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Wednesday, June 28, 2006 | One of the most obvious flaws in the calculation of both the city’s and the county’s annual payment to their retirement systems is the use of negative amortization. That’s the practice of making payments that don’t even pay all of the interest on the debt, never mind making a principal payment.

That’s correct, the city and county both owe large debts to their pension systems. They continually reassess the timeframe by which they will pay off those debts. They have engineered it so that they are always in the beginning of the timeframe and they never have to make a payment large enough to keep the debt from growing.

Don’t be confused by the dance of the actuaries, who make the calculations and projections that seem to prove that eventually, if followed, the planned payments to these retirement systems will pay off the debt.

Negative amortization increases principal. It is a mathematical fact.

On June 8, a group of plaintiffs (myself included) filed an amended complaint against the County of San Diego and its retirement system, San Diego County Employees Retirement Association (SDCERA).The purpose is to stop the county’s negative amortization of retirement debt.

The applicable law (Gov’t Code section 31453.5) states “The portion of liability not provided by the normal contribution rate shall be amortized over a period not to exceed 30 years.” The first question is whether negative amortization is, in fact, a form of amortization.

It seems to me that negative amortization is exactly the opposite of amortization because it causes the principal to grow. Negative amortization is not a type of amortization. One can be “fashionably dressed” or “warmly dressed.” But, to me, being “undressed” is not a form of being dressed.

Amortization is the process of gradually reducing the loan principal. The important thing is that it is a process, not an outcome.

The judge did not agree. He opined that “amortize” means “fully paid off.” He seems to believe that if you make no payments for 29 years and then make full payment in year thirty, you have amortized your loan because you have ultimately paid it off. While I respectfully disagree with his definition, using it reveals that the county and SDCERA are still in violation of the law because they have not yet paid off pension debt from 30 years ago. There has never been a point where they haven’t either had an unfunded liability or pension obligation bonds, which are simply that same pension debt re-financed into another form.

In the end, however, the underlying question isn’t so much whether negative amortization is or isn’t legal; it’s whether or not it is a prudent methodology for trustees to adopt. The California Constitution requires prudent conduct. As the charts show , it’s clear that the county’s pension-related debt has soared in the last few years, now exceeding $2.5 billion. I do not understand how the trustees can even consider adopting a payment plan that makes no inroads on that obligation.

The other thing that simply dumbfounds me is that SDCERA and the county are willing to spend precious retirement funds (ultimately taxpayer dollars) on legal fees in order to avoid putting more money into the system. We have offered to settle our suit if they will simply stop the negative amortization. Our proposed settlement would include no attorneys’ fees.

The county claims to have plenty of money. Why, then, can’t they just adopt a payment plan that actually pays some principal? What’s the issue? Why does it take a lawsuit to make them eat their vegetables? The visual is of a spoiled child at the dinner table saying “you can’t make me!”

We’ll see.

April Boling is an accountant. She is the former chairwoman of the city’s Pension Reform Committee was also chairwoman of the San Diego County Taxpayers Association. Agree? Disagree? Send a letter to the editor.

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