San Diego Reader

A week ago Saturday, as President George W. Bush and other federal officials hastened to bail out the U.S. economy, Democratic San Diego city attorney Mike Aguirre, facing his own uphill battle against his better-financed GOP opponent Jan Goldsmith, sat down to lend perspective to the sell-off on Wall Street and to how it might affect traditionally Republican San Diego. He also reflected on some radical moves — including putting the City’s pension fund into bankruptcy — that he insists the City will eventually have to make in the face of the predicted long-term financial squeeze besetting the world.

In terms of the global financial meltdown, what do you think about the future of property and sales taxes here? Is that going to be a problem?

Well, I think it’s a problem because we’ve allowed the [city] pension [fund] — the present value of future benefits of the pension — to be in excess of $7 billion. The assets are now somewhere below $4 billion, so the deficit has got to be somewhere in the neighborhood of $2 billion to $2.5 billion, maybe as high as $3 billion. With the shrinking property taxes and the shrinking sales taxes and the shrinking hotel taxes and the increasing liabilities of the pension plan and the backlog of infrastructure, we have a combination of the worst factors, which, you know, many people have been concerned about, been warning about — such as myself and Diann Shipione and Pat Shea. And now the City finds itself in that situation, and they’ve stuck their head in the sand. No one wants to get the information out. Even people that are with Fannie Mae and Freddie Mac and Lehman Brothers and Bear Stearns, they recognized the crisis that they were in — because they’d gone long on debt — and they took action.

Here in San Diego, we’re doing nothing. We’re just letting the situation get further and further out of hand. That’s one of the reasons that I’ve asked that a full accounting be made, right now, of exactly where we are with the pension deficits and then the plan be adopted to reduce the distributions to levels that are proportional to the ratio of assets to liabilities now. ’Cause what’s happening, as with all Ponzi schemes — and there’s no question the pension plan is a Ponzi scheme, because of the 50,000 years of credit that were created with no funding — you’re moving new money in to pay for the old liabilities, and pushing off the amortization into future years, and then reamortizing every year the losses.

We need to really look at whether we have to put the pension plan into reorganization. That needs to be done now, while there’s still good assets there. The pension is paying out about $400 million a year now. And that is a cash drain that has been paid for with money that should have gone to streets and roads and bridges and securing water supplies, having to be able to put out fires, and things of that sort. All the things that the government does to empower people have been curtailed, all the things the government does to protect people have been curtailed, except when it comes to the pension plan. And there we’ve built a Taj Mahal of pension benefits.

Since the market meltdown, does anybody have an idea what the pension fund is worth now?

Well, we know that supposedly as of September 30, it was $4.3 billion, which would be about a $700 million loss from the year before, if not more. And now, you know, since there’s been such a substantial drop since September the 30th, it’s probably under $4 billion. The liabilities are more than $7 billion. They were $7 billion last year, and the liabilities have been increasing every single year. That’s called the present value of future benefits. We know there’s a substantial gap, ’cause it started off as a $1.2 billion deficit.

The thing that I asked the mayor to do and Jay Goldstone to do last week, which they’re resisting doing, is to actually report where we are as of today. And then to make reasonable forecasts of where we’re going to be next year. And then, you know, it’s clear that our annual required contribution is going to have to be closer to $300 million, and if that’s the case — this year it was $160 million — there’s literally no fiscal way to keep the City moving forward with essential services. So that means that we’re going to have to get the debt down. And that makes it even more important to get rid of the billion-dollar illegal pension benefits, the 50,000 years we’re giving away.

But beyond that, it may very well mean that the pension plan has to go to reorganization. It’s a trust, and it may have to go into reorganization. There may be a requirement that only so many cents on the dollar actually will be paid out. Because what you don’t want is, you don’t want hundreds of millions of dollars being drained from the pension, assuming there’s 100 cents on the dollar. And so you’re draining out the assets on one hand, and then on the other end, the assets that you have in the stock market are plummeting, and that puts us in a situation where the pension plan could be broke.

What normally is done under those circumstances, and what was done with all the various reorganizations with Freddie Mac and the rest of it, is that there’s some kind of percentage reduction. With the reworking of the loans with IndyMac that FDIC has done, and with the other subprime loans with Countrywide, what they’ve announced is that they’re going to rework the loans at lower levels, lower values more commensurate with what actually is affordable. That principle is what keeps — and will keep — vast numbers of the loans viable. Same is true with the pension plan. There has to be a reworking of the liabilities. You simply cannot keep paying out $10,000 and $15,000 a month to people assuming that you have 100 cents on the dollar when you know there simply isn’t the cash flow over the time horizon that would be needed to sustain that.

What people need to understand is the management of the pension plan has not changed. The pension power brokers are still very much in control of the city council and of the mayor’s office. There has been no reform. So what we have is a more sophisticated way of hiding the losses. So now you have a high-risk investment policy that has produced massive losses, and you had the creation of 50,000 years of pension benefits with no funding. Those two things come together and create a massive, oppressive debt that the City has been trying to pay by shortchanging all of the essential services. That whole ability now has been swamped.

Let’s put it this way, if San Diego was Enron or Bear Stearns or Wachovia or Washington Mutual or Countrywide, they would have still tried to keep the businesses going and continued to hide the losses and the financial imbalances. And that’s what we’re doing. And beyond that, again, as I said, we’re putting our head in the sand. That’s why I’ve been trying to get the mayor and the council to focus on this problem, which, I think there’s a lot of reluctance because it’s a lot of unpleasant news and it’s going to upset the municipal unions because it’s going to show that they were completely and totally wrong. And now it’s a catastrophic situation that they’re not prepared to deal with.

Is there any way at all for the public to find out what the current status of the fund is?

The only way to do that is if we can get the mayor’s office to disclose that information. Right now the response from Jay Goldstone is that I’m being an alarmist. He’s not interested in getting the information out on a current basis. He did provide me the information as of September 30. That information is that it’s $4.3 billion. That is extremely serious and very telling.

Is there any suggestion that the funds themselves have been mismanaged in some way?

Well, the funds have been mismanaged in the sense that there has been the creation of 50,000 years of pension credits with no funding. And then there has been the adoption of the very high risk investment policy that was more like a high-risk mutual fund than it was a conservative pension plan. Where we are now is that they basically rolled the dice with the pension assets on the stock market and the bond markets and that it’s all blown up, as many people were saying.

Ideally speaking, what you want in a pension plan is to be in as risk-neutral, risk-averse a position as you possibly can. And then if you go out with some limited percentages of your pension plan and move it into the stock market, you know, that’s rational and reasonable. But what they were doing is they were all in. They were touting the fact that they were getting 16 percent, 20 percent returns. The problem with that is, to get those kinds of high returns, you have to be high risk, and if the market goes the other way, you know, you have the opposite effect, and that’s what happened here. There’s been a substantial hit, and it’s been hidden!

< PREVIOUS | NEXT >