Wednesday, Nov. 1, 2006 | The city of San Diego has slightly more than 18 months to figure out how to infuse $493 million into its pension system in order to comply with its labor contracts and, potentially, tentative legal settlements, according to a pension report released Tuesday by the City Council’s independent budget analyst.
The city’s ability to do so is hampered by a number of issues, the report states, including questions about whether proceeds from land sales can legally be funneled to the pension system and whether the borrowing of money through pension obligation bonds will prove economical. The city’s credit problems have also left it unable to borrow money on the public markets to raise the necessary cash.
“It is unclear whether the full $493 million can be infused into the Retirement System before June of 2008, even if all funding options discussed above are executed to the fullest extent,” the report reads.
The report titled “Pension Plan: A Strategy for Action” from the Office of the Independent Budget Analyst recommends that the offices of the mayor and city attorney confer to understand the legal and financial implications of the city defaulting on its contract with the blue-collar workers union, although the mayor’s chief financial officer downplayed the estimated financial impact of such a scenario.
The union agreed to pay cuts in 2005 on the condition that the city infuse $600 million into its pension system by June 30, 2008 above and beyond its annual pension bill. Workers would likely receive a refund of their concession if the city defaults.
The concessions agreed to by blue-collar workers and the rest of their union colleagues total about $17 million a year and are scheduled to be securitized for upfront cash. But the blue-collar workers’ share of those savings could be in jeopardy should the city not comply with its contracts. So far, the city’s credit problems have left it able to put in only $107 million of the $600 million called for in the contracts.
The IBA report says it is unclear whether borrowing through pension obligation bonds remains a viable option because of the uncertainty of interest rates and the “acerbic treatment of POBs” from private consultants from Kroll Inc. in a report on city finances released in August.
“I think our intention was to try to bring to the forefront that the ideas that have been commonly raised (to solve the pension problem). People shouldn’t fool themselves into thinking they can just pick one of those and it will take care of it,” said Penni Takade, a legislative and policy analyst with the IBA.
Mayor Jerry Sanders has offered pension obligation bonds as a primary tool in his attempts to tame a pension deficit that’s estimated to be $1.4 billion. The deficit has consumed city budgets in recent years, forcing deep service cuts despite booming revenue growth. It is forecasted to continue to drag down city budgets absent significant remedy.
Sanders issued a plan in April to borrow a total of $674 million for the pension system by 2008, $574 million of which would come from pension obligation bonds.
Jay Goldstone, the mayor’s chief financial officer, said the city’s ability to meet its obligations to the labor union depend on questions surrounding a number of the tools originally envisioned to do so.
“There’s a huge question mark whether we can sell land to meet those needs. We’ve not taken pension obligation bonds off the table. They’ll have to be economical,” he said.
“If people take items out of our arsenal, it’s going to be more problematic,” Goldstone added, noting that City Attorney Mike Aguirre had raised questions regarding the legality of the mayor’s borrowing plan.
Aguirre has also argued that the labor contracts in question aren’t legal because he never signed off on them.
Supporters of pension obligation bonds say they offer a large, upfront cash infusion to struggling pension funds that can then be invested. Opponents say they simply shift debts around and don’t truly solve pension deficit problems.
Goldstone said the Mayor’s Office hadn’t yet analyzed the impacts of defaulting on its labor contracts, but noted that the blue-collar workers’ share of the $17 million in annual savings is on the small side.
However, any budget hit taken in the coming years is likely to hurt as the city scrambles to make up for its pension neglect, maintain city services and funnel cash into a number of other forgotten, yet vital, funds.
The IBA report touches on a number of other reforms, highlighting what has already been done by city officials and what remains to be completed in order to extricate the city from its woes.
It notes that a long-term plan must be put into place, especially in the face of pension payments that are estimated to rise significantly in 2009 because of a change in the pension’s debt-repayment schedule.
“The City cannot continue to hobble along year-to-year barely making its payments,” the report states.
Sanders spokesman Fred Sainz said the mayor will release in mid-November a long-term budget analysis that lays out plans to increase funding in five major areas. It will include plans to pay more than is annually billed by the pension system in order to more quickly pay down the deficit and reverse the negative amortization experienced by the fund in recent years.
The analysis will also lay out plans to shift more funding to a retiree health deficit estimated to be more than $1 billion, a deferred maintenance backlog estimated at $900 million, parched reserves, and a miscellaneous category comprised of a number of other struggling funds.
The analysis, however, won’t include recommendations on what services to cut or taxes or fees to increase in order to cover the additional costs, Sainz said. “We don’t have that level of detail,” he said.
The IBA report also noted that two long-standing pension and labor issues remain unaddressed.
The report states that the pension system’s “waterfall” has yet to be resolved, noting that requests for a legal analysis from the City Attorney’s Office had been made in June by Council President Scott Peters. The waterfall is a structure in the pension fund that uses investment earnings to pay for off-the-books liabilities and is considered an unsound practice because investment earnings are supposed to be squirreled away in good years to make up for bad years.
Additionally, the report states that labor contracts struck in May have yet to be formalized by an ordinance and therefore cannot be enforced. The contracts, for example, eliminated certain pension benefits for new hires. “This ambiguity is problematic,” the report states.
Takade said the ordinances need to be drawn up by the City Attorney’s Office.
Aguirre said both issues will be ready to be dealt with when the council returns from recess in a week and a half.
“It’s very complicated to solve it,” he said of the waterfall issue. “The lawyers had to do massive amounts of research to solve it.”
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