Council Inhales Sanders’ Offering

Tuesday, April 25, 2006 | The City Council took its first official step toward using borrowing as a primary tool in managing San Diego’s pension deficit Monday, approving a $100 million bond package that the Mayor’s Office said doesn’t guarantee the city any savings, but brings it in compliance with its labor contracts.

Representatives from three of the four labor unions present during Monday’s council hearing disagreed, saying the plan to borrow $100 million against the city’s annual share of the tobacco settlement doesn’t go far enough to utilize benefit and salary concessions made by employee unions in the last round of labor talks with former Mayor Dick Murphy.

As Mayor Jerry Sanders celebrated what his office called a “tremendous achievement,” union officials said they were mulling their options, which could include filing grievances against the city or challenging its compliance with the labor contracts.

“What you are being asked to do is fulfill an obligation that we have to our employees to fund the pension system,” Sanders told the council. “It’s not only good for employees, it’s good for the city.”

The council’s decision puts in motion a financing plan that had to be equal parts creative and speedy, as the city is bound by labor contracts to put a lump sum of borrowed cash into the pension system by June 30 at a time in which it cannot access traditional capital markets because of its financial woes.

By a vote of 6-1, the City Council approved Sanders’ complex plan to borrow $100 million and inject it into the struggling pension system. In exchange, the city agrees for the next two decades to hand over to investors as much as $10.1 million annually in the revenue it receives as part of the nationwide 1998 settlement with tobacco companies.

The maneuver is essentially the city’s only way to get to capital markets to borrow money, as its credit rating has been slashed or suspended for more than two years. With tobacco securitization bonds, investors typically judge the creditworthiness of tobacco companies rather than the municipality.

The $10.1 million in tobacco revenues that is sold to investors is to be backfilled in the city’s everyday budget by $10.1 million of the estimated $17.5 million in labor savings. Under the mayor’s plan, the remaining $7.4 million that couldn’t be leveraged because of the city’s financial woes will be dumped into the pension system. He hopes to leverage the rest of the savings into a $74 million loan next year.

Representatives with the unions representing firefighters, police officers and blue-collar workers said the deal doesn’t comply with their labor contracts because the full $17.5 million in savings isn’t being leveraged this year. Officials with the Mayor’s Office have said they are making a good-faith effort to comply with the labor contracts and appear confident in their interpretation of the deal.

If the city were found to be in violation of the contracts, the cash freed up by the concessions would go back to employees.

Sanders had made borrowing the centerpiece of his financial recovery plan, as he announced two weeks ago a $674 million borrowing plan that is to be kicked-off by the tobacco bonds.

“It all begins with this transaction,” Sanders said.

Such borrowing plans don’t rid the city of its $1.4 billion pension deficit; they simply aim to make pieces of the debt cheaper. For example, the mayor’s office estimated it would cost $194.5 million to pay off a $100 million chunk of its pension deficit by 2023. Conversely, it hopes that it costs $187.5 million to finance its $100 million tobacco loan by 2024 and earn even higher sums off the extra cash infused into its pension system’s investment portfolio.

But with such borrowing plans come risk. The city could lose money if it cannot earn more on its investments than it pays in interest on the loan.

“I think the risk is manageable,” Sanders told the council.

The Mayor’s Office first announced the proposal in February and its projections have varied markedly over the project’s two months because of uncertainties surrounding interest rates and tobacco companies’ legal challenges to the settlement.

For example, the Mayor’s Office released figures Monday showing that the borrowing plan could save the city as much as $7 million over the course of two decades. When the council was originally set to hear the item a month ago, the savings was projected to be $11 million; last week it was projected to be only $3 million because of increased interest rates.

If the city’s share of the tobacco funds – which has fluctuated in recent years – comes in at $10.1 or higher for the next two decades, it hopes to pay off the bond sooner the projected. If it comes in lower than $10.1, it will take the city longer to pay off the loan and its savings will shrink accordingly.

If interest rates rise to 7.9 percent – the rate at which there won’t be projected savings – by the time the bonds are let, the item will have to return to the council for reconsideration. Last week, the mayor thought he could get 7.17 percent interest rates, an increase from 6.87 in March. On Monday, he estimated a 7.11 percent interest rate.

Chief Financial Officer Jay Goldstone said the rate will fluctuate again by June, when the bonds are to be sold. He said the city likely wouldn’t choose this borrowing method if it had other alternatives, but insisted that the borrowing deal complied with the labor unions’ contracts.

“We are where we are,” Goldstone said.

Councilwoman Donna Frye voted against the proposal, saying that it was risky, offered no guaranteed savings and possibly didn’t comply with labor contracts.

“Basically the action we are taking could eventually save the city nothing,” she said.

Councilman Tony Young said Monday’s action was a start.

“I think this is a step in the right direction. However, it is pretty clear to me that this is a small step toward a very long trek that we have to take,” he said. “And I think it’s important to point out that just refinancing our debt is not going to get us there. We have to look at other options.”

Please contact Andrew Donohue at