Two elephants entered a special meeting of the City’s Budget and Finance Committee on Wednesday, November 12, and councilmembers donned their blinders to be certain not to see them. The two elephants were very inconvenient truths appearing as a result of studies by Joe Esuchanko, a consulting actuary for the City of San Diego.

The first was a bombshell: Esuchanko, discussing the sad status of the San Diego City Employees’ Retirement System, displayed a chart showing that the system’s unfunded liability was $2.2 billion on June 30, up almost a billion dollars from mid-2007. On October 31, that number had grown to $2.8 billion. That meant that the pension system was only 58 percent funded on October 31. Repeat: 58 percent funded. Actually, that percentage was almost certainly worse on the day of the meeting because stocks had continued plummeting from October 31 through November 12.

For the fiscal year that began this summer, the City will have to plunk $245 million into the pension fund, according to Esuchanko. The City would like to put in $160 million. “There is a relatively stable workforce, but benefits are accelerating at a rate much faster than the creation of assets,” said City Attorney Mike Aguirre, who had presented Esuchanko’s figures to the council on the previous Monday, then invited Esuchanko to give the awful news in person two days later. Most councilmembers, who were looking into the City’s fiscal fix out to 2014, were clearly upset by the intrusion. They were busy looking for nickels and dimes, not billions — or fleas, not elephants.

Then there was the second Esuchanko elephant. Toward the end of the all-day session, Councilmember Donna Frye prodded chief operating officer Jay Goldstone on the subject of the Deferred Retirement Option Plan, called DROP, in which employees declare at the average age of 55 that they will retire in five years and then continue to draw their salaries in one pot while piling up 90 percent of that salary at 8 percent annual interest in another pot. This classic double-dipping scheme was adopted by the council on a trial basis in 1997, made permanent in 2000, and later killed for new hires. Frye reminded Goldstone that the municipal code requires that DROP be revenue-neutral. She asked him if any actuary had done a study recently.

Goldstone allowed that Esuchanko had done one about a year ago. Result: DROP was not revenue-neutral. (Much earlier, another actuary had found the same thing.) Frye said that if the program by law should be revenue-neutral, and it is not, “We should do something about it.” Goldstone was noncommittal.

There was other friction early in the day, right after Esuchanko gave his presentation on the pension gap. Frye inquired why David Wescoe, chief executive officer of the pension system, was not there. Asked Frye, “Do we have the ability to issue him a summons, as we do with others?” Aguirre wondered if the council could freeze the system’s administrative budget.

It turned out that Wescoe had talked with Goldstone a few days earlier. Frye is often suspicious when a bureaucrat talks with another bureaucrat on some topic but doesn’t show up and speak publicly before the council. “For them [pension officials] to not come over to see us is outrageous,” Frye told me at the noon recess.

I contacted pension system offices. Wescoe called me. He said that the Esuchanko numbers would have no impact on the 2009 budget (the current one). “I would want to see [Esuchanko’s estimates] in writing and go over them” with the pension system’s actuary, said Wescoe. “I did not know Esuchanko was coming. Nobody called me.” I told him that Aguirre had recited the figures at a council meeting on Monday, and while mainstream media had ignored them, they had been on my Reader blog on Tuesday. “I don’t read your blog. I don’t read any blogs,” quoth he. He refused to comment on the 58 percent funded figure. He said he would be willing to meet with the council, and he affirmed that in a hand-delivered letter to the council later in the day. But on Friday, just to be certain, Frye sent him a summons to attend the November 19 meeting.

Councilmember Jim Madaffer put a happy face on Esuchanko’s grim numbers. Pension performance is cyclical, he said. “There will be peaks and valleys,” and today we are in a very deep valley, he conceded. The world’s financial system is “managing” the crisis, Madaffer claimed. Other cities and states are also experiencing low funding levels now, he said, without being specific. This has been the oft-recited line of Councilmember Scott Peters and others who have refused to recognize that the pension system is in trouble as global stock markets crater.

Obviously, Madaffer was unaware of a growing consensus among economists that 2008 is a watershed year, marked by a collapse of both Wall Street and Main Street. This is why Barack Obama kept saying that this is the greatest economic crisis since the 1930s. In fact, a day before Wednesday’s council-committee session, none other than John Thain, chief executive of Wall Street’s Merrill Lynch (soon to be part of Bank of America), said that the global economy is seriously stalled and won’t bounce back quickly. Thain said we have to look back to 1929 “to see the kind of slowdown we are experiencing now.” The day after the budget session, President Bush said, “We are faced with the prospect of a global meltdown” and it “won’t be solved quickly.”

Aguirre took up the Obama/Bush/Thain deep-crisis theme. This is not merely a cyclical experience, greatly because of the subprime mortgage crisis and the derivatives to which they are tied, said the city attorney. More than half of the pension system’s portfolio is in domestic and foreign stocks, and that’s too high, he said — a point he has been making for some time. Aguirre said he has been working with pensions for 30 years, and when systems go sour, the victims immediately go into denial. He said the City should consider going into Chapter 9 reorganization. It should hire expert consultants that could give advice on the matter — specifically, the firm that counseled Vallejo to go into bankruptcy.

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Comments

JohnnyVegas Nov. 19, 2008 @ 12:17 p.m.

Councilmember Jim Madaffer put a happy face on Esuchanko’s grim numbers. Pension performance is cyclical, he said. “There will be peaks and valleys,” and today we are in a very deep valley, he conceded.

"Valley"..........LOL...what a friggen moron.

Almost as stupid as Scott "We're Not Broke" Peters writing the Wall Street Journal and claiming the San Diego pension fund is fine.

There is a BIG difference between a "valley" and bankruptcy. Our pension fund is technically bankrupt on a cash flow basis.

Someone find Madaffer and tattoo that fact on his forehead-so everytime he looks in the mirror he is reminded of what a chump he is.

There is absolutely NO WAY San Diego will not file BK. BK is coming, there is no way around it. Just a matter of time.

The notion that a City of 1.3 million people can fund a deficit of $4-5 billion (and counting) which is growing at an exponential rate is absurd.

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JohnnyVegas Nov. 19, 2008 @ 2:50 p.m.

Dow = 7997.28 Off -427.47 Points
Off -5.07%

Don, I have a question, if the pension fund was only 58% funded on November 12, 2008, what % do you think it is at today (November 19, 2008)??????????

If it drops below 50% funding what does Don Bauder think we should do??????

(I say file BK ASAP).

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Don Bauder Nov. 23, 2008 @ 10 a.m.

Response to post #1: There is only one councilmember who has the intelligence to analyze the situation and the courage to raise the pertinent points: Donna Frye. Best, Don Bauder

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Don Bauder Nov. 23, 2008 @ 10:02 a.m.

Response to post #2: Yes, following Friday's close, that number should be much lower -- maybe 55 percent or so. Best, Don Bauder

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jv333 Nov. 26, 2008 @ 6:10 p.m.

How about the Council slash the salaries of all city employees earning over $120,000 by 10% for 2-3 years to help make up the short-fall?

How about pursuing a suit against Sempra if there was liability for any of those brush fires?

If any pensions were increased illegally, those should also be rolled back per Aguirre's findings.

Without going to the extreme of raising sales tax, these might be good places to look for savings/revenue for the city, for starters.

Maybe look into some sweet-heart land deals involving the city to see if any revenue can be recovered there.

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Don Bauder Nov. 26, 2008 @ 11:11 p.m.

Response to post #5: We'll have some more suggestions in later columns. I doubt Goldsmith, who is in the establishment's pocket, would go through with suits against Sempra and the pending suit against benefits granted illegally. Yes, San Diego should chase sweetheart land deals. But with Aguirre gone, no one would pursue such cases. Best, Don Bauder

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