Only a Few Hundred Million Short

Friday, Nov. 30, 2007 | The city of San Diego could find itself once again negotiating over a pension payment it committed to make but will be unable to, as officials acknowledged this week that the city won’t likely hold up its pledge to pour $600 million into the employee retirement fund by the end of June.

The promise to do so was a condition of the city’s contract with blue-collar employees in 2005 when they — along with all other City Hall unions — agreed to take home less pay in order to help stem the pension costs that had ballooned upward at the time. The city is currently about $493 million short of the $600 million it agreed to pay.

With only half a year to go before the contract’s deadline, Mayor Jerry Sanders and City Council President Scott Peters have thrown up their hands, saying there isn’t a plan to garner the needed dollars — outside of proposals City Attorney Mike Aguirre has already vowed to kill.

Failure to garner the money would mark another chapter in the city’s history in which the city has been unable to find the funds necessary to pay the pension obligations it arranges.

Past instances in which the city has tried to skimp on its pension payment have resulted in deals between the city, employee unions and the board of the retirement fund that raised employees’ pension benefits in exchange for giving the city funding relief. Those deals resulted in criminal charges, a host of lawsuits and a political firestorm that crushed the careers of several officials.

Members of the City Council led by former Mayor Dick Murphy, including Peters, forged the $600 million requirement as they sought to stem a pension deficit that soared to nearly $1.4 billion in 2005.

The city won several concessions from the employees that year, including pay freezes for employees who agreed to contribute more of their paycheck to the pension fund and others who agreed just to take a pay cut.

In exchange, Local 127 of the American Federation of State County Municipal Employees, which represents City Hall’s blue-collar workers, secured a guarantee that the city would pay $600 million into the pension fund over three years in addition to its regular annual payments. The deadline to meet that commitment is June 30, 2008.

To meet that goal, the city put forward a plan later that year that would reach the requirement by borrowing $400 million by issuing pension bonds, selling $100 million worth of land, and taking out $100 million in loans against the money that was saved annually through the employee concessions.

Except for one $107 million loan, the city has not found other ways to meet the $600 million target. Sanders anticipates taking out another $65 million loan for pensions sometime before the June deadline, but proposals to sell hundreds of millions of dollars in pension bonds and to sell swaths of city-owned real estate to pay down the debt have been scuttled by Aguirre.

Aguirre argues that the city’s bylaws do not allow officials to spend receipts from real estate sales on the pension fund. Instead, land-sale revenues can only be spent on capital improvements, such as other real estate purchases or construction projects. City officials have backed off using that strategy as a result.

Additionally, Aguirre has refused to sign off on pension bonds, preferring instead to solve the pension deficit by rolling back the benefits that were handed out to employees in 1996 and 2002, when the city couldn’t meet its pension bills. He has been unsuccessful in pursuing the benefit cuts in court.

Sanders and Peters blame their reluctance to use the other vehicle for financing the debt — pension bonds — on Aguirre, as the city attorney has opined that taking out those loans improperly burdens future taxpayers for expenses that have already been incurred.

“He hasn’t shaved a dime off the pension debt,” Peters said. “The City Council and mayor have stepped up in trying to find solutions, but the city attorney continues to stand in the way.”

Aguirre did not return calls seeking comment.

The city attorney isn’t the only one to have criticized Sanders for his aggressive pursuit of pension bonds upon taking office. Independent Budget Analyst Andrea Tevlin suggested the mayor was banking on the bonds as an imprudent fix to the 2007 budget. Consultants at Kroll Inc., whose management advice Sanders almost endorsed wholesale, also panned his borrowing plan in 2006.

By using pension bonds, the city can alter the interest rate and the timeline for paying off the debt. As a result of being several years behind in annual audits, the city does not have access to the public credit markets. There, interest rates on pension bonds can be as much as 3 percent cheaper than if the debt is owed directly to the retirement fund, according to Lakshmi Kommi, the city’s debt management director. But pension bonds also set more hard-and-fast schedule for paying off the debt, as the retirement system often changes the city’s payment timeline.

If the city doesn’t meet the $600 million commitment, the money that Local 127 saved the city through its pay cuts will be routed to a special reserve fund that will allow the union’s workers to forego making its contributions into the pension system for as long as there’s money squirreled away in the reserve.

Curt Ostrander, an AFSCME negotiator, claims the city’s commitment to make a massive payment into the fund doesn’t cease if it gives back the money. He said the city is still on the hook for the remaining $493 million, but added that an alternative solution could be found at the bargaining table.

“It’s our position that it’s not the only remedy,” Ostrander said.

Ostrander didn’t comment specifically on what the union would seek in negotiations. Fred Sainz, a spokesman for the mayor, suggested Local 127 consider using the leftover savings to become a new revenue source for the pension fund, which is currently $1 billion in debt. Ostrander said Sainz’s recommendation wouldn’t suffice by itself.

“We are not of that understanding,” he said.

The prospect of Local 127 receiving better pension benefits in exchange for forgiveness is very unlikely, at least in the short term. Last year, voters approved a proposal by Sanders that would prohibit the City Council from granting workers enhanced pension benefits unless it received an OK from the voters.

Negotiators from the Sanders administrators and the city’s five unions are expected to begin bargaining in January, said Lisa Briggs, a policy adviser for Sanders.

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