Last September, Mayor Dick Murphy and City Manager Lamont Ewell made it a point to assure the public and Wall Street that rumors of the city's pending bankruptcy were false. The mayor even produced a fancy visual aid with the word "Bankruptcy" confined within a Ghostbusters-style no sign.
But on Monday, City Attorney Mike Aguirre gave voice to the words that many dare not speak, announcing as loudly as possible that bankruptcy is an inevitability if San Diego's city officials don't stop fooling themselves about the state of the city's pension crisis.
Aguirre's proclamation came in the form of a memo issued to the mayor, city manager and City Council late Friday. (It was released to the press Monday.) In it he warned that if they fail to take decisive measures to reduce the city's $1.16-billion pension liability during their upcoming negotiations with labor unions, that debt will consume more than one third of the city's payroll and force the city to file for Chapter 9 bankruptcy. To avoid that, Aguirre advised the City Council to "roll back" all benefits that were retroactively boosted by the City Council, reduce the amount the city spends subsidizing workers' ability to purchase years-of-service credit toward their pension, eliminate the notorious Deferred Retirement Option Program (DROP) and use the proceeds of pension-obligation bonds to fund settlements with affected city workers.
At a Monday press conference, Aguirre said it's time for "the City Council to begin the process of unwinding the unpaid-for benefits that were created knowingly and with the intent that the pension plan, and the city, did not have the money to pay for the benefits when they were created."
Aguirre's aggressive recommendation was hailed by some as a "lifeboat"-although an untested one-but the city's largest labor union quickly slammed the plan. In a statement issued Monday, San Diego Municipal Employees Association (MEA) President Judie Italiano said Aguirre's legal advice to the City Council was "full of holes" and that, if followed, the city's upcoming labor negotiations would be "doomed from the outset."
But there are signs that Italiano-who also served on the Pension Reform Committee and has been criticized for downplaying the role of pension benefits in the crisis while, along with two other union heads, accepting huge retirement benefits-may have other worries. In recent weeks, an anonymous flyer calling for her ouster from the MEA board has landed in the e-mail boxes of MEA members, and although an MEA staffer downplayed its significance, Aguirre indicated a worker-led revolt against union leadership is due.
"I think that the time has come for union members to start asking themselves who is responsible," he said. "Is it the City Attorney who is telling them the truth and who is looking for ways to secure their pension benefits to the fullest extent that is possible with our limited financial capability, or is it their union leadership, who have created substantial excessive benefits for themselves and who are persisting in putting forth policies that they know will not solve the problem?"
Convincing city workers to accept a reduction in benefits would go a long way toward garnering the support of the City Council-many of whom relied on union backing to get elected-something Aguirre admits he'll need to make his recommendations policy.
During his annual State of the City address Monday night, Mayor Murphy stopped short of using the "B" word but told the audience the city must act "resolutely, courageously and decisively to solve the city's financial problems."
To facilitate that process the mayor said he would appoint a new, more transparent city retirement board; use $200 million in new pension-obligation bonds to reduce the pension system's unfunded liability and repay past under-funding; impose a two-year salary freeze for all city employees; eliminate the DROP program; and reduce the amount the city spends to subsidize employee contributions to the pension plan.
Murphy also noted that "for the first time since 1996, the city will make the full actuarial payment to the retirement system" and that "Prop. G, passed by the voters in November, will prevent future under-funding."
But those facts aren't as positive as they may at first seem. According to accountant April Boling, the Murphy-appointed chair of the city's Pension Reform Committee, Prop. G won't take effect until 2008, and the city is currently using a 30-year amortization model. Under that payment plan, she says, full actuarial funding won't keep the unfunded liability from increasing.
"Under the city's 30-year amortization model, you don't even pay all of the interest on the unfunded liability, and so the unfunded liability goes up," she says. "There is nothing being paid down on principle-and, in fact, the principle grows, but that is still called "full actuarial funding.'"
That's a misleading term in her view because "it implies that you are not only paying what you need to pay for the current year, but that you are also making some attempt to whittle away at the debt.... On the 30-year schedule that the city is using, it's not until the 12th year that you start making principle payments."
Asked by CityBeat after his speech about that criticism, Murphy stuck to his talking points, emphasizing the importance of his salary freeze.
"Each year of the salary freeze frees up approximately $40 million a year that we can put into the pension plan, but, more importantly, that unfunded liability you're talking about is a projection of the payments we will have to make to retirees. It presumes a 4.5-percent increase in salaries every year. If you have two years with zero increase, it reduces unfunded liability all by itself by $200 million.... If I can get five members of the council to agree with me, we are going to make it happen."
Murphy and Aguirre were expected to detail their plans in a closed-session portion of Tuesday's City Council meeting. However, a report released late Monday called one of the mutual tenets of the plans into question and could delay the formulation of at least a part of the City Council's labor-negotiation strategy.
According to City Manager Ewell's analysis of the DROP program's impact on city finances, the retirement benefit labeled by critics as a double-dipping scheme actually saved the city $45.2 million since its inception in 1997 and is projected to save the city $15.9 million in 2005. The report did not consider the impact of DROP on the retirement system-that report is scheduled to be released in February-and therefore the program's overall cost or benefit is unknown. But it was enough of a twist to confound at least one well-read City Council member."The memo says essentially that the city made $45 million by using the DROP program, and then [Murphy] stands up and says, "Eliminate DROP,'" said Donna Frye. "I have got to confess, I'm a little confused."