San Diego Council Approves Tobacco Settlement Funds Use for Pension Deficit

April 25, 2006 ( - The San Diego City Council, subject to a second reading next month, approved a plan to use funds from tobacco settlements to borrow about $100 million for paying down the deficit in San Diego's pension system.

The loan will be backed by revenues the city gets from its share of funds collected from the settlement of a lawsuit against tobacco manufacturers, which was originally supposed to be used to fund health-care related programs, according to reports by The San Diego Union Tribune.

Mayor Jerry Sanders, who proposed the measure, said it would be a step toward addressing the $1.4 billion deficit in the San Diego City Employees’ Retirement System, the newspaper reported. If approved, the transaction is supposed to close by June 30 so the funds can be deposited into the pension system before the end of the fiscal year.

According to Jay Goldstone, the San Diego’s chief financial officer, the city will use about $10 million annually in funds contributed by employees to pay off the loan over the next 18 years. The city would save $7 million on pension payments as a result of the bond sale, based on today’s 7.11% interest rate, Goldstone said.

But there is a danger in this if interest rates rise too high. Sanders and Goldstone both pledged that there will be no transaction if interest rates climb above 7.9%. The newspaper also reported that Sanders has also proposed the city issue $574 million in pension obligation bonds over the next two fiscal years to pay down the retirement debt. That idea has yet to go before the council.

In a 6-1 vote, the council approved the plan, but Sanders’ proposal requires a second reading by the council on May 8.  If the amount of the tobacco revenue San Diego gets fluctuates, or disappears, that risk will be borne by investors and not the city’s general fund, Goldstone said.