See related story on LBReport.com here
Date: Mon, 20 Nov 2006 13:16:28 -0800
To: "Don Knabe Supervisor 4th Dist." , , Yvonne Burke , Michael Antonovich , Zev Yaroslavsky , Gloria Molina
From: "www.LAAG.us | Lakewood Accountability Action Group"
Subject: 11/21/06 vote on raise and benefits (agenda item 17)
Cc: "LBReport.com" , troy.anderson@dailynews.com, molly.hennessy-fiske@latimes.com, info@hjta.org, "Larry Allison, Editorial Page Editor" , speakout@presstelegram.com
Dear Mr. Knabe:
Let me just say that I cant take it any more. After reading article after article like the 4 below (read them first then my letter) I do not understand how any board of supervisors or any city council can continue to give money away at this rate. Full speed a head on the Titanic! I want to make sure my opposition to this increase is noted in the record before your vote on 11/21/06. As a self employed person I do not have the time to appear personally at the meeting on 11/21/06. I am sure it will be unanimous in favor of the govt. employees just like the boards vote on 10/31/06 which includes a three-year, 15.5 percent pay raise and extras such as fully funded health benefits for more than 50,000 members of Local 660. Well I will remember this and make sure the voters in the 4th district remember at election time.
One of the arguments made for the increase is "This agreement ....will result in better services for the public." Are you kidding me? It has not worked for the last 10 years so why now? Lets look at the example of some of the fine public employee work over the last 10 years. Lets see.... MLK hospital. How much is that going to cost the taxpayers? No one can even count that high. Lets just total up the costs of all the Sheriff and LA County fire dept lawsuits over the last 10 years. I am sure the County has never seen any discrimination suits like the one brought by the LA fireman who got 2.5 million for being tricked into eating dog food (it was "his turn to collect"). Or the most recent suit by the 20 sheriffs officers who killed an off duty fireman in Lakewood last month. The list goes on and on. And these quality county employees filter all the way down to the LA Dept of Public Works and the courts.
The other argument for these increases is that you cant hire quality people and you cant match the salaries in the private sector. Right. There is no private sector corollary for most public jobs. Plus the county never reveals just what these individual employees actually earn over their life time, or what their LUCRATIVE lifetime pension and healthcare benefits will cost from when they retire at 50 (assuming they live to age 90 with their great benefits). On average probably over 4 million per employee in total dollars, without looking at the cost of living increases on these pensions. The reason this is not disclosed is that it would outrage most private sector employees who at the federal level have not had a raise in 10 years from 5.50 hr. (just ask the private sector steel and airline workers what happened to their benefits; Now only about 20 percent of private-sector wage and salaried workers are covered by PBGC-insured defined benefit pension plans, down from more than 30 percent in 1985 ) No one looks at the "total cost of ownership" (TCO) on public employees. There is very low value for the total cost. I cannot wait until the new accounting rules take effect in 2008a and taxpayers will be able to see for the first time just how much they're paying to provide benefits to active and retired state and local public employees. (see story below).
We are in a "race to the top" in public sector salaries and benefits while the private sector is in a "race to the bottom" to compete with low global wage rates and no insurance or pensions (but of course once again the politicians has elevated the public sector over private by ensuring that the public sector cannot outsource to over seas labor to save tax dollars) Again, market forces be damned in the public sector. Its government entities in a bidding war against themselves with no market forces, just an unending supply of tax dollars. San Diego is only the first CA city to have to learn this lesson According to the U.S. Census Bureau, California has the highest paid public employees in the nation.
In the private sector (which most people in public service have never experienced except in high school jobs) economic forces reduce wages, eliminate defined benefit pension plans and reduce workforces through mergers and bankruptcies. But these forces dont work in govt. Ever year the costs go up and up and the workforce grows and never "rightsizes". The county argues that property tax revenues are up but apparently no one reads the paper as for the last 6 months they have gone down and will likely do so for the next 3 years (I am sure the county will rush to lower my tax bill to match real values). But hey that does not slow the government down! Government wages never go backwards like in the private sector, just forwards.
Government entities would love to get rid of proposition 13 and would love to sneak in some "temporary" (yeah right) sales tax increases (a la Mr. Baca). Over my dead body, especially when the finds are squandered like in the stories below.
I think elected officials have forgotten who they represent. Its taxpayers. Not public employee unions. I think to some extent the anger at the "new aristocracy" (elected officials form "safe districts") was apparent in the November elections. As the one article hints below I think we are headed into a future of public vs private sector employees.
"Those who cannot remember the past are condemned to repeat it." (George Santayana (1863–1952), U.S. philosopher, poet, Life of Reason, 'Reason in Common Sense,') I think elected officials need to go back and read what happened in the French Revolution as I think the US may be headed for something similar.
LAAG
4th District,
City, County, State and Federal Taxpayer
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County's payday giveaway
15.5% deal extends to nonunion workers
BY TROY ANDERSON, Staff Writer
Article Launched:11/17/2006 11:51:45 PM PST
Los Angeles County's Board of Supervisors has expanded a lucrative raise and benefits deal for union workers to include thousands of additional nonunion employees, according to details released Friday.
The deal - which includes a three-year, 15.5 percent pay raise and extras such as fully funded health benefits - initially was struck last month for more than 50,000 members of the Service Employees International Union, Local 660.
It was recently expanded to include 12,000 nonunion employees - managers, executive secretaries, doctors and most of the supervisors' staffers, said Bart Diener, assistant general manager of the SEIU.
The deal is expected to cost an extra $341 million in 2007-08.
But the plan already has begun to draw sharp warnings that it exceeds salary-inflation assumptions and could swell the county's already massive pension debts.
"It seems to me that it is our hope this deal gets rejected in light of its exorbitant cost," said Jon Coupal, president of the Howard Jarvis Taxpayers Association. "How is the county planning to pay for this?
"The economy and housing market is beginning to cool down and their own advisers are suggesting this will have a negative impact ...It would seem to me to be extraordinarily irresponsible for the Board of Supervisors to approve this magnitude of pay and benefit increases."
County officials, however, defended the deal, noting that the county's budget has grown from $18 billion in 2004-05 to $20.9 billion this year, largely because of rising property tax revenues and the recent passage of a measure that prevents the state from raiding local coffers.
"We are confident the county can afford these agreements," Chief Administrative Officer David Janssen said. "We have around $300 million in a capital surplus. And property tax revenues are still going up, although we expect them to be less than they were.
"We have forecasted a modest growth in the out years of 4 (percent) to 5 percent. This year, it's been growing at 11.9 percent."
Agreement hailed
The county and the SEIU reached the tentative agreement last month, hailing it as key to helping the county retain and hire more nurses and help lift workers who now qualify for food stamps out of poverty.
Diener noted that SEIU members and nonunion workers only received 5 percent in raises in the past three years.
"In recent years, the county has experienced a growing inability to hire qualified employees in many classifications, from law enforcement to health care," Diener said. "This agreement will help the county address that problem, which will result in better services for the public."
But in a letter to the supervisors, the county's pension actuary advised that the proposed salary increases exceed the Los Angeles County Employees Retirement Association's assumptions and "will result in an increase in actuarial liability."
The warning was the first that Buck Consultants has made in the two years since a judge ordered government agencies to include a pension actuary's advice on the fiscal impact of salary and benefit increases.
Buck Consultants tempered its warning, however, noting that the salary increases given to the SEIU and other employees in the past three years somewhat offset the proposed adjustments.
"The bottom line is the actuarial salary assumptions on LACERA have been down for the last three years and just because the assumption is going to be higher for three years, that balances out," said David Sommers, spokesman for Supervisor Don Knabe.
"The CAO has told us this does not pose a great or significant risk to the county by moving forward on this and the supervisor is confident with the CAO's recommendation."
Currently, LACERA's $34 billion pension fund has an unfunded liability of $4.9 billion and is 85.8 percent funded.
Officials in cities and counties throughout California have been paying more attention to these long-term debts.
Officials now estimate that government agencies in the state need more than $300 billion to pay for pension and retiree health benefits.
In recent years, state and local officials have sweetened public-pension plans by expanding the list of bonuses that can be considered as income to determine the size of a worker's retirement check.
Currently, county employees are eligible for more than 110 pensionable bonuses.
These pension enhancements have allowed thousands of employees to retire with six-figure incomes - in many cases, that's more money than they made while working.
"It's transparent pension-spiking and it's offensive to taxpayers who don't have nearly as sweet a deal as public employees and is just another example of how this state is going into bankruptcy," Coupal said of the proposed deal.
Vote on Tuesday
The supervisors will vote Tuesday on the package, which also includes an additional 5.5 percent pay increase over two years for workers who have been at the top of their salary range for at least one year.
It also calls for 10 percent increases per year in the county's contribution to employee health and dental plans.
And in an effort to address an estimated $9.4 billion county retiree health deficit, the contract calls for a joint labor/management retiree health committee to look at ways to control costs.
Jim Adams, chief of the CAO's Employee Relations Division, said the county decided to provide fully paid health benefits because health care costs have risen so sharply in recent years.
"This hit the lower-paid employees pretty furiously," Adams said.
He said the addition of nonunion workers to the deal was simply a matter of timing and that nonunion employees typically get the same deal as the SEIU.
"What is unusual this time around is we have done it en masse," Adams said. "In the past, bargaining units kind of trickled in and this time we had a total settlement."
The plan also includes a range of new benefits including a 5.25 percent "manpower shortage range" bonus for clerks and librarians, a $1-an-hour weekend bonus and a 5.5 percent bonus for district attorney, public defender and alternate public defender employees who work in the Antelope Valley and reside more than 30 miles from the courthouses where they work.
Envious that firefighters and sheriff's employees get longevity bonuses that periodically boost employees' salaries and their pensionable incomes as they near retirement, social workers also sought longevity bonuses - which now total up to 6 percent.
And after firefighters and lifeguards recently negotiated a 3 percent "fitness for life" bonus, their nonunion management counterparts in the Fire Department and Department of Parks and Recreation clamored for the bonus, too.
"It's an effort to try to develop some healthy patterns and reward people for staying healthy and getting their checkups," Adams said. "When we settled the lifeguard contract last spring that started it, and the managers piggybacked onto that."
troy.anderson@dailynews.com
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Retiree health care may overwhelm gov'ts
By BOB PORTERFIELD, Associated Press Writer Sun Sep 24, 5:42 PM ET
SAN FRANCISCO - The bill is coming due for years of generous benefits bestowed upon the nation's public employees, and it's a stunner: hundreds of billions of dollars over the next three decades, threatening some local governments with bankruptcy and all but guaranteeing cuts in services like education and public safety.
This staggering burden is coming to light because of new accounting rules issued by the Government Accounting Standards Board. They require public agencies to disclose the future cost of health care and other benefits such as dental, vision and life insurance promised alongside traditional pensions to the nation's estimated 24.5 million active and retired state and local public employees.
Retiree health care costs have been quietly mounting for decades while public agencies have passed out generous retirement benefits during labor negotiations often in lieu of salary increases. But government negotiators rarely considered the long-term financial consequences of awarding such perks, according to Brian Whitworth, a retirement benefits specialist with JP Morgan Chase and Co.
"A surprising number of public entities didn't even make informal estimates of long-term costs prior to the new accounting rules," Whitworth said.
Many cities and state agencies already are struggling to fully fund their pension obligations, but experts say those liabilities pale in comparison to the debt accumulated for other retirement benefits.
Last month, JP Morgan released what it considers the most comprehensive preliminary estimate. It projects the present value of unfunded health care and other non-pension benefits at between $600 billion and $1.3 trillion.
By comparison, the debt rating agency Standard and Poors estimates the country's total unfunded public pension debt at around $285 billion.
"There's a good chance some government entities are going to go bankrupt," said California Assemblyman Keith Richman, a Republican from Chatsworth. "But the issue isn't just bankruptcy, it's governments dying of a thousand cuts in services. The costs of promises that have been made are going to be astronomical."
Union officials say it's not their fault municipalities put themselves in a hole by promising more than they can deliver.
"This is a monumental problem and government is going to have to deal with it," said Steve Regenstrief, head of the retirement division at the American Federation of State, County and Municipal Employees.
When the new accounting rules take effect in 2008, taxpayers will be able to see for the first time just how much they're paying to provide benefits to active and retired state and local public employees.
"When the numbers are produced, they're going to be shocking," said Ronald Snell, director of state services for the National Conference of State Legislatures. "They'll be in the hundreds of billions, and it's definitely something that policy-makers are going to have to take notice of and act upon. ... There are consequences of decisions made in the past."
The Government Accounting Standards Board is an independent nonprofit organization that establishes accounting standards for public agencies. Seeing a need to bring public sector disclosure rules in line with those of the private sector, the board unveiled the rules change in 2004 and gave governments several years to implement them.
The new rules don't require governments to come up with the money right away, just to disclose the present value of these future costs and estimate how much more money is needed to pay for them. To prepare for these disclosures, public officials across the country already are beginning to calculate how much they might owe.
So far, California, New York, and Maryland appear to have the biggest burdens, but that could change when estimates begin trickling in from Florida, Texas, Illinois and Pennsylvania. Of the country's 10 most populous states, none has completed a formal estimate of their liabilities, but those that have completed preliminary assessments are reporting astounding numbers.
_The California Legislative Analyst's Office estimates $40 billion to $70 billion in retiree health care and related liabilities for the state. With cities and counties included, JP Morgan pegs California's debt at $70 billion to $200 billion. The state controller is just now beginning a detailed study.
_New York's preliminary analysis puts state liabilities between $47 billion and $54 billion. In a recent budget report, the state acknowledged "these costs are substantial and would significantly reduce or even potentially eliminate" New York's current $49.1 billion in positive net assets.
_Maryland has initially estimated its liability at $20 billion.
_Other states also have reported significant amounts: Alabama estimates $19.8 billion, Massachusetts $13.2 billion, Alaska at least $7.9 billion, and Nevada between $1.62 billion and $4.1 billion.
Many local governments also are beginning to acknowledge huge liabilities. The City of San Francisco reported its burden at $4.9 billion, and the Los Angeles Unified School District said its liability is $10 billion. New York City has yet to complete its analysis, but is expecting a large shortfall and already has set aside $2 billion to help cover it.
How this will impact citizens depends upon the size of their government's obligation and how it's handled.
At the least, experts say, the public can expect increased taxes and fees or reduced public safety and public works services as governments adjust their budgets to amortize the debt.
They probably can't expect much in the way of concessions from public employee unions, said Suzi Rader, director of district and financial services for the California School Boards Association. Any attempt to limit benefits already granted in future negotiations will be a contentious issue, she said, so employers must instead hold the line on granting additional perks to future retirees.
John Abraham of the American Federation of Teachers said union negotiators have long been aware that future retirement benefits must be paid from shrinking resources.
"If they haven't been looking at the numbers, shame on them," he said. "Do we recognize there is a cost problem? Absolutely. As costs have gone up we've made accommodations."
Lori Moore, spokeswoman for the International Association of Fire Fighters, said nothing is really changing except the need for cities to reveal how much they'll owe in non-pension retirement benefits.
"The liability has always been there," she said. "They had to know in the back of their minds that it was there."
Most governments now fund retiree health care on a pay-as-you-go basis, with annual appropriations from their general funds, focusing most of their attention on current expenses.
Under the new accounting rules, the liability can be paid over 30 years, just like a home mortgage, but it forces public officials to recognize the debt and calculate an annual payment.
If officials choose not to set aside additional money each year to cover the payment, it counts against net assets, potentially putting a city or agency deeper into the red. Because assets are a critical component in the credit ratings that allow governments to borrow money at lower interest rates, governments that don't handle their liability properly could end up insolvent.
Parry Young, director of public finance at Standard and Poors, said few governments are prepared for the annual contributions they'll be expected to make.
"It's been a growing liability that wasn't being addressed. But now the chickens are coming to roost," he said. "For some it's going to be a big credit issue depending upon what resources they have."
Young says one way governments can get a jump on their liabilities is by putting more money into retiree health care plans, something "easier said that done."
Public officials "might also choose to issue bonds, or review benefit costs and maybe make changes in the benefits themselves," he said.
Some states have taken a proactive stance. Ohio sought to address its future liabilities by establishing a Post Employment Health Care Fund containing more than $12 billion, an amount the fund's trustees say will not be enough. In order to cut health care costs, the state has reduced the amount it will pay for employees who retire with less than 30 years of service.
Utah, with a relatively small liability estimated at between $536 and $828 million, has taken a unique approach, earmarking unused sick leave for retiree health care expenses. Under a law passed last year and upheld by the Utah Supreme Court, retirees can no longer cash out unused sick leave earned after January 2006. Instead, 25 percent must be placed in an employee's 401K and the remainder in a Health Reimbursement Account.
"The law really stopped the out-of-control-escalation of health care costs," said John C. Reidhead, director of Utah's Division of Finance. "From a financial perspective it's a good deal. From the employee perspective, maybe not."
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Private-Sector Anger Builds as Public Pension Costs Rise
Lawmakers feel the heat from taxpayers who see their own benefits wither, and traditional payouts give way to 401(k)-style plans.
By Molly Hennessy-Fiske
Times Staff Writer
October 2, 2006
HADDONFIELD, N.J.For insurance agent Steve Adams, 51, the resentment began two years ago.
As he worried whether his stagnant 401(k) account would be adequate for retirement, his wife's employer ended her pension plan, forcing her to rely on a 401(k) as well. Then New Jersey lawmakers raised his property taxes to maintain state workers' pensions.
Last spring Adams joined a taxpayer group called Americans for Prosperity that is seeking limits on government employee pensions.
In June he attended a rally in Seaside Heights, N.J., where about 200 people urged state legislators to make cuts in such things as pensions rather than raise taxes again this time, a proposal to raise the state sales tax.
"We don't get anything nearly as generous in the private sector" as public pensions, Adams said.
Public employee pensions, one of the last bastions of guaranteed retirement plans in America, are under assault as cash-strapped state and local governments struggle to cover rising costs and as resentful taxpayers refuse to pay more to cover them.
The development has led to "pension envy" among people like Adams, as baby boomers struggling to make it to retirement see state workers retire early to reap rewards they may never enjoy. The tension has crept into relationships between friends, neighbors, parents and teachers.
The struggle to fund public employee pension plans is a familiar topic in California, where last year Gov. Arnold Schwarzenegger unsuccessfully sought to replace state workers' pensions with 401(k)s.
The California Public Employee Retirement System and California State Teachers Retirement System cover more than 2 million workers. CalPERS is 88% funded and CalSTRS 82% funded, according to their financial records levels that researchers at the conservative Pacific Research Institute say are high compared with states such as Illinois and New Jersey.
Alaska and Colorado have made changes to state pensions, and Illinois, Oklahoma, Montana, New Jersey, Pennsylvania and Providence, R.I., are contemplating similar steps.
About 90% of state and local workers in the U.S. have pensions, compared with about 20% of private-sector workers, said Keith Brainard, research director at the National Assn. of State Retirement Administrators.
Instead of company-paid pensions with guaranteed payments, most private-sector workers now are offered 401(k) plans, investment accounts that employees pay into and manage while they're working, then tap when they retire. Some employers contribute to 401(k) plans.
With state pensions, investment management is up to the state, but taxpayers are often called on to cover costs. As of last year, 84% of state pension plans were underfunded, meaning their assets don't cover projected payments, according to Santa Monica-based Wilshire Associates. Some lawmakers plan to make up the difference by raising taxes.
The tension between public employees and taxpayers is playing out across the country, but nowhere more sharply than in New Jersey.
Several of New Jersey's major private employers recently eliminated pensions. Telecom giants Sprint Nextel Corp. and Verizon Communications partially froze pensions last year, affecting some 18,000 workers in New Jersey. DuPont Co., which employs about 1,300 in New Jersey, announced plans this summer to freeze pensions, meaning the company intends to drastically reduce its pension fund for current employees and deny any coverage to new hires.
"More and more New Jerseyans find themselves without pensions and become resentful of the double whammy that they face: fewer benefits for themselves and higher taxes so that the public-sector workers can receive generous benefits," said David Rebovich, managing director of the Institute for New Jersey Politics at Rider University in Lawrenceville.
Nancy Burwell, 52, of Morristown, N.J., is one of them. She's been attending and organizing meetings of Americans for Prosperity seven were scheduled in September across the state, seven this month where organizers explain the public pension system and how it contributes to local tax increases.
Burwell, who works in sales, said she and her husband, a computer programmer, were saving for retirement without a pension or 401(k) because their jobs didn't offer them.
"We don't expect anybody else to help us out; we take care of it ourselves," Burwell said. "I really resent these public workers. Why should I pay for their retirement?"
State Assemblyman Paul D. Moriarty is pushing pension changes. "In New Jersey, life is still about keeping up with Mr. and Mrs. Jones. And the Joneses have state pensions and health care coverage," the Democrat said.
Retired construction contractor Charles Reveliotty, 67, of Cherry Hill, N.J., complains about public pensions but doesn't talk about them with his neighbor, a town engineer.
"It's a little bit like talking to somebody about religion," Reveliotty said. "If you say to somebody, 'You have to give back half your pension,' you can imagine what the results are going to be."
Public employees say resentful taxpayers should instead defend private-sector benefits, which continue to erode.
"Private-sector workers, who should be angry as hell at their employers for walking away from pensions, are angry at public employees," said Jon Shure, president of New Jersey Policy Perspective, a nonpartisan Trenton think tank.
He said eliminating state pensions would feed further cuts in the private sector, leaving all workers with less for retirement. "If the people who are fomenting this have their way, public benefits will stink too and we'll have dumbed it down to the way it is in the private sector," Shure said. "If anything, the public sector should set an example for how benefits should be."
If anyone in New Jersey would be expected to defend workers' pension benefits, it would be state Sen. Stephen M. Sweeney. A Democrat, longtime ironworker and union official from a blue-collar South Jersey family, Sweeney heads the state Senate's labor committee. But Sweeney has become an unexpected ally of the anti-pension crowd.
When Gov. Jon Corzine proposed raising the sales tax to fund state pensions this summer, Sweeney and two other lawmakers proposed cutting state retirement plans instead.
Their announcement split the state AFL-CIO, which includes both public- and private-sector unions. Public workers' unions dogged Sweeney, shouting him down at Trenton meetings, mailing him a pink slip, and showing up at his events with an inflatable rat usually reserved for union-busters.
Some in the AFL-CIO say pension changes are driven less by pension envy than by conservative groups such as Americans for Prosperity, Americans for Tax Reform and the Heritage Foundation. Union officials say Wall Street money managers are also pushing the changes so they can earn a windfall of fees once public pension plans are converted to 401(k)s.
But Sweeney says he received praise from private-sector union workers refinery shop stewards, pipe fitters and ironworkers thanked him on the streets. "The private side is looking at the public side and realizing pensions are luxuries they cannot afford," Sweeney said.
In a recent interview at the Ironworkers Union Local 399 in Westville, N.J., where he still serves as business representative, Sweeney noted that ironworkers contribute 14% of their pay to their pensions, and members of Local 399 went without a raise this year to cover rising pension costs, paying 3% more into the fund.
State workers, by contrast, received a 4.65% raise, even as their pension costs rose. State workers in New Jersey receive an average pension of $24,317 annually, compared with the national average of $19,856, according to the American Federation of State, County and Municipal Employees.
State workers have long defended their pension benefits as compensation for lower pay, but New Jersey state workers earn an average $54,742, compared with $43,970 in the private sector, according to the New Jersey labor department.
A New Jersey legislative committee now is considering state pension changes including a pension freeze, increasing public workers' contributions and raising the minimum retirement age.
Beyond New Jersey, the debate over public pensions has become an election issue.
In Massachusetts, Illinois, New York and Oregon, Republican candidates for governor proposed new 401(k)-style plans for state workers, as did Republican candidates for comptroller in Maryland and New York.
In April, Colorado began offering state workers a defined contribution plan such as 401(k)s. The mayor of Providence, R.I. plans to switch all new hires from pensions to 401(k)s in July. In Alaska, legislators voted last year to close the public pension system to new employees in an effort to stem a $6.9-billion deficit in the retirement fund.
Alaska state Sen. Bert Stedman, a Republican, warns that if states like California and New Jersey don't change public retirement benefits, they may soon face angry taxpayers.
"When the private sector has to pay for the public-sector benefit packages they can't get themselves, you're going to have a lot of political and social unrest," Stedman said. "The average homeowner, when he gets his property tax jacked up to pay his neighbor's benefit package, he's going to get upset about it. And that's what we don't want to happen in Alaska."
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San Diego Isn't the Only City With Pension Troubles: Joe Mysak
By Joe Mysak
Nov. 17 (Bloomberg) -- What other municipalities are committing fraud when they sell bonds, by not coming clean about the size of their pension shortfall?
How many are committing that kind of fraud?
These are the questions investors have to pose after the city of San Diego settled fraud charges with the Securities and Exchange Commission this week.
The city sold five bond issues totaling $260 million in 2002 and 2003. ``At the time of these offerings, City officials knew that the City faced severe difficulty funding its future pension and health-care obligations unless new revenues were obtained, pension and health-care benefits were reduced, or City services were cut,'' the SEC said in the settlement with the city.
San Diego provided some disclosure of the city's pension and health-care obligations. ``It did not reveal the gravity of the City's financial problems,'' the SEC said.
That's fraud.
``The City, through its officials, acted with scienter,'' the SEC said. That is, the city officials knew they weren't providing the whole story in their bond-offering documents, and went ahead with the sale anyway.
What Happened
You know there are more out there. States and municipalities are looking at a gap that has been estimated at something like $2 trillion, with pension shortfalls of $700 billion and health-care costs -- also known as ``other post-employment benefits,'' or OPEB, as the analysts so felicitously put it -- of $1.4 trillion.
It's hard to believe that the San Diego story only really dates -- at least if you're not a resident of San Diego -- from January 2004. That's when the city admitted it had major concerns with its pension system, and the rating companies lowered and then suspended their gradings on San Diego debt.
Maybe the reason it feels like this story has been dragging on for so long is because it has been featured in two big studies, one by a law firm, and the other by an audit committee. Now, finally, the SEC weighs in.
What happened in San Diego? In the simplest terms, city officials were obsessed with the City Employees' Retirement System, or CERS. They spent decades figuring out how to increase pension checks and health benefits without making adequate contributions to the pension fund.
`Surplus Earnings'
That's basically what it comes down to, and yes, they were at it for decades.
``In fiscal year 1980, the City began instructing CERS to use `surplus earnings' -- i.e., earnings above the actuarially projected 8 percent return rate -- to fund an ever-increasing amount of additional benefits for CERS members,'' the SEC said.
How it's supposed to work in the real world, or at least in the old days when you still provided employees with pensions, is that you put money away every year into a big pot and invested it in bonds, stocks or something else. Your actuaries came up with a number and you said, ``OK, if we keep putting aside X amount of cash a year, and make X amount on that money, then we'll have enough to pay everyone's pension.''
How it's also supposed to work is that there is no such thing as ``surplus earnings.'' In some years, you make 15 percent, in others 2 percent, or sometimes you actually lose money. Yet it should all average out to 8 percent a year, or whatever number the actuary tells you.
And Who Else?
Try telling that to San Diego -- and who else? States and municipalities found themselves holding these enormous hoards of cash that were spinning off some very nice investment returns, and some of them thought, ``Hey, wait a minute, look how much the pension fund is earning! Let's cut down on the contribution to the fund -- it clearly doesn't need it -- and spend that money elsewhere.''
This is exactly the wrong thing to do if you are trying to manage a liability that is long term. In fact, the retirement ``liability'' doesn't really have an end in sight. It's like railroad tracks. It looks like it meets somewhere out on the horizon, but it doesn't.
San Diego -- and who else? -- kept playing games for years. It is bad enough that they were stinting on steady city contributions; they were also increasing retirement benefits.
The end came only when the stock market swooned. This is why so many states and localities have run up $700 billion in unfunded pension liabilities.
As for the health-care benefits, that OPEB business, well, they never put aside money in a fund to pay for those, like they do for pensions. Those costs were going to be paid out as they were incurred -- pay as you go. Except now everyone is being asked to calculate that figure, too, and disclose it in their bond documents.
The SEC settlement with San Diego makes for exasperating reading. Surely other municipalities haven't carried on this way. Or have they?
(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: Joe Mysak in New York at jmysakjr@bloomberg.net
Last Updated: November 17, 2006 00:05 EST
