Pension fund could face $2 billion deficit by 2009

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Pension fund could face $2 billion deficit by 2009

By Philip J. LaVelle
Union Tribune, May 10, 2003

San Diego's troubled pension system may be in far worse shape than previously thought and could face a deficit of more than $2 billion within six years, according to a report prepared for city officials but buried from public view.

The report describes a problem more serious than the sobering official assessment presented in mid-February to Mayor Dick Murphy and some members of the City Council.

It also marks more bad news for a City Hall that faces $30 million in service cuts – ranging from shorter library hours to neglect of street repairs – and up to 109 layoffs beginning July 1.

The report also shows that much of the $2.3 billion retirement system's troubles will result from the city's policy of deliberately under-funding its contribution to the pension trust.

The practice began in the mid-1990s as a way for the City Council to obtain cash to balance the city's operating budget during a time of rising benefit increases.

The report, dated Feb. 28, was written by Rick Roeder, the actuary for the San Diego City Employees Retirement System, and was addressed to Lawrence Grissom, the system's administrator, and Paul Barnett, his assistant. The report had not been publicly aired and surfaced only recently through a lawsuit.

It evidently was written to give officials the latest data in their study of whether to add to the city's debt load – by issuing "pension obligation" bonds – to reduce the system's deficit.

Roeder's job is to analyze the demographic and economic realities facing the system and to recommend the amount of money the city should put into the system to keep it fully funded, an objective not met by City Hall for several years.

The system serves about 5,350 retirees and also includes about 11,000 current city and Port District employees.

Earlier this year, pension officials estimated the system's deficit – the difference between the current value of the trust and the system's liabilities – at $720 million.

Officials attribute the deficit to three factors: three years of falling financial markets; years of deliberate under-funding by the city; and benefit increases made without accounting for the impact to the pension trust.

Roeder's report was obtained by Michael Conger, an attorney representing retired city workers who allege in a lawsuit that the city's under-funding policy is illegal. Conger provided a copy to The San Diego Union-Tribune yesterday.

"Their actuary is telling them that unless you stop this train wreck, our $720 million debt that you have today is going to grow to (more than) $2 billion," Conger said yesterday.

Murphy was in meetings yesterday and could not be located to comment on the report, according to his press secretary, Colleen Rudy. Retirement officials declined to discuss the report, citing pending litigation.

City officials have said the pension system poses no immediate threat to city finances, because its horizon – unlike the city's annual operating budget – spans decades. They also say worker "vested" benefits are not in danger.

However, the system's troubles have already led to the suspension of one benefit – the "13th monthly check" – paid to retirees.

Conger dismisses city assertions that things are under control; he predicts bankruptcy for the city or massive service cuts and layoffs.

Citing one projection that the city may log more than $400 million in underpayments between now and 2009, he said: "The Padre ballpark costs about $400 million. You could build a whole new stadium with the amount of money they're shorting the pension system . . . I'm glad I don't live in the city of San Diego. Taxpayers of the city – brace yourselves.

"And they've been hiding this (report) from the public. I've been at the Retirement Board's monthly public meetings and this has never been disclosed. Why? Because they don't want to tell the public how bad the trouble really is."

The pension system's woes – including the $720 million deficit and more than $1.1 billion in unfunded retiree health care costs – surfaced in mid-February at a hearing of the council's Rules Committee, whose chairman is Murphy.

In an interview the day before the hearing, Murphy said the council needed to find a solution within 30 to 60 days. At the hearing, he directed City Manager Michael Uberuaga to report on potential solutions within 60 days.

But the report was pulled from the Rules Committee docket in late April; city attorneys said it was because of the litigation. The mayor's office said yesterday that Murphy will not put the matter on the docket until city attorneys give approval.

Policymakers appear to be as left out about the latest retirement system projections as the general public.

City Councilwoman Donna Frye, a critic of city pension policy, said yesterday that she is not being kept informed and had not seen the Roeder report.

Pension board trustee Diann Shipione, also a critic, said yesterday she does not know what city officials may have in mind for the pension trust.

As for Roeder's report, "I haven't seen it, but I'm not surprised" at its findings, she said. "This shows the tremendous penalty the city pays each year for pushing this problem off."

Grissom, the system administrator, declined to discuss the report or explain why it was kept secret. He said the system's attorneys have advised him to not discuss the matter because it is part of litigation.

He said he, too, is not privy to what city officials may have in mind for the pension trust.

The issue "hasn't been dropped," Grissom said. "My understanding is that because of the lawsuit, they (city officials) were going to go back in closed session (of the City Council) rather than into the Rules Committee, and that is the sum total of what I know about it."

In February, officials said the pension system's deficit might be cut around $400 million by 2009.

But Roeder's report, dated 16 days later, gave a starkly different picture, putting the deficit at more than $2.02 billion. Presumably, this figure includes the current deficit, plus hundreds of millions of dollars in future under-funding, and interest owed on years of under-funding. It also factors in investment performance for the first half of last year, data not available in his previous assessments.

As bad as a $2 billion-plus deficit looks, Roeder's letter said "a different set of numbers would paint a more somber picture."

Roeder's report assumes 8 percent annual investment returns – some analysts consider that a rosy scenario – and his calculations do not include "subpar investment performance" in the first eight months of fiscal 2003, which began last July 1.

It also does not account for millions the city owes to retirees under a court settlement; that figure alone may soar to $38.5 million by 2009.

The report also predicts that in addition to $102 million in underpayments dating to the mid-1990s, the city will underpay an additional $320 million to $446 million by 2009.

Roeder's report includes a table showing the likely path of the pension system's deficit as well as the system's funding ratio, which measures the system's assets against its long-term liabilities.

Today the system is 77.3 percent funded – critics say the level is lower – and could fall to 65 percent by 2009.

In November, Murphy and a council majority voted to increase benefits while putting off heavier contributions to the pension for several years. The annual payment for 2009 alone could soar to $214 million, up from $54 million paid last year.