— San Diego's massive pension deficit and retiree health-care liabilities have created two warring political camps: the roses and the garlics, or stinking roses. In coming months, it should be clear that the garlics have the grasp on reality. The city's pension situation smells, and not like a rose, despite everything you hear from Mayor Dick Murphy and assorted "Pecksniffers."

According to documents put out by two Wall Street firms, the city will try once again to sell half a billion dollars in sewer bonds this spring. The offering was cancelled in September after Diann Shipione, the whistle-blower who has brought the pension issue to the fore, challenged the veracity of the bond prospectus on pension and healthcare issues, according to city government sources.

The prospectus was withdrawn and the offering delayed. The city is reported to have hired a law firm to help it pen the new document. Although San Diegans will have to cut through craftily created obfuscation -- that's what lawyers are for -- the prospectus should reveal more details on the pension odor.

If the city is honest about the deficits, Wall Street may well cock an eyebrow at San Diego's credit. If, on the other hand, the prospectus gets too cute with legal gobbledygook, Wall Street might also look askance. After all, San Diego became a laughingstock of the bond market when it agreed to pay junk-bond yields on insured ballpark bonds two years ago. There still has been no plausible explanation for the astonishingly high yields.

And little but sweet talk is coming out of city hall on the pension mess. In his state of the city speech, Murphy soft-pedaled the issue and said he was committed to putting the pension system on a firm foundation. For this column, deputy city manager Pat Frazier did not respond to faxed questions about the pension woes.

Next month, a civil lawsuit charging the city with deliberately underfunding the pension system goes to court. It also charges that an overwhelming majority of the 13 members of the San Diego City Employees' Retirement Fund are voting on matters that line their own pockets -- an obvious conflict of interest. That suit represents "the last best hope to avoid city meltdown," says Michael Conger, attorney for the plaintiffs.

But such critics exaggerate the seriousness of the issue, insists April Boling, who is chairman of Murphy's pension-reform commission. "I think there is a lot of unfounded hysteria," says Boling. "We can have a problem without getting hysterical about it. I'm not willing to say the city is going bankrupt."

Conger, in turn, points out that Boling was Murphy's campaign treasurer, as well as a key member of the blue-ribbon committee that he set up to study city finances. That blue-ribbon group also recommended that the city fully fund its pension obligations. "The pension-reform commission is the broom to Dick Murphy's attempt to sweep this under the rug," says Conger.

Boling's critics don't question her competence but wonder whether she and other members of the commission will, for political reasons, try to spray perfume on the stench. The city's pension fund is $1.15 billion in the hole, and the retiree health-care deficit is $1 billion. Both sums are growing rapidly. While the three-year bear market in stocks is part of the pension-deficit problem, the major cause is underfunding. The city council since 1996 has intentionally refused to put the city's share into the fund. In return, the labor unions representing city workers have been granted large benefit hikes. It's a double whammy, and city officials, who stand to profit from the huge benefit hikes, didn't blow the whistle on the billowing deficit.

Last week, city auditor Ed Ryan elected to retire in February. His office audits the pension system's financial statements. Ryan has a representative on the pension board and is, of course, a recipient of the generous benefit increases. "Why didn't the auditor raise penalty flags?" asks Shipione. "Where was the auditor when information was being vetted?" According to city hall sources, Shipione, a member of the pension board, pointed out that the prospectus for the sewer bonds used outdated and incorrect actuarial information on the pension deficit and essentially ducked the billion-dollar health-care deficit.

Officially, the pension system is 67 percent underfunded. But Conger says the city has fudged the accounting to get the figure up to 67. He has been negotiating with the city. "The city said to us that if the pension fund is below 70 percent fully funded, it concerns bond issuers [underwriters]. But they [city officials] are doing several things to cook the books. They use a little-used funding method that understates the debt. They are not counting all their liabilities. They are understating the expected age at which people start paying into the retirement system." Some of these tricks are called "actuarial gaming." Without all this "ledger-demain," the system is actually below 60 percent funded, says Conger.

That's scary. And, unfortunately, it's very believable. But Conger feels his negotiations with the city and the pension fund are progressing well. "The pension fund is realizing how dire the circumstances are," says Conger. "They want the city to do more." Conger's goal: "We want no more IOUs." The city must agree to fund the system now.

On January 6, Frazier made a presentation to the pension-reform commission about pension-obligation bonds, or the possibility of plugging the deficit by floating a bond issue, resembling Governor Schwarzenegger's proposed deficit bonds. The counties of San Diego, Mendocino, and Contra Costa have all issued pension-obligation bonds in the past two years. The bonds would be taxable, and the interest rate would likely be a bit above 6 percent, Frazier told the commission. After fees and the like, the actual interest rate would be 6.3 to 6.4 percent, says Boling.

From an actuarial perspective, the city's pension fund is set up to survive on an 8 percent annual return, explained Frazier. The pension board says that the city made 7.95 percent a year on its portfolio in the past five years. That portfolio is about 53 percent stocks, and stocks were in one of U.S. history's worst bear markets in three of the past five years. Shipione, for one, wonders if that 7.95 percent return is accurate and whether the 8 percent actuarial assumption is realistic, particularly since Berkshire Hathaway, headed by the legendary investor Warren Buffett, lowered its expected annual return to 6.5 percent.

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