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Monday, Feb. 12, 2007 | The city of San Diego’s retirement board is poised to set a new timetable for collecting San Diego’s $1 billion pension debt, and its choice will impact how much money the city will have left in future budgets to confront other looming shortfalls.
Mayor Jerry Sanders expects the board to set a 20-year schedule, an assumption he built into a forecast of the next five years’ worth of budgets. But San Diegans voted in 2004 to eliminate the debt over 15 years.
The decision could swing the city’s budget by about $20 million a year, beginning in the 2009 fiscal year, when Sanders expects the budget will already fall short by about $173 million. The pressure to allow a popular mayor some leeway on the city’s bill will also test the independence of trustees whose predecessors have been accused of accommodating the city’s short-term needs at the detriment of the retirement fund.
The board will hear its financial consultant’s advice at a meeting Friday and could possibly decide on a timetable in March.
A 2004 legal settlement currently prescribes that the city pay off its $1 billion pension deficit on a 27-year schedule, a requirement that will force the municipal government to contribute about $138 million in the next budget year. Sanders has pledged to pay an extra $27 million into the fund in the next year anyway in an effort to make a larger dent into the shortfall after the system received a one-time windfall from accounting rule changes, strong investment returns and a mortgage on the city’s tobacco tax money last year.
But with the expiration of the settlement the following year, the retirement board’s decision will impact the treasury of a city that is grappling with an $800 million-plus infrastructure backlog, thinning reserves, a $1.4 billion retiree health care deficit and a potential salary hike for police officers.
While the city has historically preferred to pay less money over a greater number of years in order to minimize the pension contribution’s impact on the annual budget, many favor paying the shortfall off more rapidly in order to avoid hefty interest costs that compound every year. For every year the debt is not paid off, interest accumulates at 8 percent annually. Many of the city’s past yearly payments have not even covered the interest that accrued, a practice known as “negative amortization.”
A 15-year schedule was first proposed by the city’s Pension Reform Committee in 2004. That year, about 54 percent of the voters approved the recommendation, known as Proposition G.
Within a year, however, then-Attorney General Bill Lockyer opined that the state constitution protects the pension board’s discretion over the matter from a city law like Proposition G, and many lawyers concur.
April Boling, a local accountant who chaired the Pension Reform Committee, said the retirement board might not have to comply with Proposition G, but that it still needed to protect the pension fund’s interests. “In order to ignore Prop. G, they would have to assert that what they are doing is more prudent,” she said. “I do not believe the amortization schedule that allows negative amortization is prudent.”
Sanders contends that a 20-year schedule would not result in negative amortization. “From day one, I’ve been promising that we will pay the principal and the interest,” he said. However, the financial snapshot of the fund’s health that will determine whether he is correct is not due out for another year.
Nonetheless, a pension board’s secondary duty — behind safeguarding the interests of pensioners whose benefits are paid out of the retirement fund — is to safeguard the city, local attorney Michael Conger said. The pension board would be violating its duty if it ordered the city to pay a sum that was big enough to force the cash-strapped government to file for bankruptcy, he argued. “So they have to push the city as far as they can push them to get the debt paid off as soon as possible, but at same time to not push the city over the edge.”
Sanders has ruled out bankruptcy, but acknowledged that stepping up the size of the city’s contribution will further strain the city’s budget.
In the 2009 fiscal year, the first in whatever new schedule is determined, Sanders projects the city will have a $173 million funding gap in its everyday operating budget — far more than the $87 million deficit he is projected for the upcoming fiscal year, which begins in July. Accelerating the debt payment to a 15-year table could add another $20 million in costs to the city, said Jay Goldstone, the chief financial officer for Sanders.
If that extra cost materializes, the mayor will be forced to cut services even further than currently imagined or ease up on the pay-down of other long-term liabilities.
Sanders said he has not tried to pressure the retirement system into giving him more leeway, but said he will be conducting ongoing discussions with the plan’s administrator, David Wescoe, in the coming weeks.
The board has not taken a position, but it will have to wrestle with its role as an independent body, even if it means confronting Sanders. Board members balked at Sanders’ request last year to step down, asserting that their duty was to serve out their terms free from political pressure.
Boards in the past have capitulated to the city’s controversial requests for relief from its pension bill, most notoriously in 1996 and 2002. In those years, pension board allowed the city to skimp on its annual bill, and even more criticism has been lodged because those underfunding arrangements also boosted the future retirement pay for employees, including several board members.
The deals are being fought in federal and state criminal courts, and serve as the focus of City Attorney Mike Aguirre’s landmark lawsuit, which was trimmed significantly by a judge in December.