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Monday, Dec. 11, 2006 | Oops, I Did It Again: The Daily Transcript had an interesting item (registration required) this past week about new asset numbers out from the San Diego City Employees’ Retirement System, which show (get this) that SDCERS has another billion dollars of assets. They just found it – lying there.
Hooray – we’re saved! There’s no pension deficit crisis after all. We found a billion more.
And, this just when you thought it safe to put away those “I’m-in-the-stupid-club” buttons.
One of the classic SDCERS public relations tricks is the annual: “Good news, everyone! We have lots more money!”
Year after year they pull out this ratty little rag and wave it around, never telling you about the monstrous liabilities that actually offset this so-called “found” money.
OK. So, here we go again. SDCERS celebrating they just “found” another BILLION dollars.
The last of the SDCERS’ “audited” financial statements were in FY 2003. This audit was done by the same crack troops that audited the city’s 2003 books! The very same firm that so bazookaed the city’s books that we had to go through a complete numerical “make over” by KPMG and scores of other lawyers, consultants and mercenary numerists (humorists?), at a cost to you in the many dozens of millions of dollars – the result of which was the admission of hundreds of millions of dollars in errors and omissions in the city’s revised 2003 financial statements.
Fact is SDCERS has not been comprehensively audited since 1991 – and this was confirmed by the city auditor. That’s a mere 16 years that we’ve just been taking SDCERS’ staff’s word that everything’s just fine.
Take a look at the 2000, 2001, 2002 or 2003 SDCERS CAFRs and you’ll find the unaudited disclaimer not only for the “investments” but also for the “actuarial” stuff.
So some might start with a nagging concern that maybe SDCERS isn’t starting out with the real, no fooling, gotta be right numbers.
But, just for laughs, let’s compare SDCERS’ most recent “Big Announcement!” of “unaudited” (their word not mine) $4.6 billion to the also “unaudited” $3.6 billion it claimed to have as of June 30, 2005.
The difference is $921 million.
Since there was no break out of the what and where of this astonishing amount that was found, here’s a couple of reasons why this hooray-hooray found money will probably not be paying off the city’s $1.4 (at least) billion pension deficit.
Since both the $4.6 billion and the $3.6 billion numbers include about $200 million in assets that belong to the port and airport authority(which fully fund their systems) we should probably deduct that amount because it’s not ours. A technicality, perhaps, but it seems fair. So, reduce the hooray-hooray found money by $200 million and the number is now down $721 million.
Next, we need to deduct the $225 million that supposedly belongs in the alleged DROP accounts (as reflected on page 15 of the Cheiron report) because theoretically that money has been pledged to DROP participants, and they’d be disappointed if they found out that SDCERS was telling folks those assets were available to pay down the pension deficit. I’m not saying SDCERS can’t, or won’t, steal it in the end (ditto for the port and airport authorities monies.) If they need to and can, they will. But, just for now, it’s not ours so let’s just leave it out. That takes hooray-hooray found money number from $721 million down to $496 million.
Then, remember, SDCERS needs to have earned 8 percent on the $3.6 billion in assets just to make the assumed rate of return bogey so we need about $288 million for that which leaves us about $208 million to maybe pay off the deficit.
But wait, remember, the $1.4 billion deficit accrues 8 percent interest for the 2006-2007 fiscal year and that equates to $112 million. Now we’re down to $96 million.
And then there’s the “contingent” liabilities, such as Corbett, which if included in the deficit would accrue at 8 percent interest as well – another $11 million.
These are just a few adjustments and we’ve gone from the “billion dollars in found money” to a mere $85 million.
And, according to page three of the Cheiron Report, the city’s actuarial liabilities grew by $380 million dollars (or 9.5 percent) from 2004 to 2005. How much will they grow in 2006 and how much is that going to cost?
In a letter to the editor of the Daily Transcript, the CEO and Board President of SDCERS noted that the city contributed $430 million to the pension system last year (where did that number came from?) but that the city’s increased actuarial liabilities for the last year have not been calculated (or, more likely, announced) yet. So, it would be foolish to compare current assets to last year’s liabilities. In fact, they conclude, “any guess about the [actual current] size of the unfunded liability is just that – a guess.” So, why the misguided announcement of the new found assets?
City CEO Jay Goldstone, who apparently doesn’t want to wear a “stupid” button, said,
I don’t know how much of this billion dollars could be used or will be used to pay off the deficit. I have to believe it’s not going to be the whole billion.
I spoke this past week to a fellow formerly very familiar with the SDCERS pension system. In considering this latest rancid piece of bait, he said (disgustingly), “I don’t believe anything those guys put out any more.”
Can You Pass Me That Bucket Over There: In another event at SDCERS, the recent Staff Compliance Report for Dec. 4 reflects the efforts of the system to obtain a private letter ruling from the IRS for a new “Preservation of Benefit” trust. This new fund is required because for some city retirees, what the system pays out to them exceeds the current $175,000 maximum annual payout allowed under IRS Section 415 (this will increase to $180,000 in 2007). The new trust fund will hypothetically handle these excess benefits so they can still be paid out.
MIA: Whatever happened to the Secondary Voluntary Disclosure on the city of San Diego’s Water Utility Department financial statements for 2002? Back in Jan., March and April of 2004, the city confessed to massive errors and omissions on its 2002 General Fund and Wastewater financials promising that a comparable disclosure for the water department forthcoming – post haste. By August of 2004, the city’s disclosure folks said that this MIA disclosure would be released at the same time KPMG produced its opinion on the 2003 Financial Statements. But, KPMG didn’t have anything to do with the Secondary Voluntary Disclosures. Did KPMG’s audit scope include the Water Utility Department, or was it limited to just the General Fund and Wastewater? Remember, like with the SDCERS audits, it’s all about the scope. It’s long been known in the city that the water department’s financials are “a mess.” By now, you’d think we’d know more about this. This matters because we are now going to be paying yet again increased water fees and we don’t even know the status of the water departments past or current finances. And, despite comments that an “audit” of illegal transfers from the water department was done last summer, the fact is that only a “review” was done -definitely not an audit. Probably for a reason.
Quality of Life Tax: The one thing we have here that we don’t pay for is our “quality of life.” It’s free. Like the sun, blue sky, the fresh breeze, and the blue ocean water (at least when we aren’t dumping our raw sewage in it).
Last Thursday’s “Full Focus” on KPBS featured SANDAG’s Executive Director Gary Gallegos discussing a forthcoming tax initiative to fund “quality of life” items like beach sand and open space. A precursor of Christmases to come.
Last week, this post looked at the inevitable privatization of Balboa Park, because there is not now, and won’t be for a long time, any money to do the repair and maintenance of that facility. It used to be paid from the city’s General Fund taxes, but as we now know, those are thin at best and we will be removing hundreds of millions each year for decades to pay off the pension deficit crisis. In the end, we will all pay for our use of the park in the future.
Perhaps SANDAG has realized that this model must be employed in virtually every other element of San Diego life. New money has to materialize to provide what we have always had in the past, because so much of what we are already paying must now be diverted to pay off of the pension mess over the next decades.
There has always been an alternative to a Chapter 9 plan of adjustment. What we are doing now is it. And, it’s just beginning.
The mayor now leads the charge on the next round of sewer and water rate increases even though it conflicts with his campaign commitment no to do so:
I do not support increases in taxes or fees to solve the current crisis. The mayor and council created the current crisis, and it is not fair to ask the taxpayers to pay for politicians’ mistakes, nor does it make sense to reward bad behavior.
Tony Atkins leads the Balboa Park privatization issue, and SANDAG takes the lead on the new “quality-of-life” taxes that will need to be raised. These are just some of the inevitable consequences of our choices. And, more are coming.
My friend Scott Peters once rhetorically admonished me that the last election confirmed that the people of San Diego didn’t want to adjust the city’s debts in Chapter 9 bankruptcy – instead they wanted to get on with paying these deficits off.
I think we are on our way.
County Health: A lot was made, then not made, of the Dianne Jacob/ Pam Slater-Price retiree health care proposal. It started out with a U-T editorial suggesting the proposal would cut off retiree health care for new employees saving the county $1.8 billion over 20 years. Those retiring before 2002 would continue to get free health care.
But, in a Nov. 29 SLOP item, Jim Duffy, head of the Sheriff’s Association confirmed that the county would be creating a VEBA – a fund, if you will, that would hold contributions for future retiree health care benefits. Duffy opined that the county would be making all the contributions going into that fund so it would still be all taxpayer money. No real change as far as employee/retirees were concerned. And, the supervisors did not necessarily reject that position.
This clearly wasn’t anywhere near what the U-T thought the proposal to be. If the county funds it, as expected, there won’t be a “savings” of $1.8 billion because some of that amount will be paid along the way. But, it’s still a good thing. Why? Because the county will start paying today for future health benefits promised today, instead of leaving a massive debt bomb for future generations, a practice the city has expertly made into an art form. If the county continues to pay by way of the VEBA as suggested by Duffy, it will have to fit those payments into its annual operating budget – that means other stuff will have to be cut. That’s how budgeting is supposed to work. Doing it that way prevents the creation of illegal municipal deficits.
It still costs money. But, it’s a far more honest and responsible way of paying for what you promise.
In yesterday’s editorial, the U-T still incorrectly assumes that future retirees will be cut off from health care benefits which seem likely not the case. And, it exhorts the city act similarly. It can’t. It can’t cut off health care entirely because the council won’t do it for political reasons. And, it can’t even structure it properly through a fully funded VEBA because it is so broke, and unwilling to address its financial condition directly, it has no financial ability to fully fund its real ARC, its required deficit reductions schedule or the maintenance of its sewer system, much less annual VEBA contributions.
Choices get difficult at this point.
Who’s Watching Who: There’s a thing going on about the formation of the city’s soon to be constituted “audit committee.” The mayor and the U-T editorial board want the committee to be appointed by the mayor. The council has decided that it will appoint the audit committee.
In what is now the usual signal that the U-T doesn’t like what’s going on, it early on blames Aguirre, and only later gets to the council/mayor conflict issue.
[Sometimes you have to read this stuff all the way through to get the real news. Reminds me of the front page of North Korea’s leading newspaper the day after their atomic test. The lead article was something like “Dear Leader Visits Pig Farm;” you had to read down to the bottom of the page to get to the small article on that fact they’d lit off a nuke. But, I digress.]
The point here is a big one. In a place genetically inclined to fakey-fakey, what measures must be taken to get a truly dispassionate set of eyes on the city’s numbers?
Under our “new” government, the mayor is like an über/manager-president type person. Everybody but the council reports to him. All numbers get filtered through him. So, is he the right person to have control over the auditor reviewing those numbers? In fairness, probably not.
One of the causes of Orange County’s plop down was that they had an office of “Auditor/Controller.” So, the person in charge of spending the money was also in charge of auditing his own performance. That didn’t work out so well in Orange County. We’ve had similar problems here. Can’t say we’ve done much better.
See, there’s critical role to the auditor of any entity, and I can think of few more challenging places for that critical role than here.
For the present, the council will be the audit committee. But, if we are thoughtful, and don’t want to be wearing our “stupid” buttons in the future, the best solution is an elected auditor, as suggested recently in a voiceofsandiego.org editorial.