San Diego Benefits "Void" Says City Attorney Report

April 11, 2005 ( - City Attorney Michael Aguirre fired yet another salvo in the controversy surrounding the funding of the San Diego city pension fund on Friday - declaring that the pension benefits paid over a span of nearly a decade are illegal - and therefore void.

Aguirre’s report said that a mix of taxes and benefit reductions is needed to close a $1.37 billion pension-system deficit, and that increasing the assets and lowering the liabilities of the $3.6 billion San Diego City Employees Retirement System will be difficult because of limited ability to raise revenue and reduce pension obligations, according to a report in the San Diego Union-Tribune.   “However, if these hurdles are not overcome, the only option remaining is bankruptcy,” the report stated.

Aguirre wrote that the “benefits are all void as they blatantly violated legal requirements, fiduciary duties, and the trust of the public, and in fact were void from inception.”   However, if all of these benefits are removed, the $1.37 billion unfunded liability is cut in half, according to the report.   The other half of the debt — roughly $700 million — largely represents interest that has accumulated on the $1.37 billion shortfall, and the report then states that the city must pay this sum off in three years.

Aguirre’s report recommends a “spread the pain” program that calls for reduced benefits for city employees and bigger burdens for city taxpayers, though exactly how much was not specified.

The report’s conclusions and recommendations are nonbinding, but they are sure to be controversial nonetheless.   Mayor Dick Murphy, who at the time had not yet read Aguirre’s report, but was told the high points, disagreed that that City by the Sea was careening toward bankruptcy.   “I think ‘that is totally incorrect’ would be a nice way to put it,” Murphy said, according to the Union-Tribune report.

Abuse Impact

Aguirre’s  report  attributes the current pension deficit to a series of abuses, beginning with the practice, dating to 1980, of using surplus earnings from the retirement fund to reduce the city’s contribution to the system (see  Officials Admit They Made Mistake in San Diego Pension Decision ).   The report said City Hall’s decisions to underfund the pension system while boosting benefits were illegal, actions that were first approved by former Mayor Susan Golding and the City Council in 1996 and again in 2002 by Murphy and a council majority (see  Extra Pension Contribution Clouds San Diego , and  San Diego Settles Pension Litigation ).

Additionally, Aguirre said some former members of the pension board who are also city employees violated California’s conflict-of-interest law by voting in 2002 to allow the underfunding in exchange for benefit increases that enriched them financially.   The report also was critical of special benefits that it says had strained the pension system, including enhancements given to the presidents of four municipal labor unions and provisions allowing city employees to buy pension credits that give them more retirement pay than called for by the years they actually worked.

However, the report bluntly cites what it considers the "…two primary problems with the management of the plan: creation of benefits without providing a funding source, and intentionally understating the problem with creative accounting."   Overall, the report said the deficit was due to "gross oversight and inattention" as well as failure to follow the law. It criticized reliance on "creative accounting" maneuvers that overstated the pension system's assets while masking liabilities (see  "Don't Ask, Don't Tell" May Be Crux of SD Pension Woes ).

Trouble Spots

The FBI and US Attorney's Office are conducting a criminal inquiry into possible securities fraud and other financial crimes (see  DoJ Subpoenas San Diego Pension Officials ), and the Securities and Exchange Commission is also conducting a parallel, civil investigation into whether city officials violated securities laws (see  SEC Demands San Diego Pension Testimony, Documents ).

Standard & Poor's suspended San Diego's credit rating in September, citing a lack of audited financial statements for 2003, which are overdue, along with audited statements for 2004 (see  San Diego Officials Question Pension Audit ).   In February, Fitch Ratings Services lowered the city's bond ratings, citing the lack of a plan to deal with the burgeoning pension plan deficit.   Today, the pension system's funded ratio, a measure of assets versus liabilities, is estimated at roughly 67%.

The report is Aguirre's third report on city finances since he took office in December. His first two reports concluded that the mayor's Blue Ribbon Committee had vastly understated problems at the pension system and that Murphy and the council may have committed civil violations of federal securities laws (see  SD City Attorney Accuses Officials of Pension Wrongdoing ), though Murphy and the council have rejected those conclusions.

Also on Friday Mayor Murphy released a five-year budget assessment aiming to identify prospective changes and provide a road map to resolve the city's financial challenges.   The mayor's plan attempts to demonstrate that the implementation of a pension proposal issued in February to unions could save the city at least $48 million annually, which could be redirected to reduce the deficit (see  San Diego Mayor Calls for Cutbacks to Close Pension Shortfall ).  

That plan allows all current city employees and retirees to keep the lucrative benefit packages awarded in the now-controversial City Manager I and II agreements.   New city employees would bear the brunt of the price tag for the benefits, by taking a two-year salary freeze, not receiving pension credits for the first three years of work, paying more into the pension, or receiving less when they retire.  

According to Sign On San Diego, in the fiscal year 2005-06 budget year the city would realize a savings of about $20.8 million to be directed into the pension shortfall under Murphy's proposal, in fiscal year 2006 to 2007 the number would jump to $46.2 million, while

  • in fiscal year 2007 and 2008 the number increases to $61.4 million,
  • in fiscal year 2008 to 2009 the figure drops to $34.9 million, and
  • in 2009 to 2010 the number inches up a little to $36.3 million for the pension.  

Murphy's plan also issued a set of figures estimated if no changes are made with the unions, with budget shortfalls moving between $48.2 million in fiscal year 2005 to 2006 and growing to $97.3 million in fiscal year 2009 to 2010.