The Morning Report
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Wednesday, Nov. 1, 2006 | Last Friday, the county of San Diego’s pension system released a bevy of numbers intended to illustrate its financial strength.
The news was, indeed, good. The latest test of the county’s pension system showed it to be in a bit better state than it was last year. It now has 83.6 percent of the assets it needs to make good on its obligations to current and future retirees. This is up from 80 percent last year. The shortfall in the county’s pension program is now at $1.2 billion.
And officials from the San Diego County Employees’ Retirement Association touted the news – trumpeting the “very positive” results of another year of investing. What they didn’t harp on about, however, was how much this improvement had cost taxpayers.
County pension officials claimed that the total assets of the fund grew $3.6 billion in the last four years. The impression was that this money came from the solid investing and management of the fund. Some of it did. But by far, this growth was due to a massive series of loans the county took out and an unprecedented taxpayer investment in the fund.
In the nine years from 1994 to 2003, county taxpayers were asked to put in a total of $132 million in regular contributions to the county’s fund. The total for the three years since then, however, is astounding. More than $698 million in taxpayer funds have been invested in the county’s pension fund in regular contributions since 2004 – five times the previous nine years combined.
See the graph below.
The pension fund was once so healthy that, in 1999 and 2000, it did not require contributions from taxpayers. Yet we are only now beginning to understand the costs of a frenzy of salary and benefit enhancements that the county Board of Supervisors went on from 2000 to 2003.
The county’s payroll, in 2003, was 26 percent higher than in 2000. Compare that to the last three years in which payroll has grown only 7.5 percent. When you increase salaries, you increase pension benefits.
And in 2002, the Board of Supervisors – without much discussion – approved an eye-popping pension benefit enhancement that turned what had been a surplus in the pension fund to an intimidating deficit in one year. It raised the expected pensions of county employees by 50 percent and immediately after it was approved, a flood of employees applied for retirement.
Time and time again, administrators of the county’s pension system allowed county leaders to put off the day of reckoning for these decisions – continually moving the deadline for payment further and further into the future. And, although the county’s pension fund continued to send so-called “excess” investment earnings to pay for extra benefits for retirees, the fund also maintained that the county need not pay too much into the fund to keep it healthy.
But even those measures haven’t spared taxpayers the full brunt of the spending the supervisors approved.
So, in addition to the great taxpayer investment detailed above, the county has borrowed more than $1.2 billion to invest in its pension system – loans that taxpayers will be paying off long after the people who borrowed the money are out of office.
It is in that context that we, last month, witnessed the collapse of Amaranth Advisors, a secretive hedge fund in which the county pension system had invested $175 million. Other investors, including the San Diego Foundation, had seen Amaranth for what it was: a highly leveraged, secretive and dangerously risky venture. But the county pension administrators trusted the promises their staff made that they need not ask taxpayers for more money to handle these inflated pensions. Through crafty investing they could beat the expectations of most other pension funds in the country.
The loss from Amaranth’s collapse may be total, but the county pension fund will not recognize it for years to come and it did not figure into the latest valuation of assets touted by officials on Friday. The pension fund is filled with protections to ease the volatility of major investment gains and losses. That taxpayers could experience so much volatility, then, after 2002, is all the more illustrative of the incredible burden supervisors foisted on them that year.
The county pension board’s investment in Amaranth and other similarly secretive hedge funds concerned us as did the continual lack of desire to force county supervisors to come to terms with the debt they have incurred on residents’ behalf. But the health of the pension fund is not the main issue.
County retirees and employees should not worry about receiving their pensions. Nothing short of bankruptcy would threaten their lifetime retirement checks. And even that may not.
As the city of San Diego’s city attorney is learning, trying to roll back pension benefits is a Herculean task, even when evidence exists that they may have been awarded illegally.
Our worry then is not, ultimately, about the management of the county’s pension fund. We worry for the taxpayers who have not been told the true extent to which they will be asked to pay for decisions that were made in 2002 without discussion at all.
Taxpayers now are required to pay off $1.2 billion in county loans that they never voted to take out. Look at all the bonds on the ballot this year. State and local governments are asking taxpayers to approve billions and billions in loans on next week’s ballot.
But because the supervisors either didn’t recognize or intentionally hid the cost of their decision to dramatically boost county employees’ pension benefits, local taxpayers were not asked whether they approved of the incredible debt they had just incurred.
Taxpayers will be making these large annual contributions to the county pension fund for years to come. It is impossible to imagine a day in the future when those yearly payments are anything close to as low as they were only a few years ago.
This has been manageable only because of the vast revenues that have flowed into local governments as a result of the housing boom. In years to come, when perhaps the local economy and housing market are not so robust, residents will see and feel the pain of these decisions.