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Friday, July 17, 2009 | It’s $50 million. For years, the idea that the city of San Diego was nearing bankruptcy was too much like a philosophical discussion. It was a matter of preferences — not of math.
Now, we finally have a number measuring the exact distance between the city and insolvency: $50 million.
When businesses come to the end of their rope, it’s simply a numbers game. Like when the leaders of Metabasis, the Torrey Pines area biotech, called their employees into a room recently and said, quite suddenly: Here are your last paychecks. Go to the bank and cash them quickly because they might not be good soon.
Numbers. The numbers had become clear. And when this happens, steps are actually taken.
It is now a numbers game for the city of San Diego. The city has done everything it can to patch over its troubles. But the economic downturn, and the plummeting value of the fund built to protect the assets of its workers, has now left the city facing jaw-dropping payments to its pension system. In two years, the city will have to make a payment 50 percent higher than it did this year — and the payments we’re making now would have scarred the psyches of city leaders had they pictured making them just six years ago.
San Diego City Hall has finally admitted that it can’t pay what it owes to the pension fund that is holding and investing assets to pay retired city workers. The city has concluded that if its pension fund doesn’t change the rules and they don’t lessen the city’s burden, the city will be insolvent.
As in broke.
This is no longer a philosophical discussion. This is not me speaking. City and pension officials are now saying this. They’re making the choice as clear as they ever have. They are done arguing that everything’s OK. They’re now saying that we have to do something ridiculous because the alternative is unimaginably ridiculous.
City and pension officials are essentially saying that they either take these steps or it’s bankruptcy.
This morning, the San Diego City Employees Retirement System will host a discussion with its trustees to talk about whether it is appropriate to entertain certain “options.” The options are pretty complex but bear with me here.
The most contentious option would free the city and its pension board from an arcane obligation. The pension system knows what its assets are worth. And it compares those assets to how much it owes current and future city retirees. But the assets fluctuate in value every day. In order to keep from sending the city a wildly fluctuating bill, the pension system “smoothes” those market peaks and valleys.
But the pension system doesn’t want to let that smoothing get out of hand — or at least it didn’t. It put into place a “corridor” that limits how high and low the actuarial valuation can be compared to the real or market value of the stocks, bonds and property it owns on a given day.
With the economy performing so badly last year, the pension system’s assets are worth much less than the smoothing method would reveal them to be. But the pension system’s corridor limits ensure that this doesn’t get more than 20 percent out of line. So the smoothing effort is restrained and the reading of the health of the fund is more closely aligned with reality.
The pension board is now going to consider whether to get rid of or stretch those limits, effectively allowing the system to pretend like it has far more assets than it does.
Why do this? Because if it doesn’t, the pension fund will send a nauseating bill on to the city.
It’s a bill so large, and so nauseating, in fact, that the city would simply buckle under the weight of it.
It would be a numbers game. The city would be insolvent — or at least no reasonable person would allow it to cut what it would have to cut in services to pay those bills. We would be talking serious consequences to public health. And no law will allow it to just cut employee compensation to make it whole.
That is, no law outside of a bankruptcy proceeding.
And this is where we get to the “downside” of not taking the option laid out above.
If trustees of the pension system don’t take this option, they “may force plan sponsors to take other actions that will be detrimental to SDCERS’ membership.” This language is taken directly from a PowerPoint presentation that the trustees will receive from their appointed actuary Friday.
A plan sponsor in this case is the city. It’s the sponsor of the employee pension plan: SDCERS.
So, let’s review. The pension’s trustees are supposed to look after the assets in the fund to make sure there are enough of them to pay retirees into the future. But they have a secondary responsibility to keep the city’s wellbeing in mind.
And now they are being told that if they don’t free the city from its current obligations, they may force the city to take actions detrimental to SDCERS’ membership.
How is this possible? After all, the status quo would force the city to actually pay more money into the pension system. Isn’t this a good thing for those whose primary responsibility is to grow and protect the assets in the fund?
In what kind of warped universe would putting more money into their retirement fund be “detrimental” to city retirees and employees?
The answer might be found in a letter send out yesterday by former pension trustee and chairman of SDCERS’ board of administration, Tom Hebrank. He wanted to defend the board’s decision to explore these options.
You should read it. It provides a very clear window into what the thinking is at the pension system.
Hebrank is no longer a trustee — one of three shooed out by a mayor who wanted people with less experience to make these upcoming decisions. But he articulated what the actuary only alludes to in the PowerPoint warning of detrimental consequences if the pension system sticks with the status quo.
He starts by pointing out that all of his colleagues are very acutely aware of the city’s past pension deals. They know that the city has come to the pension board twice in the last 15 years and asked the trustees to lower the city’s obligation. And they know that both those times the board agreed. And they also know that a mayor lost his job because of this. They know this. Hebrank wanted to make that clear.
This time is different, he writes. This is a global economic problem we’re responding to. This isn’t San Diego just being San Diego. This is the thinking.
I talked to David Wescoe, the current CEO of SDCERS, and he echoed the same thought: 2008 was a “black swan” year — a historical anomaly as strange and rare as it was disastrous. This presumably means that black-swan — strange, rare and potentially disastrous — actions are acceptable.
Of course, this has come up before. In 2002, the last time they decided to consciously underfund the pension system, they blamed it on the fallout from the Sept. 11 terrorist attacks — a black swan moment, of course. But it turned out that it was our leaders’ decisions that had led us there ; the economic fallout after the attacks had only revealed the troubles.
Hebrank repeated the point that he also understood his primary duty was to protect and nurture the assets of the fund. He went on (emphasis mine):
“However, the law recognizes another secondary responsibility to SDCERS’ plan sponsors, including the City of San Diego. This recognition is appropriate because there is no benefit to SDCERS’ membership if the plan sponsor is forced into bankruptcy. This would jeopardize, not protect, SDCERS’ members.“
Look at what he’s saying. Yes, it would seem to be really warped world in which he and fellow trustees actually worked to underfund the system they’re supposed to oversee. But when you think about the fact that the city will go bankrupt trying to make its payment, well, then, it’s a bit different calculation.
Then it becomes clear what the trustees are worried about above all. They want to protect not only the assets in the fund, but the promises the city made to its workers, which potentially could be renegotiated or realigned in bankruptcy. These are the detrimental consequences warned about.
Yes, it is now a numbers game and some are being told to go to the bank and cash their checks.
The pension board’s actuary is going to tell the trustees that they could relieve the city of about $50 million in payment obligations if they go with one of these options. Again, if they don’t, the city may be insolvent.
For weeks, I couldn’t figure out why the mayor would ever consider pushing such a plan. Was he nuts? Had he not seen what similar decisions had done to his predecessor?
Now it’s much clearer. This time, he really is staring down the barrel of insolvency and he, and the city’s powers that be, are doing everything they possibly can to make it shoot somebody else in the face.
The mayor is bound and determined to prove something: that not being able to make your payment to the pension system doesn’t mean you don’t have enough money. It just means the rules are wrong.
You, residents, are at least technically in control of the situation. You have to decide whether you fear bankruptcy more than you fear the pain of reckoning with what is the defining attribute of the city in which you live: It simply doesn’t take in the money it has promised to pay out.
You can change all the rules you want. You can count it in different ways.
But we now have as clear a reckoning as ever. If the city is forced to put $50 million into its pension fund, it will be insolvent.
You can follow Scott Lewis on Twitter at twitter.com/scottlewisVOSD. E-mail him at firstname.lastname@example.org with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.