In the wake of speculation about how many hundreds of millions of dollars the city will have to pay into its retirement system this year, on Friday a fancy accountant working for the system's board of trustees pegged the contribution at $162 million.
Much interpretation ensued.
Don McGrath, City Attorney Mike Aguirre's point man on pension matters, said $162 million wasn't enough to cover the interest on the city's $1.4 billion pension debt and keep it from growing. He likened it to making the minimum monthly payment on a credit card and said the city would need to hand over somewhere in the neighborhood of $240 million if it wanted to make a dent in the balance.
Over at City Hall, officials were quick to dismiss McGrath's figures and reacted with a sense of relief. After all, the $162 million fell well short of the $300 million worst-case scenario bandied about in recent weeks-a sum which would have swallowed up a third of the city's general fund, money used to pay for fire, police, parks, pools, libraries and other basic city services. It was even $1 million less than last year's payment, which also didn't keep the pension debt from increasing.
"Fortunately, the number we got today was not staggering," said City Council President Scott Peters, who called the city's financial crisis a "manageable... long-term challenge" that nonetheless contains "breathing room" for the city to address its myriad fiscal problems.
Peters and others prone to downplaying the severity of the crisis like to point out that the city's $1.4 billion pension debt isn't due in its entirety tomorrow, or a month from now, but is spread out over decades, much like a mortgage. Along those lines, the $162 million is just our annual mortgage payment.
But let's put the argument aside for a moment and, like Mayor Jerry Sanders has done, accept the $162 million as a "starting point." There are more numbers yet to crunch.
Add to this year's payment a few other soon-to-come-due bills and the city is faced with a $1 billion pension payment-not due in decades, like the total debt, but in the next three years, essentially the remainder of Sanders' term.
So the timeline is dramatically shorter, but just how hefty is that $1 billion number?
To pay that off, the city will have to come up with roughly $38,000 an hour-each and every hour, day and night-for the next three years.
Staggering? How's the breathing room now?
"The annual payment really misses the mark," Sanders told CityBeat. "Whether it's $162 million or $200 million, we're looking at a huge number."
That $1 billion is a rough estimate the city auditor's office has come up with, assuming that a bunch of things, like the city's payroll and the pension fund's investment earnings, stay the same. The number crunching starts by adding the $162 million to the estimate for next year (another $162 million) and the year after that ($198 million, which increases because voters last year approved a 2008 switch from a 30- to a 15-year debt schedule). It adds up to more than $500 million, to be paid largely from the general fund.
Call that the "payment" side of the equation.
On Friday, Sanders said the city would likely come up with a way to contribute more than the $162 million to its retirement system this year. He didn't mention that the city doesn't have much of a choice.
That's because under terms of the labor contracts that Sanders' predecessor, Dick Murphy, and the City Council struck last summer with the four unions representing city employees, the city is supposed to put $600 million into its pension system in the next three years.
Call that the "promise" side of the equation.
The good news is that the $600 million won't come from the general fund. Instead employee labor unions essentially agreed to loan the city $51 million worth of contract concessions over the next three years. Using some as-yet-undetermined creative financing methods, city officials must turn that money into $600 million. If they fail, the city has to return the original $51 million to the unions.
The first deadline on this agreement happens this summer, when the contract with the firefighters expires. City officials need to raise $100 million. To make it happen, Sanders has proposed selling off the city's future rights to annual payments it receives from a legal settlement with tobacco companies. The City Council will soon consider that proposal.
Assuming that happens as planned, Sanders and the City Council have about two years to come up with the remaining $500 million of the "promise." Foremost among the options is the possibility of issuing pension-obligation bonds-essentially borrowing money at a lower interest rate to pay off debts with higher interest rates-which could bring in hundreds of millions of dollars but would first require the city to obtain its long-delayed financial audits and restore its credit rating. If those developments happen according to schedule-a big if considering it hasn't in the past-the city won't see any money from those bonds until early next year.
In the meantime, Sanders and the City Council will have to consider the possibilities of raising revenue by selling land, or raising taxes-a political and practical impossibility considering a tax hike would require voter approval and Sanders ruled one out during his campaign.
On the "payment" side, they need to reduce the city's annual contribution and are targeting the city's payroll by streamlining services, attempting to talk the unions into accepting a pay cut and threatening to cut jobs. Aguirre also has an ongoing legal effort to persuade a judge to deem illegal and void employee benefits granted by the City Council in 1996 and 2002, which, if successful, he estimates could reduce the pension debt by more than $700 million and, consequently, reduce annual payments.
Yet, Sanders is looking for ways to contribute even more money to the pension fund, and for good reason. The $1 billion estimate doesn't include the nearly $500 million the city should be paying during the next three years to, as promised, cover the healthcare costs of its retirees. Jay Goldstone, Sanders' chief financial officer, is looking into different options, including the possibility of only making a portion of the required annual payment in this and upcoming years, and investing the remainder in hopes that sum will grow.
It's a gamble that, if successful, could help the city turn $162 million into a lot more money for the pension fund, but one that relies on unpredictable investments.
"If it goes wrong," Goldstone told CityBeat, "you've created more debt."