The Ross Retort
January 10, 2004
Spinning The Pension Debacle
For those living without a fitness club membership, spin class sounds more like a seminar run by James Carville, the political scandal candy wrapper, than a 700 calorie an hour workout.
For example, spin class might be understood by the fitness challenged as a place where San Diego City officials figured out how to explain that their screwed-up employee pension fund structure benefits taxpayers.
In fact, spin class is a place where forty or so growling and groaning upper IQ types simultaneously peddle-to-the-metal on stationary bikes under the hypnotic control of a greyhound built drill instructor.
It is the last place where I expected to hear chatter about San Diego’s municipal employee pension fund fiasco—the seething debacle that certainly will send the city into the financial abyss by 2009 if allowed to continue on the current road to insolvency.
So there I was hoping to sweat out the New Years poundage in endorphin oblivion when a buffed out guy swiveled around on his bike seat and aggressively suggested that I devote this week’s column to the snoozey subject of defined benefit plans and pension portfolio management.
He was not the first wound up taxpayer to push the pension debacle story over the holidays.
I heard from outraged public officials representing other jurisdictions who took the heat from employee unions when they reined in spiraling pension obligations while the City of San Diego increased benefits without making contributions.
Freaked out activists, normally concerned with preserving open space, wondered in email wails whether more public lands would be sacrificed on the auction block to pay for a billion dollar pension deficit.
This was a civic “Holy Cow.” Given Councilman Scott Peters’ defense of his vote to increase benefits last year in spite of dire warnings from pension trustee Diane Shipione and a spate of news stories and columns, the scream is thus far falling on deafening dead ears.
Peters apparently attended the wrong spin class. If his performance on KPBS These Days Monday is any indication, he earnestly believes that the new employee benefits, woefully called DROP--as in Drop Drawers, Drop Jaw, Drop Dead- actually benefits the folks on the hook, the taxpayer.
Today’s city employees can not only retire on 90 percent of their highest salary year with full health care benefits for life, but now at age 55 they can put their lump sum and an amount close to their yearly salary for five years into a guaranteed 8 percent escrow pension account if they choose to work longer.
In case you have been vacationing on Mars, you know that the pension fund cannot be making more than 5 percent. And because San Diego’s pension fund is a defined benefit rather than a defined contribution like many private retirement funds, the entire risk is born by the taxpayer.
City Council Candidate Phil Thalheimer, a former city employee and municipal finance expert, finds it problematic that city employees can also "buy" employment years. A fifteen year employee can buy five years worth of retirement credit and retire according to their highest year salary.
All this is supposed to incentivize employees to keep money in the cash strapped retirement fund that is already paying out more than it takes in--a system that might have been invented by Carlo Ponzi and maintained by Nicolo Machiavelli.
According to City Attorney candidate Mike Aguirre, who handled many pension fraud cases when he was a federal prosecuter, the city could be violating state law by increasing benefits while failing to make adequate contributions.
In a three-page letter sent to the pension Board of Trustees and to the San Diego City Council in June of 2002, Aguirre argued that both could be in violation of their fiduciary responsibilities by allowing the city to defer contributions to its employee pension fund.
The City responded to Aguirre’s warnings by indemnifying the pension trustees against lawsuits just in case the public interest attorney should sprint to federal court to force a fix. This was like making the taxpayer cover the foxes in case the hens grow teeth.
Aguirre was not the first, nor the last to raise pension fund red flags.
A Mayoral blue ribbon citizens committee on city finances sounded a soft but ominous warning about pension underfunding in three pages of their 2001 report, but as Mayoral appointees, they were as quietly polite as the Mayor. And just as effective.
It took Diane Shipione, one of four public pension trustees (the remaining nine are current city employees or retirees), to raise the roof.
By law, employee pensions must be funded before salaries. That means when and if the system can no longer meet its retirement obligations, public employees like fire fighters and cops go before retirees lose a dime.
And, with the pension fund first in the receiving line in case of bankruptcy, there is little incentive for employee trustees who bear no personal liability to rein in benefits or politic the City Council to make prudent contributions.
There are a few proposals emanating from the folks who participated in this catastrophe: raising taxes and fees, cutting more services or selling city assets like public land. And then there is the Schwarzenegger bond idea – the "charge-it" fix.
No matter how hard officials spin the pension story on the road to the March election, the City of San Diego is flirting with bankruptcy.
Under funded pension plans and over funded sports teams are not a winning combination.