Friday, Feb. 29, 2008 | Thank you for drawing attention to the recent report from the Independent Budget Analyst outlining the city’s historical structural deficit. The issues the report raises have been the focus of the City Council for some years, and will continue to face us for many more years. Still, it seems vital for your readers and the public to understand the significant improvement we have made in this decade.
Just three years ago, candidates for mayor discussed seriously whether the city should declare bankruptcy because of its pension obligations — one serious candidate claimed it was unavoidable. Likewise, our city attorney claimed it was critical to invalidate benefits he deemed “illegal,” and the candidates for mayor agreed he should have that chance. He filed that case (“Ta-Da!”) and lost that case (“Thud!”), yet the pension system has recovered and nobody talks about bankruptcy anymore. What happened?
Well, since 2003, the mayor(s), City Council and employees have addressed pension funding in a variety of ways. Beginning in 2004, we stopped the annual pension underfunding that had been a practice since the mid-1990s. In ballot measures that year, we outlawed further underfunding agreements and we reconfigured the pension board so that it would no longer be run by a majority of persons with financial interests in the pension. In 2005, the city’s labor agreements produced a reduction in the pension deficit — estimated at $350 million — that was worth approximately seven times the cost of the 2002 benefit increases. That came about because employees went without raises and took money out of their pockets to pay a higher proportion of the cost of their benefits. We committed to a payment schedule that will eliminate “negative amortization.” And in the past three fiscal years, we have paid more into the pension system than our actuarially required contribution.
As a result, and because the pension system’s investments have performed well, the pension has recovered. In a remarkable presentation in April virtually ignored by the media, the city’s independent actuary found that the pension system was not bankrupt, but was financially “sound,” and that “there is no material risk that SDCERS will be unable to pay the benefits which the City has agreed to pay.” And as pension administrator David Wescoe pointed out last week in response to the city attorney’s 24th interim report (a set of publications less interesting but more imaginative than the Harry Potter series), projections for the next 20 years “show a decrease in the City’s annual required contribution as a percentage of payroll and the reduction and elimination of the [Unfunded Actuarial Liability].” That’s good news we can all be proud of.
Nobody thinks that’s the end of the work — certainly not me. Even though our pension payments are now expected to decline over time, the IBA’s report still warns of a structural deficit. The fact that this report was even prepared is itself good news. It is possible the City Council and the public would never have seen this kind of report without an IBA, a position that was illegal under the old city manager governance system. The new system of government, which began in 2006, allows and necessitates a more open and honest discussion of finances and fiscal issues than ever took place under a city manager.
The IBA report does not attribute the city’s deficit problem to the labor agreements of 2002, which your editorial does, if obliquely. In fact, while virtually everyone, including me, agrees it was a mistake to underfund the pension in order to give raises and to maintain services, that controversial vote resulted in only 4 percent of the pension deficit at that time. (The annual cost of that vote is far less than the cost of outside attorneys’ fees incurred by our city attorney every year.) And, as I’ve explained, a lot has changed and improved since 2002.
The IBA report does confirm what we have long known — San Diego is a low revenue city. Right or wrong, the City Council has been reluctant to impose new or significantly higher fees, and voters have generally not approved new taxes. In San Diego, two measures in 2004 to increase transient occupancy (tourist) taxes — on visitors, not San Diegans — both failed. Thus we are forced to operate with limited resources, and we have cut a lot of worthy programs just to stay close to our resources. I’m proud in this context that we have still been able to maintain services at the level we have, while (appropriately) increasing spending on police by nearly 40 percent and fire protection by roughly 50 percent since the Cedar Fires in 2003.
Our long-term structural deficit is exactly that: long-term. It took us decades to get to this point; we cannot solve the problem overnight. As the IBA suggests, we must have a civic conversation about smart, legally sound ways to reduce our expenditures and/or increase revenues. The IBA report is the first step of many in finding ways to make our city structurally sound and a model of efficient, transparent governance for other cities nationwide.
Scott Peters is council president of the San Diego City Council, where he represents District 1, and a candidate for city attorney.