add to that $135 million for one year’s amortization payment to pay off the $1.4 Billion deficit in the next 15 years. [The new actuary for the San Diego City Employees’ Retirement System recommended a 15-year fixed amortization schedule because the debt is already on a staggering 68-year amortization schedule.]
Then add to that the 8 percent “assumed rate of return” interest on the minimum $1.4 billion deficit, which is about $112 million.
Let’s see, that’s $81 million, plus $135 Million, plus $112 Million, for a total of $328 million. And, that does not include the “contingent” benefits which would increase the deficit by $100 million! In addition, because in San Diego we also have an “Employee Pick Up” program which compels the city to “pick-up” a large portion of the pension contribution amount the employees are required to pay, you have to add another approximate $60 million for that this year. So, you’re up to $388 million. And, that does not include the city’s required contribution to the DROP account or the post-retirement health care costs – which is a whole ‘nuther billion-dollar mess. But, it’s pretty easy to see that the real annual pension contribution obligation is north of $374 million. Each year.
The city’s retirement contribution number is not $162 million, even if the pension system names it the “Actuarially Required Contribution.” Might as well call it the “Baloney Contribution.” The mayor should never mention it again. Jay Goldstone knows better.
It is the city, not the pension system, which is legally required to contribute the correct number, so there is no profit in faking ignorance based on the system’s phony number. The mayor promised to hire an actuary to run the real “ARC” number for the financial statements to be produced next year. Don’t do that! Get an actuary next week to provide the correct ARC number for the budget so you know the number you have to contribute next year.
There is no such thing as a “minimum payment” to the pension system. The mayor’s proposed budget just continues the city’s past practice of pretending to balance the budget by hiding the true annual pension cost. Just like we used to do with “overtime.”
Borrowing to make this year’s annual pension contribution is not structurally balancing the budget. And, asserting that pension-bond proceeds are going to pay down the debt when in reality they are just going to cover the cost of the real annual contribution is an odd form of honesty. Any legitimate 20-year projections of the City’s pension obligations under this budget will confirm that by 2020, the City will still owe multiple billions of dollars and the $600 million plus POB contributions over the next two years did nothing of consequence.
We need to adjust the amount of the massive debt down, or we need to bring in new revenue to pay them off; and perhaps both. If the former is bankruptcy, so be it. If the latter is new revenues, so be it. If there is some other way to accomplish either or both of these, fine. But, the process starts with acknowledging the real “ARC” obligation north of $328 million and ends with a current and long term commitment to deal with the real annual pension contribution obligation, a number north of $400 million.
Diann Shipione was a Trustee on the board of administration of the San Diego City Employees’ Retirement System from 1997-2005, representing the general public. The board was re-constituted in 2005 under Proposition H, and then-Mayor Dick Murphy did not re-appoint her. She is a vice president of investments for a national brokerage firm.