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City Pension
  09/18/09   The full bill for San Diego's Municipal Millionaires is finally being presented.  
  07/24/09   Does Jerry Sanders have a better solution to the pension crisis than Mike Aguirre?  
  04/11/09   The Mayor gives his senior staff 3 months "heads up" to enter DROP.  
  04/07/09   The account nobody wants to talk about - the NPO account.  
  04/02/09   Eliminating DROP could save $16 million immediately.  
  05/07/10   Goldsmith's lawsuit covers Saathoff's escape.  
      by Pat Flannery                                                      top^  

San Diego's behind-the-scenes power brokers managed the media well this week. While DA Bonnie Dumanis was springing (Godfather) Ron Saathoff out the back door for the crime of the decade, the Great Pension Heist, City Attorney Jan Goldsmith was charming the media out front with a lawsuit-to-nowhere, filed to send the pension posse in the opposite direction to Saathoff's getaway trail. It worked like a charm.

Here is the Dumanis press release. Here is the Goldsmith lawsuit.

Who got all the press coverage? Why Goldsmith of course. The Voice of San Diego wrote ecstatically "Lawsuit Could Bring Radical Shift to City's Pension Payments"It's editor Scott Lewis in a Tweet called Goldstone a "pension warrior". But the Voice never even mentioned the Dumanis/Saathoff story.

The Union-Tribune did better. Craig Gustafson wrote this piece. He balanced it with an interview with Aguirre about Goldsmith lawsuit.

Gloria Penner and her favorite editor, LA Times Tony Perry, on KPBS' hyped Goldsmith and only at the very end of


  09/18/09   The full bill for San Diego's Municipal Millionaires
is finally being presented.
      by Pat Flannery                                                      top^  
The SDCERS Pension Board made a "tough decision" today. Here is the actuary's full presentation showing all of the Board's grim options.

Below are the two options the Actuary "could live with", the Board chose Option 1 - no change.

    Option 1     Option 2  
  Smoothing 25%     25%  
  Corridor 120%     130%  
  Amortization 15 years     15 years  
  Avoid Negative Amortization Yes     Yes  
    ARC     ARC  
  FY-10 $154.2     $154.2  
  FY-11 $224.8     $193.2  
  FY-12 $250.9     $226.3  
  FY-13 $274.9     $256.2  
  FY-14 $297.1     $283.3  
  FY-15 $318.1     $308.3  

It is but a foretaste of the devastating impact pension over-benefiting, much of it illegal, will have on San Diego city services for decades to come. Deeper and deeper cuts will be the price future generations of San Diegans will pay for the gross over-benefiting by city employee-dominated pension boards over many years.

The shrill cry of "you promised" (in reality the city employees promised themselves) from employee attorney Ann Smith will echo through the city services budget for a long, long time to come. The bitter battle she won over Mike Aguirre regarding illegal retroactive benefits will be remembered every time future mayors are forced to make deeper and deeper service cuts to fund the over-benefited pensions of hundreds of San Diego Municipal Millionaires.

  07/24/09   Does Jerry Sanders have a better solution to the pension crisis than Mike Aguirre?  
      by Pat Flannery                                                      top^  
Because of the growing re-focus on the City's pension system, whether it is sustainable or whether it will drive the City into bankruptcy, I decided to do a careful study of what the system's actuary had to say to the pension board last Friday, July 17, 2009. I downloaded the 3 hour 42 min. video, studied it, then edited it down to three short segments for YouTube and overlaid it with this actuary's PowerPoint Presentation.

The resulting video segments give a good overview of what the "asset corridor" is all about.

The board's actuary, Gene Kalwarski of Cheiron Inc., started by explaining that there is nothing sinister about him bringing the "corridor" before the board at this time.
Back in December 2008, anticipating extraordinary losses in 2009, he had promised to do so. In fact, professionally, he was obliged to advise the board.

First he showed what the recent investment losses did to the system's assets. The market value of those assets on June 30, 2008
was $4.70 billion. On June 30, 2009 it was down to $3.77 billion, a $1 billion loss. When you factor in the assumed rate of return, currently at 7.75%, (that was not achieved) the loss was $1.21 billion.

The actuarial loss, using the current 25% "smoothing", was $680 million. Using current amortization policy, that loss will be amortized over 15 years. It is these three elements, the assumed rate of return 7.75%, the 25% "smoothing" percentage and the 15 year amortization period that are discussed in the rest of the presentation. These are the tools the board will use to balance the fund's needs with the City's ability to pay.

He briefly looked at the potential impact on retirees before tackling the main issue of the impact on the City's contribution if no changes to the actuarial methodologies are authorized by the board. He explained how the Actuarial Required Contribution (ARC) will increase by 50% from $154 million to $224.8 million in FY 2011 and by more than 100% to $315.1 in FY 2015, based on the current 7.75% assumed rate of return. But we all know that we will not achieve a 7.75% return and that additional losses are a certainty, therefore the impact will be much worse.

If the City is not given some relief i
t "may force plan sponsors to take other actions that may be detrimental to SDCERS' membership", warned  Kalwarski. Clearly the membership, as represented by the board, has a dilemma. Hence the "Alternative Funding Methodologies" that has many citizens and politicians disturbed - should the City pay now or pay later?

I thought Kalwarski did an excellent job in explaining the interplay of the three actuarial tools mentioned above: the 25% "asset smoothing" percentage, the 15 year amortization period and the 7.75% presumed rate of return. You may have to play the video a few times to fully grasp this interplay, but it is worth the effort. There are few things more important for the city right now.

It turns out that "asset corridors" or actuarial/market valuation limitations, are not required by the "Actuarial Standards of Practice" (ASOPs). But Kalwarski seems a little skittish about getting rid of it for SDCERS. He told the board that 50% of Cheiron's clients have an "asset corridor" and 50% do not and that the top range of those who do is between 105% and 120%. SDCERS' actuarial value of its assets is currently 131% of their market value, well above Kalwarski's comfort zone of 120%.

In the second video segment Kalwarski gets into the "squishy" ASOP 44 standard. This requires that actuarial valuations bear a "reasonable relationship" to the market value and that differences should be recognized within a "reasonable" time.

This is where the "asset corridor" becomes an expression of how "reasonable" the actuary sees the smoothing period or how "sufficiently short" he sees the period within which the pension board recognizes the difference between the actuarial and market valuations. He explained that when using a 120% "corridor", as SDCERS does currently, 1/6th of actuarial value is "not there". He seemed unwilling to "un-recognize" more than that. This may become very significant for the City.

In his summing up, he also seemed to take a reduction in the smoothing percentage "off the table". Look carefully at Slide 28. Based upon his apparent reluctance to extend the "corridor" beyond 120%, one would tend to guess that he will recommend scenario "D". But "D" requires a big reduction in the smoothing percentage from 25% to 10%, which he seems unwilling to do.

Scenarios "E" and "F" seem to be his outer "goal posts". These two scenarios are practically the same because the effective current AMA/MVA "corridor" is 131%. He has repeatedly ruled out a combination of widening the "corridor" and reducing the "smoothing" percentage, so "E" and "F" are definitely out.

This means that he will have to recommend either the status quo "A" or reluctantly bust the corridor using "B" or "C" ("B" and "C" are essentially the same because the current effective corridor is 131%). Unfortunately all scenarios assume a totally unrealistic rate of return of 7.75%. Nobody has suggested touching that as lowering it would drive the ARC through the roof. So, we are caught in a fantasy world of 7.75%.

The final segment contains revealing questions from the board. They do seem to "get it". They know, as one board member put it, that "substantial things have to happen at the plan sponsor level". Another board member worried about whether the fund could survive "if the City were to have difficulties making these payments".

He called it a "cash burn" issue but I would call it an "asset burn" issue. Cash is an asset so the fund may already be cannibalizing itself. The benefit payout is growing at an alarming rate as hundreds of top level employees make a rush for the door to lock in DROP and other disappearing benefits.

Two-thirds of the City's ARC payment currently goes to amortize the "Unfunded Actuarial Liability" (UAL). And that is only the pre-2004 debt I call the "over-benefiting" bubble. Then came the "financial meltdown" bubble. It is becoming abundantly clear that the City cannot afford to amortize this exploding UAL debt at a 7.75% assumed rate of return, or at any other rate for that matter. The whole concept is fantasy.

The trouble is that the remaining one-third of the ARC may not be sufficient to cover current benefits, let alone purchase the income-producing assets that will fund future payments. If the only way to pay current benefits is to sell assets, anybody who has ever run a business knows where that is headed.

My guess is that they will allow massive negative amortization of the UAL and push it back to a 30 year schedule. That was the one option that did not draw fire from Kalwarski. But a 30 year schedule, with or without negative amortization, has huge problems. It will pump up the UAL to obscene proportions and cram down the funded ratio to where it will again threaten the City's credit rating. And all that is just on paper.

The preservation of real assets must be the board's top priority. But is it too late? If the system cannot avoid selling real assets (or burning through its cash reserves) to pay current benefits, without a massive infusion from the City just when the City can least afford it, the system is in a tailspin. Is the concept of amortizing an imaginary asset (the UAL) masking an underlying asset/liability instability? Is the recent "financial meltdown" masking the "over-benefiting" element of the fund's problem? I think so.

If I were on the board I would ask Administrator Wescoe for an absolute assurance that assets are not being sold to pay current benefits, that he has a sufficient cash reserve. Even if he has, how long will it last? Benefit payments are supposed to be paid out of investment income. What happens when that income goes negative? What happens when an investment fund like SDCERS has to sell assets in a falling market to meet cash calls like monthly benefit payments? Has that already happened? Is it about to happen? It has happened at CalPERS.

At the very least the City must provide the cash to pay the monthly checks. Cannibalism is not an option. Nor is bankruptcy. Defaulting on legitimate debt obligations is not permissible for a municipality. It is not a private corporation. That is why municipal bonds carry lower interest rates. Unlike private bonds they are risk free. However you look at it, the taxpayer is staring an annual $300 million pension payment in the face, just to preserve assets. The "over-benefiting" part is a self-inflicted wound. We might have been able to weather the "financial meltdown" storm.

Aguirre tried to have the "Cadillac" over-benefits declared illegal. He got little support and much abuse. Perhaps Jerry Sanders has a better solution. If not his fate will be worse than Aguirre's.

  04/11/09   The Mayor gives his senior staff 3 months "heads up" to enter DROP.  
      by Pat Flannery                                                      top^  

Writing about Sanders' lawsuit against the POA on March 2, 2009, I asked why Sanders
"loudly proclaims that DROP is not a vested benefit for police officers, while allowing his own staff and those directly under his mayoral control to retain it as a benefit."

I am now reliably informed that he has given his senior unclassified and unrepresented staff a "heads up" that he will be eliminating DROP for those under his control starting July 1, 2009. He is giving his close associates three months to get into the City's 5 year DROP program, while it is still possible and while the creditable interest rate is at 7.75%.

Most of his senior staff will leave with him anyway in January 2011, as happens with most elected offices.

  04/07/09   The account nobody wants to talk about - the City's NPO account.  
      by Pat Flannery                                                      top^  
Here is a copy of
an account in the City's books that shows the accumulated unpaid Annual Required Contributions (ARC) from 1988 to 2007, known as the Net Pension Obligation (NPO) account. It shows a balance at June 30, 2007 of $195,556,000 owing to SDCERS by the City. The City pays 8% interest on this debt.

SDCERS has confirmed that this item is not shown as an asset in the pension fund's list of plan assets. This means that each year the Unfunded Accrued Actuarial Liability (UAAL), the difference between the actuarial value of pension assets and pension liabilities, was greater by that amount. The interest charged on the UAAL was consequently greater. Interest on the UAAL is part of the ARC payment each year.

To the extent that the City has not offset these duplicative charges, and it is not clear that they have all been offset, an overcharge has resulted to City Departments and therefore to the citizens over the years.

In addition, the pension fund should cease claiming that the $103 million tobacco settlement the City received in 2006 reduced the UAAL. That windfall was used by the City to pay down its NPO account. There is a difference.

Therefore the tobacco settlement was NOT a "pension contribution" as falsely claimed by the Mayor. Look again at the NPO account. Look at the bottom of the 2006 column. You will see that the $103 million was used to reduce the NPO balance from $264 million to $160 million. In other words it was used to pay off a cost item that was already booked.

The truth is that proceeds of the Tobacco Settlement was merely used to pay down the existing ARC debt, not an additional "pension contribution" as the Mayor keeps claiming.
  04/02/09   Eliminating DROP could save $16 million immediately.  
      by Pat Flannery                                                      top^  

Mayor Sanders filed
this lawsuit in the Superior Court today seeking a Writ of Mandate declaring that the City's Deferred Retirement Option Program (DROP) is a "term and condition of employment", not a "vested benefit" as claimed by the Police Officers Association (POA).

The City's lawsuit cites Art. 43 6(D) of the
POA MOU dated July 1, 2008 in error; it is in fact Art. 44 6(D). Read the relevant page.

It says: "The Member is 100% vested in the DROP from its inception. That means that a POA Member who has entered DROP owns the money in his/her DROP account from the day they entered the program. It does not mean that entering DROP is a universal right that cannot be taken away. Otherwise why would it be in an MOU for any particular period?

It is a benefit available as "a term and condition of employment", which may be offered from time to time as a term of employment, as happened in the last POA MOU. It will be interesting to see the POA's argument.

But what struck me about Sanders' lawsuit is how he loudly proclaims that DROP is not a vested benefit for police officers, while allowing his own staff and those directly under his mayoral control to retain it as a benefit!

Management personnel account for most of the DROP cost. They are the highest paid employees, are not represented by any union and serve at the pleasure of the Mayor. The entire cost of DROP for these non-represented employees could have been saved from the day Sanders entered office.

There is something deeply hypocritical about a man who gets elected as a "reformer" and once elected refuses to take a simple action that would save the taxpayer millions of dollars. If all this time he has believed that DROP is not a vested benefit, he should, even now, immediately discontinue DROP for those under his control.



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