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It has been said that genius is the ability to see the obvious. If so, the smartest guys (and gals) in San Diego may be those occasionally scruffy looking folks who have been occupying the Civic Plaza for these last several weeks.

Ironically, the Occupy movement arises from many of the same concerns that animated the original Tea Party movement. It is that gut level outrage, supported by irrefutable economics, that the fix is in. That Wall Street bigwigs don’t win because they are smarter, faster, or better: they win because they cheat.

It is not contempt for capitalism, or corporations or the work ethic that motivates people to Occupy San Diego. It is the understanding that a rigged game of avarice and arrogance threatens the very essence of the American Dream.

Paul Krugman, Nobel Prize-winning economist, uber capitalists Warren Buffett and Bill Gates, former CNBC anchor Dylan Ratigan, Joe Dears, the CIO of CALPERS, and others agree that the system is rigged. The resulting economic inequities threaten the foundation of our country.

So, what has that got to do with reforming the city of San Diego employee pension plan?

The biggest problem with the pension is that the city didn’t put in enough money. Our investment strategy has made a bad situation worse. Everything else in the discussion — 401(k) plans, pay freezes, amortization schedules, union bashing, pension envy — is just political whack-a-mole around these fundamental facts.

In actuarial planning, one reduces the amount of money currently needed in the pension fund by setting the assumed return on investment (discount rate) as high as possible. The San Diego City Employee Retirement System (SDCERS) has set its discount rate between 7.75 and 8.25 percent over the last several years.

Unfortunately, if you ASSUME you are going to make an 8 percent return, you have to TRY to get that rate of return. You have to make high risk investments in the hope that you will hit the big ones. In Las Vegas they call it “double up to catch up.” SDCERS’ casino of choice is Wall Street.

The result, according to the SDCERS consulting actuary, is a rate of return from June 2000 through June 2010 of -2.96 percent. Yep, that’s a minus sign. That’s a negative, as in less than zero. 

Don’t think it was necessarily bad management that produced these dreadful returns over the last 11 years. The Dow Jones Industrial Average depreciated by 7.0 percent during that time. More than a decade of flat line returns and the well-known litany of larceny (Goldman Sachs, MFP Global, Lehman Bros., Citigroup, AIG, robo-signing, Bernie Madoff, Enron) lead some experts to suggest that Wall Street, as currently configured, is bad for capitalism. Many private pension plans are moving away from stock market investing. It is becoming increasingly obvious that it is a fundamentally flawed strategy to have significant portions of pension plan assets invested in the equities market.

How can SDCERS lower pension investment risk and benefit both the retiree and the taxpayer? Here are a few suggestions:

Set a lower, less risky, discount rate. Many experts think that number is between 4 percent and 6 percent.

Lower the target funding percentage to the 70-80 percent level acceptable to the U.S. Government Accountability Office (GAO).

The city could then fund the necessary present value through pension obligation bonds or other financing.

SDCERS should invest pension funds in low-risk undertakings that benefit the citizens of San Diego not the denizens of Wall Street. Here are some ideas:

• refinance the higher interest rate loans that the city has undertaken

• invest in infrastructure bonds that benefit the city

• provide financing to help stabilize local real estate values

With this change in investment strategy and the capitalization of the unfunded liability, the amount the city must pay to retire the unfunded liability each year would be a lower, fixed number. The city budget would no longer be at the mercy of stock market volatility. The general fund would benefit from lower borrowing costs on existing debt. SDCERS would have low-risk investments that it can oversee and monitor locally.  Long delayed infrastructure repairs and improvements could move forward. The application of local funds to resolve local real estate foreclosure and shadow inventory issues could help stabilize the real estate market, boost the local economy and increase revenues to the city.

The so-called pension “reform” initiative does not address these underfunding and investment problems. Indeed, it makes current city payments much higher. It eliminates new employee contributions to the pension plan.

Lack of funding and half solutions got us where we are today. It is time to address the real problems of the pension.

So here is one more thought from another scruffy looking genius named Albert Einstein: Insanity is doing the same thing over and over again and expecting different results.

If your organization would be interested in a presentation about these options and the benefits to the city, please contact me at linda@lsperine.com.

Clarification: At the request of the author, we have added the word “Locally” to the headline and changed this line “With this change in investment strategy and the capitalization of the unfunded liability, the amount the city must pay into the fund each year would be a lower, fixed number” to “With this change in investment strategy and the capitalization of the unfunded liability, the amount the city must pay to retire the unfunded liability each year would be a lower, fixed number.”

Dagny Salas

Dagny Salas was web editor at Voice of San Diego from 2010 to 2013. She was an investigative fellow at VOSD from 2009 to 2010.

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