LOS ANGELES — Money management isn’t the first thing that comes to mind when one thinks of San Diego. The southernmost major city in California is better-known for its beaches, naval bases, biotech firms and, for hedonists and illegal aliens, its convenient location to Tijuana and the Mexican border.
But residents of San Diego and other cities throughout the nation have come to learn the meaning “actuarial charts” and other arcane elements of the financial discipline. The hard way. Thanks to fat retirement packages for government employees handed out during the last decade’s bull market, taxpayers may end up forking over billions to shore up its pensions.
“When these pension benefit increases were rolling through, everyone rather foolishly believed that there would always be plenty of dough to go around,” said Ron Roach of the California Taxpayers’ Association to the Los Angeles Business Journal.
With 93 percent of public pensions “underfunded” or in deficits last year, according to Los Angeles-based money manager Wilshire Associates, municipalities are wrangling over how to meet their obligations. Taxpayers in Houston, whose fund faces a $1.5 billion deficit, are looking to get from under a state-mandated rule to meet pension obligations, while citizens in rival Dallas are on the hook for $2 billion.
Counties in California such as Los Angeles and Contra Costa have had to right their pensions while cities such as Santa Monica now have to pay millions more to help out the nation’s largest public pension, the California Public Employees Retirement System, which handles benefits for their employees.
In San Diego, officials revealed in September that the city owed $1.2 billion to its pension fund; taxpayers may have to fork over $202 million this year just to cover part of the deficit. Along with accusations that the city deliberately failed to pay its original share of pension contributions in order to finance a new baseball stadium, the city’s troubles have led to the firing of its city manager and prompted a federal investigation.
This isn’t the only pension-related bill for San Diego residents. Along with those in Escondido and other cities, they will have to find ways to repay $1.4 billion in obligations owed by San Diego County’s pension, which boosted its benefits just two years ago.
THESE PROBLEMS HAVE THEIR roots in the late 1990s. Prodded by powerful employee unions and mandates by state legislatures in Texas and California to take advantage of that era’s bull market — and wildly optimistic market forecasts — local governments began increasing pension annuity payments. Police officers and firefighters got even sweeter deals as cities allowed them to retire at age 50 — when most private sector employees are still accumulating their nest eggs — and collect their checks.
Upping the ante is a curiosity called a deferred retirement option program, or DROP, in which a government employee forgoes raises and incremental pension contributions in his final years of employment in exchange for a lump-sum payment upon retirement. The employee still gets annuity checks.
First set up in 1982 by police and fire officials in Baton Rouge, Louisiana, DROPs became popular with civil servants who enjoyed lucrative payouts. The human resources director for Houston’s city government, for example, can expect to receive a $1.5 million upfront check from the pension fund and still collect annual retirement income of $110,000 according to the New York Times.
San Diego jumped on the bandwagon in 1996 when it agreed to assume contributions to the pension fund that employees were expected to make. By 2002, the city had ladled out $600 million in new sweeteners, including so-called “13th check” payments and approved a DROP plan — without so much as a cost-benefit analysis — that paid out average lump-sum handouts of $300,000. San Diego County followed suit that same year with its own ballooned benefits packages.
But when the stock market collapsed amid the dotcom bust of 2000, pension funds found themselves unable to shoulder the entire cost of the payouts, leaving state and local governments on the hook. Exacerbating the problem: It can take as long as two years to figure out the size of a pension fund deficit, meaning that the deficits could be larger or smaller than current numbers suggest.
ALREADY STRUGGLING UNDER massive budget deficits, most cities have turned to floating so-called “pension obligation bonds” for help. Illinois issued $10 billion in bonds to help cover its pension liabilities and San Diego city officials, in the midst of an election year, may find that an appealing option. Meanwhile San Diego County approved a $400 million bond issue last month, on top of a previous float two years ago to help pay for its higher benefits package.
Such moves do little more than push off the problem into the future and increase public debt, which, unlike other spending, cannot be cut. And San Diego County decided to head to the market just as interest rates are rising. Nor does it solve the ultimate problem: the public sector has failed to move away from traditional pensions to defined-benefit plans such as 401Ks.
Such a move would not only force employees to sock away more money for their retirements, but limit taxpayer exposure to future shortfalls. But don’t expect local officials to embrace such reforms, at least in an election year.
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