Friday, Oct. 24, 2008 | The city of San Diego is being forced to return several millions of dollars to its employees that were originally conceded as part of a much-ballyhooed labor contract forged under former Mayor Dick Murphy.

As a result of the city’s failure to abide by provisions of the 2005 contract, millions of dollars that were supposed to be diverted into the city’s deficit-laden pension system will now be returned back to employees. In closed session Tuesday, the City Council voted to return what’s estimated to be between $4.3 million and $6.5 million to the white-collar employees represented by the Municipal Employees Association.

MEA boasts 4,000 members, although the city’s chief operating officer, Jay Goldstone, said it’s not clear precisely how many employees qualify for the payment. Employees who have left the city or retired since fiscal year 2008, which ended June 30, won’t be eligible.

An e-mail sent to city workers quotes MEA leader Judie Italiano urging them to spend the money in a way that helps the city’s coffers. “For those of you who have a specific purchase in mind for your settlement dollars MEA encourages you to spend those dollars where they can impact the City budget via sales tax,” the e-mail reads.

The city’s blue-collar workers union, AFSME Local 127, is also seeking a return of its concessions and is in talks with city officials. Goldstone estimated that figure near $6 million.

The repayments won’t have a significant impact on the city’s annual budget, which is already suffering from a $43 million shortfall this year, as the city was contractually obligated to squirrel that savings away and eventually plow it into the pension system, which currently has a $1.2 billion deficit. However, the city will now have fewer funds available to pay down a deficit that will continue to play a key role in future budgets at a time when city revenues have been hit hard by the recession, as have pension investments.

“We were obligated to spend those dollars. Now, less goes to the benefit of the retirement system and more goes back to the employees,” Goldstone said.

The 2005 labor deals, one of Murphy’s last efforts before his resignation, called for the white-collar workers to begin paying a larger share of their pension costs, shifting some of the burden that the city over the years had gradually assumed for employees. The employees paid 3 percent more in 2006 and 2007 and an additional 1 percent more in 2008.

Blue-collar city workers instead took a 1.9 percent pay cut.

But both concessions came with a little-mentioned catch. The city was obligated to leverage MEA’s savings in order to put a cash infusion into the pension fund by June 30.

Likewise, the city promised Local 127 it would use the savings to plow $600 million into the pension system by the same date.

It accomplished neither. The city has been unable to borrow money in any standard fashion since fall 2004 because of a tarnished credit rating. Although the city appears to be on Wall Street’s doorstep, it didn’t arrive there in time.

In an attempt to borrow money off Wall Street, Mayor Jerry Sanders earlier this year pushed an effort to raise money through a complex borrowing structure. In that structure, the city would lease land to a city-run financing authority, which then leased the land back to the city. That structure allowed the city to avoid the state’s debt-limit laws, which forbid governments from going into debt without a vote of the people, because it essentially created a new revenue stream through the multiple leases.

Sanders first tried to use the structure to finance deferred infrastructure repairs, but City Attorney Mike Aguirre found the method to be illegal without a vote of the people.

“The proposed legal structure is simply a legal fiction, a structure by design intended to work around the debt limit,” the April opinion stated.

Goldstone said the mayor planned on using the same structure to leverage MEA’s $6.5 million in savings. “He said there was no case law on point that said it was illegal, which is bogus logic,” Goldstone said.

Italiano added: “He’s made it almost impossible for them to deal with the whole financing.”

Other methods have also failed. The city considered selling land to help reach the $600 million mandated by the labor contracts, but it was later determined that the proceeds from land sales couldn’t legally be used in that manner. An earlier plan by the mayor to borrow $674 million to plug into the pension system also fell by the wayside after Aguirre opined against it and the city continued to be banned from Wall Street.

The city did manage to put in $107 million by promising investors $10.1 million a year for close to two decades from the tobacco settlement.

Now, not only is the city preparing additional payments for city employees, it has given back the 1.9 percent pay cut to Local 127 workers and agreed to pick up another 2 percent of white-collar employees’ pension contributions.

MEA sought a return savings from 2008; the funds from 2006 and 2007, which total $13.3 million, were already used to fund the pension system.

When the contracts were first signed, Murphy trumpeted them as an important step in restoring the city’s financial stability. Aguirre opposed the labor deals and refused to sign them, saying they were created by the same people who caused the city’s pension troubles.

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