City Of San Diego Underestimated Pension Debt
Friday, January 22, 2010
Why is the City of San Diego now facing a $19 million budget a week after the mayor praised the council for passing a balanced budget in December? We speak to Scott Lewis, from voiceofsandiego.org, about what's causing the projected deficit to grow.
GLORIA PENNER (Host): It’s a black hole that represents the city of San Diego’s financial obligations. It just got deeper. It seems that the city employee pensions will cost the city $19 million more than expected for the next fiscal year according to the pensions systems actuary. The total bill for the pension fund that the city must pay is $231 million dollars. So, Scott, San Diego Councilman Carl DeMaio says the actual cost for all retirement benefits for city workers, that’s all retirement benefits, that would include medical as well, I think, for city work – it’s much higher. It’s $370 million each year or 69% of the whole payroll. How accurate is DeMaio?
SCOTT LEWIS (CEO, Voiceofsandiego.org): Well, we haven’t had a chance to fact check that particular part of his analysis but I think that there’s no question that both employee costs make up the majority of the budget and now the employees’ longterm post-retirement benefits make up a big portion of that. Look, we used to put $50 million into the pension fund in two thousand, you know, three and four, this – or 2003, this is the amount we had to put. So we are literally being asked to put $180 million more into the pension system than we used to. And that money didn’t just come to us. There was no taxes that were raised to deal with that. There were no other types of things that were brought in to make sure that we could handle that liability. So that money has been pulled away from other services and it will be into the future. My contention has always been, look, if you want to offer employees the kind of benefits that you offer, if you wanted to enhance their pensions, you should’ve paired it with an increase of revenue because the fact is right now we do not have that revenue. And the question has never been whether we can fund those pensions, the question has been how hard is it to fund those pensions.
PENNER: All right, so how can, JW, how can San Diego sustain this huge chunk of its payroll for retirement benefits and pensions?
JW AUGUST (Managing Editor, KGTV 10News): I think we are whistling past the graveyard on this pension thing. The – DeMaio and Frye, both sides of the political spectrum, have said as much and so did a recent U-T editorial. The city collects less than it spends. Hello. That means that, you know, even improved efficiencies in government, outsourcing, reducing services, finding new revenue streams, you have to do all those things and hope somehow that you’re able to fund it. I think, frankly, the pension program is wi – government employees, on the average, make more money than people in the private sector, they have much more generous pensions, and I know I’m going to get a couple of angry calls but I honestly think this pension program is just far too rich. I wish I could retire after 20 years, you know, with full – almost full salary. Most of us out in the private sector would love to have that. It’s just – it’s too rich. They need that. You know, they should drop the DROP program.
ALAN RAY (Senior Editor, KPBS News): Well, let me ask you a question for the perspective of people who’ve been here much longer than I have. I’ve been here 3 years so I didn’t see the genesis of this. But what I’ve read from out of town was that the pension arrangements they made were given in lieu of much bigger wage increases so that there was a trade forward from like ten – even ten, fifteen years ago that got us into this problem now.
LEWIS: Well, it’s a – it’s a…
PENNER: There was something else that happened…
AUGUST: Oh, yeah.
PENNER: …there, too. I don’t know whether we want to go into it. Can you do it briefly, Scott, or do you want me to do it?
LEWIS: I’ll try it. So, basically, yeah, that’s called deferred compensation. Instead of giving people raises, they’d give them that. The point is, is that they didn’t give them a raise because they didn’t have the money, and they didn’t have the money to give them this, either. Now we’re being faced with the bill for the deferred compensation. I think that they also wanted to spend money somewhere else. They didn’t want to cut programs, and so they actually made a deal that we’re going to not fund the pension system and to get you to go along with this, we’re going to offer you better benefits. That is a time bomb that they set into place that we are now watching explode.
PENNER: Let me ask our listeners about this. So now you’ve heard about it. I mean, another big pension bill coming due. Already, we’ve seen services cut in the city of San Diego, library hours, potholes not being fixed, all the usual except it’s gotten more severe. 200 employees have been laid off. $19 million, that equates to about 200 more employees, the way I figure it, Alan.
LEWIS: Well, and they haven’t been laid off. They’ve – most of them will probably find jobs within the city.
PENNER: I thought that actually 400 or 500 were, you know, were targeted and 200 actually were gone.
LEWIS: To my knowledge, there hasn’t been anywhere near that level of actual people leaving city services.
PENNER: Okay, back to the question for our listeners. So what would you consider the responsible way of handling this big pension payout that the City has to do. Does the City just go – have to bite the bullet and go with it or do you think that there could be a way to even things out so that maybe the rest of the residents of San Diego would have from – benefit from the saved pension payout? If that makes sense. 1-888-895-5727, 895-KPBS. Alan.
RAY: Well, I’m kind of curious. Has anybody talked to Mike Aguirre about how well it works to try to do something legally to change the pension system?
PENNER: Well, I don’t think too many people have been talking to Mike Aguirre from the city lately.
RAY: No, the problem is, and the courts will look at it, this is a contract. You signed a contract.
RAY: How do you walk away unilaterally from a contract? Or, alternatively, how do you find a way to change the terms of the contract by sitting down and talking with the parties involved?
LEWIS: The only place that contracts are ever dealt with like that and voided is in a bankruptcy court.
LEWIS: And there’s contentions on both side as to whether a pension contract like this could be voided or dealt with in bankruptcy or not, but the fact is that the city’s just not willing yet to have that discussion and explore that. The other option is to raise some sort of tax or fee to pay for this but yet we have politicians who are neither willing to pursue a frank discussion about bankruptcy nor willing to pursue or inspire people to get new revenue and so they’re going to sit on their hands while the entire thing deteriorates.
PENNER: Well, you say we have politicians, are there any politicians that are willing to discuss those very hard subjects?
LEWIS: No, because they say it’s impossible to do this, it’s impossible…
LEWIS: …to do that, we’re so weak, we can’t handle anything, we can’t inspire people…
LEWIS: …we’re just going to sit on our hands and let things deteriorate. And that’s the situation that we’ve been given. Now, we’re in a position where we are forced to inspire our politicians rather than the other way around and that’s just the way it is and now that there are people looking for easy way outs (sic) on this, there’s, frankly, very difficult – even bankruptcy is not easy. In order to make something like this happen, you’d have to come with a package of cuts and a package of revenue, and nobody’s even laying out a plan like that.
PENNER: So how will that higher payment be funded now that we know that the city is down to bare bones in terms of finding one-time pots of money and shifting monies around? How are they going to fund that?
AUGUST: Well, they don’t have any more of those one-time funds for next year, that reducing services. They can’t seem to work out the outsourcing. The unions won’t – you know, they’re still arguing about that, and, okay, and the mayor has instituted some more efficiencies in the government but hardly enough to take care of these problems. They – they’re coming to the point where they’re going to have to deal with this. I do think DeMaio and Frye keep pounding the table and said we gotta start – I think those – at least those two city council people are arguing wake up and smell the coffee.
LEWIS: Sure, but even their reforms have to do with things like, say, forcing the city employees to pay what they consider a fair share of their own contribution to this.
LEWIS: But that’s a very complex issue that doesn’t necessarily have the kind of effects that would change the dynamic of this.
AUGUST: But it’s a start.
PENNER: Gentlemen – gentlemen, I’m going to…
AUGUST: But it’s a start.
PENNER: I’m going to interrupt you…
PENNER: …because we have a caller who can only be on the line for a short time. I want to take her call. Kristin is in downtown. Hey, Kristin, you’re on with the editors.
KRISTIN (Caller, Downtown San Diego): Yes, hi. Thanks for taking my call.
KRISTIN: I just wanted to make a brief comment about city pay.
KRISTIN: The city pay is not that high. I’ve been working for 20 years and I just started working for the city and it’s much less than the private sector.
PENNER: Go ahead…
AUGUST: Well, it depends…
PENNER: …JW was the one who said it was high.
AUGUST: Well, it depends on the job you have and what your skills are. There – I – What is it? A U.S. labor analysis of the private and the public sector shows that the government sector makes something on the average of 20% more. And possibly you’re not one of those folks, but I’m telling you on average the government sector makes more money.
RAY: Well, understand that there is a huge disparity between the unionized government employee wage and the non-unionized government employee wage, a really significant difference.
PENNER: Okay, thank you.
RAY: And the people who work in the library, for instance, are not unionized. And we had a case of somebody who was looking at like a $20,000 a year pension…
LEWIS: I think…
RAY: …after 20 years of working at the library.
LEWIS: I think one thing to keep in mind, that the city, compared to other cities, doesn’t have much higher of a compensation system at all. In fact, in many cases, it’s much lower. The question is, is how do you even compare the city to a private sector? I mean, there’s no private sector firefighters, there’s no private sector librarians. The question is, is what – how would you do that? But there…
PENNER: There are private sector librarians. Some of the – like USD has a private librarian.
LEWIS: Oh, well, okay. There you go. So I bet you they’re pretty well taken care of there.
PENNER: Right, okay, well, we’re going to continue this discussion and we’re going to take more of your calls right after the break. This is the Editors Roundtable. I’m Gloria Penner.
PENNER: This is the Editors Roundtable. I’m Gloria Penner. I’m at the table today with JW August from 10News, Alan Ray from KPBS Radio News, and from Voiceofsandiego.org we have Scott Lewis, and we have you because you’re calling in on this new figure that we just got from the city of San Diego that $19 million in the hole again, which is interesting because one wonders, you know, we hear all of these deficits that come in, the shortfalls, and I’m just wondering how we compare, let’s say, to other large cities in California. Alan.
RAY: Well, if you look at the projected San Diego budget shortfall, which we’ve been told is somewhere between $179 and two – say, $200 million…
LEWIS: Well, they solved that but it hasn’t – and it’s opened up again, yeah.
RAY: But it’s opened up again, okay. But take a look at the city of Los Angeles, where the population is 9 million compared to just over a million in San Diego. Their budget defict is $200 million. So if you sit down and do the math and you look at how much worse condition we are in relative terms. JW, I think you did the math.
AUGUST: Well, over a billion dollars.
RAY: Yeah, that’s what our deficit would be, yes.
PENNER: Would be comparable…
PENNER: …to over a billion dollars.
PENNER: Yeah, well, that says something about the way that we are governing ourselves, doesn’t it?
AUGUST: Most inefficient, don’t you think?
PENNER: Okay, thank you very much, Alan. That’s a sad, sad commentary. I’m taking a deep breath and I’m going to Peter in Tierrasanta. Peter, you’re on with the editors.
PETER (Caller, Tierrasanta): Good morning.
PENNER: Good morning.
PETER: Two fast comments. First comment, my instinct is that a bankruptcy or pseudo-bankruptcy solution is a bitter pill that we need to swallow sooner or later. If we swallow it later, it’s just going to be worse. Second comment, I live in Tierrasanta. Our little local newspaper had an article just came out – just came out yesterday. I think the number was 65% of Tierrasanta residents believe that labor unions are responsible for San Diego’s budget problems.
PETER: Now as someone who comes from a labor family, when I hear something like that it always hurts me to think about that and I’d just like to – You know, I figure that there were adults at that table who signed those contracts and it was a decision that was freely made by educated people. But I’d like to hear the – some comments on that subject. Thanks.
PENNER: Okay, we’ll start with Scott Lewis. Thank you very much, Peter.
LEWIS: Well, on your first point about bankruptcy, this is their fundamental point is that, look, you can cut, cut, cut all to the point where we just don’t have any services to balance it out, if you want. The point of bankruptcy would be to say, look, there’s a bottom line, there’s a fundamental level of service that we just have to protect. If we get to that point then we have to consider realigning the city through some sort of reorganization process like that. Now, as to the point about the labor unions, look, they sat down with people. Their job is to advocate for their membership. They sat down with people across the table who, in many cases, benefited from the exact same deals that the labor unions were asking for.
LEWIS: They had no representation of any other side and they just wanted to get the thing done. They did not see or did not want to see the time bomb that they were setting in motion and they let it happen. And so those people are not around and the mayor will say, well, now we’re still cleaning up from that, we’re working hard, it’s going to be a long process, blah, blah, blah. The fact is, is that we’re in the exact same situation that we were in in 2005. Nothing has fundamentally changed. In fact, things have deteriorated further. And nobody has laid out a plan about how we’re going to get out of that. And if they don’t want to do bankruptcy then they need to come with an alternative and they need to come…
PENNER: Yeah, JW.
AUGUST: …and I just want to – And I agree with Peter. Stop blaming the unions. That is such a scapegoat. You hear it again and again and again. And it’s not the unions’ fault, it’s the management of the city historically. We have done a poor job of running this city and we’re paying the piper.
PENNER: So just to follow up on that, we know, for example, that there were city officials that ultimately were responsible for these pension problems. Were they ever punished?
PENNER: Have they gone on to lucrative careers?
PENNER: What’s in place to discourage this kind of chicanery from happening again?
LEWIS: Well, there’s nothing. I mean, this was a short term decision with long term consequences. And, yeah, some of them are being dealt with in that weird honest services law where they said they were not providing honest services but that looks like it’s going to be challenged in the Supreme Court and they might not ever face any kind of true trial about those things. And, you know, the question is, should they have? I mean, the fact is, is that they did make decisions based on what the city council and the city manager presented and things have moved on since then. The fact is, is that whether they’re punished or not, we have to deal with the fact that they decided to enhance everybody’s pension and yet they didn’t want to fund it. And now we’re being asked to either fund it or cut something to make it possible.
PENNER: All right. So, Simon, you’re the last caller I can take on this. You have to make it brief, please, Simon in Rancho Bernardo.
SIMON (Caller, Rancho Bernardo): I always wonder how come it’s the workers that get the tough end of the, you know, cutting stick. For example, I was reading the article in the – one of these newpapers that, for example, the public transportation department’s giving raises to all its top level management yet they’re raising the fares, they’re cutting the services, yet these managements are getting a fee hike for bonuses.
PENNER: I’m glad you raised that. That’s Gary Gallegos. It was just announced he’s going to get like, what, a…
AUGUST: How nice.
AUGUST: Well, it’s the golden rule. He who has the gold rules. I’m afraid that’s the way of the world.
PENNER: Oh. Is everybody here going to buy that at the table? I mean, I’m more of an idealist.
PENNER: Alan, save me.
RAY: I’m – No, I’m sorry. I have no idealism about this at all having at one point in my life for some time been a union shop steward. I know exactly what the issues are and I know how they go down at the table. And if you have an informed, intelligent, ethical negotiator on the other side, you get a good contract. Otherwise, you get one like this.
PENNER: Okay. Well, thank you very much. Vigorous discussion but we must go on.
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