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Who’s Responsible For City’s $2 Billion Pension Deficit?
Friday, May 7, 2010
The City of San Diego filed a lawsuit against its Employee Retirement System this week. And, the District Attorney decided to drop conflict-of-interest charges against six former pension board officials.
GLORIA PENNER (Host): I’m Gloria Penner. I’m joined by the editors at the roundtable These Days in San Diego. Today, we’ll look into a San Diego lawsuit to charge city workers for pension losses, pockets of community resistance to SDG&E’s Powerlink as the utility waits for final approval of the line, and how the Gulf oil spill is eroding support for oil exploration off California. The editors with me today are David King, founder and editor of sandiegonewsroom.com. Welcome for your debut on Editors Roundtable, David. I’m glad you could be here.
DAVID KING (Founder/Editor, sandiegonewsroom.com): Thank you, Gloria. I’m honored to be here.
PENNER: Great. And Miriam Raftery returns, editor of East County Magazine. Welcome back, Miriam.
MIRIAM RAFTERY (Editor, East County Magazine): Good morning, Gloria. It’s a pleasure to be here.
PENNER: Good morning. And Tony Perry, San Diego bureau chief for the Los Angeles Times. Always good to see you, Tony.
TONY PERRY (San Diego Bureau Chief, Los Angeles Times): Always good to be here.
PENNER: And our telephone number, when you want to join the conversation is 1-888-895-5727, that’s 895-KPBS. Well, San Diego’s pension system doesn’t seem to be able to stay out of the headlines. Each week it’s something else. Six former pension board members and city officials had been charged with conflict of interest. Five had their charges dismissed in state court. The much criticized DROP program is still in discussion. The furor over retroactive pension benefits surfaces periodically. The fear that pension benefits will drive the City of San Diego to bankruptcy permeates all. So, David, this week, another lawsuit against the pension system. Who’s suing and over what?
KING: Well, as you summarize there, it’s certainly a mess and it’s hard to keep all the moving parts distinct from each other. In this case, the city council approved and City Attorney Jan Goldsmith filed suit against the San Diego City Employment Retirement System, and the suit is based upon a charter section that obligates city employees to contribute equally with the City for normal retirement allowances. It’s different from Mike Aguirre’s suits where he was trying to have the City benefits declared to be null and void. The distinct question here is who has to make up for losses on the pension fund investments.
PENNER: Right, and the City has owed the pension system millions, even billions, for at least 10 years. So why is the City suing now?
KING: Well, the question is why does the city owe billions. The obligation to make up for prior decisions to underfund is beyond question that the City needs to make up for that. This goes to the question of who has to make up for investment losses. And last year the pension fund projects a return on its investments of 8% and…
PENNER: That’s pretty big, isn’t it?
KING: Well, 8% versus 19% loss is a big shift, and because of that disparity, there’s an $80 million obligation that the actuary projects that the City has to fund this year to make up for just the investment losses.
PENNER: That’s amazing. And, Miriam, when you think about it, $80 million, you know the City of San Diego—you’ve been reading about it—is having, struggling with its deficits periodically. Has to cut here, has to cut there, lays off city workers and now we’re talking about another $80 million.
RAFTERY: It’s going to be very difficult. These are challenging times and we’re seeing this not only in San Diego but in cities across the county, Gloria, as they’re struggling with budget cuts and now, you know, word from the state that there’s a court decision that came down saying they can raid local government funds, redevelopment funds, to the tune of $2 billion. That’s only going to make things more difficult.
PENNER: Okay, well, let me ask our listeners. If you were sitting in that courtroom and the question was whether taxpayers should pay that $80 million or whether that should be split between taxpayers and the people who will benefit from those – the city workers whose pension benefits need that infusion of $80 million, how would you feel about that? Do you feel the taxpayers should pick it up or do you think part of it or all of it should be picked up by the city employees themselves? Our number is 1-888-895-5727, 895-KPBS. Tony, I’m going to ask you a political question. When Jan Goldsmith was running for city attorney, trying to replace Mike Aguirre and he did successfully, he said he would carry out the law, not get involved in policy, not be an activist city attorney. And now he’s filed a lawsuit which is based on his interpretation of the city charter. How does interpretation differ from establishing policy?
PERRY: Well, you know, the interesting thing about this, this has been around since at least ’04 when a committee set up by the previous mayor looked at this charter provision about splitting the costs equally between the fund, the retirees and the City, looked at it and said, hey, why don’t we do something about this? But Mike Aguirre, who went to court seemingly every other day on some issue or not, did not pursue this. Now Jan Goldsmith is, with the approval of his clients, the San Diego City Council in unanimous vote in closed session. This, as Dr. Johnson would say about a remarriage, this is really the triumph of hope over experience. If you look at the long history of this debacle, all of our prosecutors have run to court with one issue or another and every one of them has flopped. U.S. Attorney Carol Lam filed charges, a flop. District Attorney Bonnie Dumanis filed charges, a flop. Mike Aguirre tried to get the pension increases declared null and void, he flopped. Now we’re going to find out whether Jan Goldsmith, frankly, is a better lawyer than those other three.
PENNER: Do you think that’s what it comes down to? You think it comes down to who’s a good lawyer and who isn’t?
PERRY: Yeah, I do, and – or who’s a good negotiator. Maybe what is in his mind is go to court and the pension board, rather than risk an adverse ruling will cut a deal more to the liking of the city council. That’s always a potential here. But this thing has been around – this charter provision apparently was written in 1954 and has been around and has been noted before but not litigated before. They claim to have found an opinion written by the author, 1954, saying here’s how I read it, and they’re going to take that to a judge, wave it under the judge’s nose and say, hey, why don’t we enforce this?
PENNER: Our number is 1-888-895-5727, 895-KPBS. All right, you’ve heard the opening salvo in our discussion on the pension situation. Let’s hear from you now, and we’ll start with Ernie in University City. Ernie, you’re on with the editors.
ERNIE (Caller, University City): Hi, Gloria.
ERNIE: It’s been a while since we’ve talked. I was, remember, as the rose between two thorns with Brian Bilbray and Peter Navarro years ago when you chaired that.
PENNER: And when…
PENNER: Was I – was I…
PENNER: Was I blooming rose?
ERNIE: No, you called me the rose between two thorns.
ERNIE: Between Brian Bilbray and Peter Navarro.
ERNIE: However – however, that’s not what we’re talking about today. As far as the pension goes, I think it’s outrageous that the private sector is held responsible to guarantee public officials their pension when we, in our 401(k)s and SEP-IRAs must risk the vagaries and the inconsistencies of the stock market and yet we guarantee public officials that and at a time when our taxes are as high as they are and our unemployment is as high as they are, rather than dropping the tax rate, for example, for capital gains. Rather that drop the tax rate, Obama is planning to increase the tax rate. There’s no incentive at all to invest and especially when the stock market dropped as much as 900, almost 1,000, points and wiped out all the gains between yesterday and January. And I think to assure and guarantee the public officials, the only part of our sector that is increasing rather than diminishing at a time when the private sector is hurt so badly, I think is not only nonsensical but it’s insensitive.
PENNER: Well, that’s…
ERNIE: And I think that law’s got to be changed.
PENNER: That sure is one point of view, and I understand that, Ernie, and thank you for your call. And it’s true, people are particularly sensitive now, David. I mean, the stock market’s taken a big, big hit in the last few days. People are feeling their personal wealth drifting away and then they look at this and they say, you know, why is it that we are responsible for funding somebody else’s retirement benefit. But what are we really talking about in terms of what it might actually cost each city worker?
KING: The number that I’ve seen is just a gross number. $4,000 per employee would be their share of – if you split the $80 million loss on investments halfway between the City and the employees, you’ve got $40 million for the City to make up. And with the 10,000 employees, it would be $4,000 per employee.
PENNER: Well, what I’m thinking of at this point is going back to what Tony had to say. Whose job is it, Tony, to interpret the city charter? Since the pension board members don’t agree with the city attorney on what the charter says when it states that—and I read that portion of it—it says the City shall contribute annually substantially equal to that required of the employees.
PERRY: Well, all roads lead to the courthouse and those men or women in those black robes are employed to make rulings like this, and it’ll be, gentlemen, you know, start your attorneys. Ernie has – Ernie, the rose, has put his finger on the difference between a defined benefit, a pension, which is what city employees, even new city employees, are promised, and a defined contribution, which most of us in the private sector have. When a defined contribution hits the shoals of the rock market, of the stock market, you lose and suddenly you’re looking at eating cat food three days a week when you retire. Defined benefit, whole ‘nother thing. And one thing this lawsuit points out anew is an incredibly sweet system that the City of San Diego devised for its employees where when the stock market is good, employees benefit with what they used to call the thirteenth check. And when it is bad, the city council jumps in and makes up the difference. Not a bad deal. No risk for the employees, the true definition of a defined benefit.
PENNER: Okay, well, let – let’s look at that. When you have that kind of a situation and, Miriam, isn’t that because the rationale is that city employees don’t have the upside potential in salary that private employees have and, therefore, what they get instead is compensation through their pension benefits.
RAFTERY: That’s certainly the argument the unions would put forward, Gloria.
PENNER: And, speaking of the unions, I mean, one of the issues has to do with whether this lawsuit gives the city more negotiating power with the unions.
RAFTERY: Well, definitely. When a contract comes up for renewal the pension benefits is going to be a major issue.
PENNER: Okay. David, back to you on this. How can the City, with so many financial problems, afford to bring another lawsuit to court?
KING: Well, this is a lawsuit it needs to bring. This is a lawsuit that’s based on the interpretation of ‘the’ charter section that is controlling and who has to make up for investment losses when the pension fund invests in assets and those assets don’t grow the way that you project. And the main event here isn’t the word substantially equal. The entire case will peter upon the words ‘normal retirement allowances.’ And according to Jan Goldsmith, normal retirement allowances is everything that the City has to fund and the employees have to fund except for special benefits, the benefits that the city employees themselves can pay for, like purchased credits. You can buy several years of credits. According to the pension fund, normal retirement allowances don’t include exceptional losses like this on the pension fund assets. But I think that the city attorney has the better argument. Every single year, the pension assets will have gains and losses. It’s something that’s going to go into the actuary’s calculation. Every single year, there’ll be gains. If there’s gains, the City’s contribution and the employees’ contribution will be lower. If there are losses, why shouldn’t they share in those losses equally, and that’s what the charter section seems to say.
PENNER: Very clear. Very clear.
PERRY: And while the city attorney is going to court…
PENNER: Well, Tony, I’m going to…
PERRY: …another way it would be…
PENNER: Tony, I’ve got to interrupt you because…
PERRY: …a charter amendment.
PENNER: …we have to go into a break. So what I’m going to do is hold your comment for when we return from the break so we can give you plenty of time for it. We are talking about a new lawsuit that’s been brought by the City of San Diego against the retirement system, and we would like to hear from you, 1-888-895-5727. This is the Editors Roundtable. I’m Gloria Penner.
PENNER: And now here we are at the Editors Roundtable talking about the city pensions, of course. And with me at the roundtable is David King from sandiegonewsroom.com, Miriam Raftery from East County Magazine, and from the Los Angeles Times, we have Tony Perry. And I interrupted Tony just before the break. He was really starting to go on about something that sounded very interesting but I had to go into the break, so let’s hear what he has to say.
PERRY: Well, we’re talking about going to court as one road. Another road, it would seem to me, is a charter change and submit it to the people. Write it so that there is no question what we’re talking about in plain English block letters six inches high so that we really know what it is, and then send it to the people and then litigate it, of course. All roads go to the courthouse. What I think Jan Goldsmith here is doing is showing somewhat frustration at the way Jerry Sanders has handled the situation. Jerry has basically done trim, cut, squeeze, hardball, city employees a lower pension, promise to new employees—why they give them a pension rather than a defined contribution, I don’t know—but what he hasn’t done is any overarching stratagem. He hasn’t asked that the people in La Jolla and elsewhere pay for their trash pickup, which could be $50 million a year, nor has he thought of bankruptcy, for example. So he hasn’t done any big thing to change the systemic problem of San Diego having champagne tastes but a beer budget.
PERRY: And so I think what Jan Goldsmith is doing here is looking for that kind of systemic change so that we don’t have to, every year, do trim, cut, squeeze, freeze, because at some point there’s a law of diminishing returns. You will have trimmed, cut and squeezed more, really, than is wise for the common wheel.
PENNER: Thank you, Tony. And now let’s hear from Heidi. Heidi is in San Diego. Heidi, you’re on with the editors. Thanks for calling.
HEIDI (Caller, San Diego): Hi. Thank you for taking my call.
HEIDI: You know, I just wanted to mention that it appears to me that the pensions, as they stand right now, are unsustainable. And I think not only should the employees be sharing in the responsibility of possible losses from, you know, market losses, but that they need to be reformed. And the politicians don’t really want to touch it because it’s unfavorable and definitely unpopular and possibly a, you know, killer for them to be able to win an election. So I think there’s a number of things going on here but I think overall it’s just unsustainable to keep it the way it is.
PENNER: Thank you, Heidi, and before we respond to you— I’m going to have David respond as a final comment—let’s hear from another caller, and this is Marie in Clairemont. Hi, Marie, you’re on with the editors.
MARIE (Caller, Clairemont): Hi. Thanks for having the discussion.
MARIE: I just wanted to point out that city employees do share in reduction. You know, we don’t only not pay into social security, the City a long time ago decided to have another retirement portion that we put money into along with the opportunity to do a 401(k), and all of that is tied to the stock market. So when the City’s portion gets hit, so does ours. So you’re looking at a double whammy if you want city employees to sustain the loss in their 401(k)s and SPs (sic) and then also make up the difference of the City’s portion.
PENNER: Okay, well, thank you very much, Marie. Appreciate that. And, David, any final comments on this? And then I want to ask you very quickly about the Bonnie Dumanis dismissing charges against some of these pension officials.
KING: Well, the last caller was right. The city employees do have 401(k) plans in addition to their pensions that you – they’re unmatched in the private sector. You do not see benefits like this in the private sector. And going to what Tony says, letting the voters decide, the voters did decide in 1954 when they wrote this section that says that the contributions need to be substantially equal. And the voters also decided in 2008 when they passed managed competition. The only thing you can do is outsource this work so you have fewer people on the pension plan. If you outsource, you’ve got fewer employees and fewer people who earn these benefits. You can’t just write them away. This is what people signed up for when they took the jobs and their vested benefits. You can’t take them away. But what you can do is have fewer people working for the City and that’s what the voters have approved and what the city council refuses to implement.
PENNER: Well, you said it like it is, didn’t you, David? I’m glad that you haven’t pulled any punches here. Just one final question for you before we change into another subject. The district attorney, whose office was pursing conflict of interest charges against six former pension board members for six years, she has dismissed those charges. Why?
KING: Well, the Government Code Section 1090 is a prohibition on conflict of interests. City council members can’t vote on a, say, a hotel project if they own the land where the hotel’s going to be built because they have a financial benefit in it. But the city council members, and the Government Code expressly exempts this, are allowed to vote on their own salaries because nobody else can vote on their salaries; there’s nobody above them. So benefit issues, including pensions, have always been interpreted to be excluded from Government Code 1090. The charges were brought by the district attorney after the city attorney made all the hay of the conflict of interest and was scoring political points with it. And you honestly – prosecutors are well versed in evidentiary issues, not the Government Code. It’s just not her ball of wax. It’s not surprising to any attorneys with experience in municipal law that the California Supreme Court said Government Code 1090 just doesn’t apply to pensions. You don’t have the right law. You’re not seeking to prosecute these people under the right law.
PERRY: And the pension board members were not only on the pension board as required by the terms of their employment, they were on it because the pension board was – consisted of public employees. How she then—I’m being less charitable to Bonnie—how she twisted that around to a conflict of interest, I think, is amazing and millions of dollars in legal fees went to defend these folks. The only one that was sort of laying in the weeds was Ron Saathoff, the Firefighters Union, and there was an issue of piling his union pension and his city pension and all that kind of thing. But the federal suit, for example, which is configured somewhat differently but it’s the same issue, got laughed out of court. I think in the longterm we’re not going to think highly of Carol Lam’s stratagem or Bonnie Dumanis’ in this case.
PENNER: That was Tony Perry, the Los Angeles Times. And, David, you’re going to wrap it up for us.
KING: Going to the federal suit, it is hard to keep a straight face and say that any public servant from the garbage man up to the President of the United States can be prosecuted for failing to deliver honest services to the public. I mean, it’s so vague but it is just – flies in the face of what we know here. What does that mean? Failing to provide honest services? That’s too vague, it’s not a crime.
PENNER: And it probably won’t go up to the U.S. Supreme Court.
KING: Well, the Supreme Court’s going to weigh in on exactly…
PENNER: If they…
KING: …what the honest services law means.
KING: But applying it in this situation is just, again, probably politically motivated instead of having any basis in the law. They preserved their rights on appeal but it won’t go anywhere.
PERRY: Face saving.
PENNER: Face saving? Thank you very much. All right, on to a new subject.
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