In all my writing about the possibility that the city of San Diego could issue pension obligation bonds in the near future, I neglected to mention that the city did borrow to shore up its pension fund in 2006.

The city pumped more than $100 million into the pension fund, promising to pay those back annually with the city’s future receipts of tobacco settlement revenue.

It’s hard to say exactly how those investments have fared since the city doesn’t track them separately from the pension fund.

However, the city is paying an average interest rate of 7.1 percent on the bonds. From July 2006 to June 2008, the pension fund’s investments earned, on average, 5.9 percent a year. Since June, the market value of the pension fund’s assets has dropped by $1.3 billion.

The city’s debt management director, Lakshmi Kommi, said the bonds are part of a “long-term strategy” and that the market “ebbs and flows” in the short term.

The decision to securitize tobacco settlement money stemmed from an agreement with the city’s blue- and white-collar unions. The employees agreed to pay a larger share of their retirement contributions, but the city was required to use those savings to reduce the pension deficit.

Since the city couldn’t securitize those savings directly, it sold bonds against the tobacco proceeds instead and used the savings from the lower retirement contributions to pay back the city’s general fund for the lost tobacco money. But the city never invested enough in the pension fund to meet the agreements with the unions and recently had to pay back employees for much of the savings.


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