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05/07/10 |
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Goldsmith's lawsuit covers Saathoff's escape. |
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by Pat Flannery
top^ |
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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
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09/18/09 |
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The full bill for San Diego's
Municipal Millionaires
is finally being presented. |
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by Pat Flannery
top^ |
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The SDCERS Pension Board made a "tough decision"
today.
Here is the actuary's full presentation showing all
of the Board's grim options.
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Below are the two
options the Actuary "could live with", the Board
chose Option 1 - no change. |
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Option
1 |
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Option
2 |
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Smoothing |
25% |
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25% |
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Corridor |
120% |
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130% |
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Amortization |
15
years |
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15
years |
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Avoid
Negative Amortization |
Yes |
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Yes |
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ARC |
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ARC |
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FY-10 |
$154.2 |
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$154.2 |
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FY-11 |
$224.8 |
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$193.2 |
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FY-12 |
$250.9 |
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$226.3 |
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FY-13 |
$274.9 |
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$256.2 |
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FY-14 |
$297.1 |
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$283.3 |
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FY-15 |
$318.1 |
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$308.3 |
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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.
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07/24/09 |
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Does Jerry Sanders have a better
solution to the pension crisis than Mike Aguirre? |
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by Pat Flannery
top^ |
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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 it
"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.
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04/11/09 |
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The
Mayor gives his senior staff 3 months "heads up" to
enter DROP.
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by Pat Flannery
top^ |
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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.
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04/07/09 |
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The account nobody
wants to talk about - the City's NPO account. |
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by Pat Flannery
top^ |
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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.
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04/02/09 |
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Eliminating DROP could save $16
million immediately.
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by Pat Flannery
top^ |
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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.
top^ |
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Keep
Government Honest.
Read source documents
HERE.
Most media merely repeat
Government Spin. |
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