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It turns out that bankrupt Detroit practiced the same pension tomfoolery as San Diego, as noted in a New York Times article yesterday (Oct. 23).

Detroit gave extra payments to retirees when the return on the pension fund exceeded 7.9%. In San Diego this was known as "the 13th check," but in cities such as New York, Phoenix, San Jose, and Tampa, it has names such as "the skim fund," "the bump up," and "the waterfall" (an appellation also used in San Diego.)

Times writer Mary Williams Walsh, who covered San Diego's scandal, writes, "San Diego ran into a quagmire in the early 2000s after years of removing 'excess earnings' from its pension fund to sweeten benefits." A consultant found the practice "not mere negligence, but deliberate disregard for the law."

Walsh reports that "San Diego's retirees still receive their extra checks — about $4.7 million last year." Walsh quotes Rick Roeder, the actuary who tangled with San Diego, saying, "There is no actuarial justification for 13th checks. A 7-year-old child could understand this. It's laughable that this could happen, but it did."

Roeder and his firm were sued by San Diego but he was dropped from the suit. His firm settled for an undisclosed amount.

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eastlaker Oct. 24, 2013 @ 10:47 a.m.

Wow. Interesting that this is still going on. I feel sure I have read several articles on how the pensions were much more under control...

My question is, how many individuals are getting these 13th paychecks? And is there a way to find out the range of amounts? And is there a way to make this end?

Thanks for the report!

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Don Bauder Oct. 24, 2013 @ 2:34 p.m.

eastlaker: I don't know how many are getting the 13th check, but I do know this: the City of San Diego is spending more for pensions for 17,000 people than it is spending for fire protection to benefit the entire population. In fact, as the post above above this one shows graphically, pension spending almost tops spending for fire protection and roads COMBINED. Best, Don Bauder

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aardvark Oct. 24, 2013 @ 9:24 p.m.

Don: I believe my mother (wife of a former city employee) got one last year. Also, usually when she got a 13th check, the amount was higher (sometimes much higher) than the regular monthly check.

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Don Bauder Oct. 25, 2013 @ 9:26 a.m.

aardvark: That is not surprising. The City has been told -- sternly -- time and again that it must get rid of the 13th check, or waterfall. But it hasn't. Best, Don Bauder

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JustWondering Oct. 26, 2013 @ 8:26 a.m.

Profits about the assumed rate of return, which was historically 8%, was referred to as the "waterfall". One of Jack McGrory tricks for balancing the city's budget during his tenure as city manager was too take those "excess profits" and pay for the Wilson / Blair health care promise to retiree. But low and behold the IRS says that's a no-no. Taking investment gains out of one retirement pension system to pay an OPEB is illegal. There were many years the city raided the fund's "profits" to pay for things it did not want to tell the taxpayers about.

Once caught with its hand in the retirement cookie jar, the city went to a pay-as-you-go method of funding the health care promise rather than going to a prefund method. Then, healthcare costs exploded as it did for all of us and costs were out-of-control.

Nowadays the city finally saw the light and negotiated with its employee groups creating a plan which has reduced future healthcare obligations for BOTH current and future employees.

Is there still a deficit of unfunded healthcare costs... Yes. All due to promises made by Mayor Wilson and Manager Ray Blair more than 30 years ago and carried on by their successors. (Where were the media watch dogs back then?) Promises made, facts conveniently omitted from audits ( gov't accounting rules are a farce...even today, while improved rules have tightened things up, if use some of them you'd go to jail if you worked in the private sector). So healthcare costs never funded, let alone pre-funded it will take years to make up those payments in arrears.

Like it or not, and most don't, we as taxpayers have a moral obligation to fulfill promises made by our elected leaders to our elderly retirees who fulfilled their end of the Wilson/Blair deal. Sadly the voters still choose NOT TO do due diligence before casting their ballot.

However, on a going forward basis it is obviously in our own best interest as taxpayers to carefully examine and analyze any new bargains negotiated by our so called leaders. While holding them accountable for their actions.

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JustWondering Oct. 30, 2013 @ 8:44 a.m.

For clarification purposes; The 13th check is issued when SDCERS has "realized earnings" greater than the assumed rate of return which is currently at 7.5%. For example SDCERS' fiscal year ending June 30, 2013 had net earning of 13.6%. In years when realized earning fail to meet the threshold, 13th check payments are not made. This happened in 2009 and 2012. The SDCERS Board is merely following the law, in this case the SD municipal code in issuing the checks. They, the Board, do not decide what the benefit is, they only administer the system, paying a benefit by following the law. The employer, in this case the City, sets the benefit level.

Regarding your questions how many get this benefit and how much is paid. With recent pension system revisions the City of San Diego eliminated this benefit for any employee hired after July 1, 2005. Thus this is a sunsetting benefit with fewer and fewer retirees each year. Current retirees and about 7400 of the 10,000 active city workers are eligible to receive it. Generally speaking the payment is about $30 for each year of service. For example if you had 30 years of service times $30 for each year your 13th check benefit would be $900. But some substantially older retirees do get a little more, earning $45 for each year of service. The average payment in 2011, the last year a payment was made, was about $715.

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Visduh Oct. 24, 2013 @ 12:38 p.m.

That this folly persists is appalling. I'd assumed that when the "pension crisis" hit, and Murphy resigned and all that turmoil occurred, they stopped sending out those checks. Just how such a thing was legal confuses me greatly. While I can understand--to a degree-- the notion that contributions could be cut or skipped when the investment returns were higher than targeted, the idea of squandering the fund on additional payouts that were plainly gifts doesn't hold water. If there is some sort of pension trust fund, with trustees from the various stakeholders, those representing the retired and soon-to-be-retired might favor overly generous payouts beyond the legal requirement. But the others involved, especially the city itself, which has to fund the whole thing, should refuse to go along. So, it would imply that politics at the city level, due to the outsized influence the municipal unions have on elections to city council, mayor and city attorney, failed to stop that practice.

The bigger issue is that the history of investment returns is replete with times when stocks ran up crazily for a number of years before crashing. But I suppose that the big run up of the 90's was deemed to be the new normal, and that no crash would come. Hence the "excess" would forever be excess and needed to be eliminated (by giving it away.)

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Don Bauder Oct. 24, 2013 @ 2:46 p.m.

Visduh: You make excellent points. The City was told by more than one consulting firm that the 13th check or waterfall was abysmal actuary practice. But the practice persisted....to this day! Aguirre believes that last year's passage of Proposition B lulled San Diegans into believing that the pension crisis was solved.

You are so right about the markets. Bull markets go on for 10 or 20 years and people think that stocks always go up every year. But along comes a bear market that wipes the gains away, usually very quickly; in the tech crash of the early part of this century, NASDAQ stocks went down something like 80%. That's why there is never any "excess" to be distributed to retirees.

Best, Don Bauder

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ImJustABill Oct. 24, 2013 @ 9:19 p.m.

I think we also tend to look primarily at US indices (Dow, S&P, NASDAQ, previously Amex too - maybe a couple of others) and not consider international indices.

I'm not sure if it's reasonable to assume that U.S. returns - even over a long period, say100 years, are going to be a good predictor of future returns.

The U.S. economy had a hell of a successfull 20th century economically. The country rose to be the world economic and political superpower, and many technological revolutions took place largely in the U.S.

I'm not a doomsday guy predicting our demise but I don't know if it's realistic to predict the same kind of rapid skyrocketing economic growth for the next 100 years of the US economy that occurred during the last 100 years.

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Don Bauder Oct. 25, 2013 @ 9:36 a.m.

ImJustABill: You make an excellent point. One of the reasons I put little faith in the technical signals that reflect a long sweep of time -- Kondratieff Wave, Elliott Wave, Fibonacci numbers, Dow Theory -- is that for centuries, the success of the stock market correlated with the success of the economy. Since early 2009, the success of the stock market has inversely correlated with the strength of the economy.

That is, a weak economy with high unemployment is just what Wall Street wants, because as long as unemployment remains above 6%, the Federal Reserve -- and other world central banks -- will frenetically create money and credit with inordinately low interest rates. That money finds its way into equities. The low rates also jack up bond prices.

So the old technical metrics in which the market and the economy's performance tracked together are, for now at least, out of date. Best, Don Bauder

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ImJustABill Oct. 26, 2013 @ 7:23 a.m.

I think that may be because policy makers put the cart before the horse. Instead of making policy decisions intended to help the economy and expecting financial markets to benefit as a consequence they might make policy decisions intended to help the financial markets, expecting the economy to benefit as a consequence.

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Dennis Oct. 24, 2013 @ 1:41 p.m.

Let's not forget that the city was not only removing excess funds to sweeten benefits, it was also using excess funds for the Republican National Convention, the Padres expansion of the convention center all projects for folks with plenty of their own money.

Detroit is now planning to build a new sports facility with public funds while paying pensioners pennies on the dollar.

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Don Bauder Oct. 24, 2013 @ 2:52 p.m.

Dennis: Yes, that Republican convention was a killer. The Golding administration robbed the pension plan to pay for the convention that put her in the spotlight for her planned Senate run. Then the employees insisted on getting a big boost, since their fund had been tapped. The employees got the manna and the city was on the way to perdition.

You are right: Detroit and the state of Michigan are subsidizing a hockey arena for a billionaire, even as the city is in bankruptcy. There is no question that the ballpark subsidy weakened San Diego's finances -- and is still doing so. If the convention center expansion goes through, the till will continue to be tapped. Best, Don Bauder

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JustWondering Oct. 24, 2013 @ 8:13 p.m.

You can thank city leaders like former manager Jack McGrory, and Mayor Susan Golding for a good portion of this mess. But don't forget Pete Wilson and now deceased former manager Ray Blair for cooking the books on promised retiree health care to get them out of their matching payments to social security and Medicare. That led to draining off of the "waterfall" of profits from SDCERS to pay for the health care benefits they never set monies aside for. BTW all done illegally according to the IRS. Sadly none of the members of this rogues gallery of political and management hacks were EVER HELD ACCOUNTABLE. No their patsy, Dick Murphy, found he was the last mayor standing when the party music stopped and there wasn't a chair to be found.

Today I see from the SDCERS website this years earning, net fee expenses, was 13.6%. That's 6.1% ABOVE the assumed rate of return of 7.5%. The average over the last 10 years, even with all the volatility, is 8.1%

Regarding the 13th check... Once again it was those leaders who legislated and passed the ordinances for the 13th check along with the Courts for the Corbett case settlement.

While every little bit of higher investment return helps we are still deep in the hole dug by those who led our city, the ones we the citizens elected to office, since the 1980s.

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Don Bauder Oct. 25, 2013 @ 9:40 a.m.

JustWondering: I agree that Wilson and Blair deserve some of the blame. Also: the current ten-year return of SDCERS does NOT include the vicious bear market of the early 2000s, when the Nasdaq plunged something like 80% and the Dow 50%. Best, Don Bauder

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JustWondering Oct. 25, 2013 @ 4:57 p.m.

Well we are just outside it now. The crash you're referring to started in Jan 2000 and ended in Oct 2002 and was based on the tech bubble as well as 9/11 attacks. The DJIA lost about 38% of its value. By comparison the crash of 1929 lost 48% and 1930-32 crash lost 86% leading us into the Great Depression.

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ImJustABill Oct. 24, 2013 @ 9:12 p.m.

So even if we somehow accept that 8% annual return is a reasonable expectation there were clearly be some volatility so some years will have less than 8% return, requiring taxpayer contributions to the fund. This is completely obvious to anyone. Was this not accounted for properly?

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aardvark Oct. 24, 2013 @ 9:27 p.m.

ImJustABill--It may have been obvious to anyone; unfortunately it wasn't obvious to everyone.

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JustWondering Oct. 25, 2013 @ 7:21 a.m.

Remember it's an "assumed" rate of return and most, if not all, retirement systems have long term outlooks, NOT year-to-year. These systems and the actuarial professionals they rely upon also use mathematical "smoothing" models sometimes referred to as smoothing corridors to account for that LONG TERM goal. With that said, no system will do well if the politician who control them tinker with their funding by taking what they call excess profits and using them to pay for their pet projects. And if nothing else, that's what history reports happened in San Diego, or at least a very large portion of it.

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Don Bauder Oct. 25, 2013 @ 9:42 a.m.

ImJustABill: The waterfall only applied if the return exceeded a given bogey. If it was below the bogey, there wasn't more money put in the pot. Best, Don Bauder

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JustWondering Oct. 25, 2013 @ 7:05 a.m.

An 8% return ISN'T necessarily reasonable in the NEW economy. But the past 10 year results indicates SDCERS is hitting their goals even in this economy. Nevertheless, politician who are rarely, if ever, are held accountable love the eight percent rate and don't want to see it lowered.

You see as long as the Board keeps it at that level the fewer dollars contributed by the "employer" side of this three part equation. (Employer + employee + investment gains over time) If the assumed rate of return now set at 7.5% is lowered further, both participants pay more into the system. Right now a discussion item for the November Board meeting, lowering of the rate to 7.25% is on the agenda. SDCERS' actuarial Cherion is strongly suggesting the move to lower the return rate to follow the trend of other Boards across the nation. If the SDCERS Board agrees it means the contribution made by the city i.e. the taxpayers will go up. However they may rise at all due to the savings from the negotiated five-year labor pact where pensionable pay increases have been eliminated. The City expected that savings this year but the Board surprised the city by delaying the savings this year and NOT lowering their required payment. Seems this new Board actually is taking their first (there are three) and foremost fiduciary responsibility seriously these days! If the Board had implemented the change the city's payment would have been about 24 million dollars LESS.

What most ignore is it took 20 to 30 years of bad management, questionable "deals" and market volatility to get us into this mess and there is no instant fix for it. We're about seven years into undoing the bad decisions of the past 30 years. There are another 10 more fiscally challenging years of payments to return the from the past years of over indulgence.

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Don Bauder Oct. 25, 2013 @ 9:45 a.m.

JustWondering: Some corporations are reporting handsome earnings because of an unrealistic expectation of annual returns from a pension fund. This problem is not just in the public sector. Best, Don Bauder

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JustWondering Oct. 25, 2013 @ 7:43 a.m.

Okay Don I'll pose the question ... Why hasn't the 13th check been stopped? I mean permanently. And while I am at it let me correct some of the record.

Unlike the Detroit system SDCERS did NOT pay the so called 13th check in 2009 or 2012. As you know there are limitations and restrictions set forth in the Ordinance and SDCERS Board rules regarding the distribution of these monies as well as how much is paid. In addition, while your total figure of 4.7 million is correct, for purposes clarity for those who don't know all the nuisances of the 13th check it also includes not only City of San Diego retirees, but Port District and Airport Authority members too.

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Don Bauder Oct. 25, 2013 @ 10:15 a.m.

JustWondering: I think you meant "nuances," but "nuisances" works just as well. In 2009, the market tanked until the end of the first quarter, when the Fed announced it would lower rates drastically, Then stocks took off. (Incidentally, I jumped into blue chip stocks with 4%+ yields as soon as the Fed indicated it would madly print money in 2009, and I have continued buying. My portfolio is now almost 50% stocks-- utilities, oils & gas, pharmaceuticals, older telecoms like AT&T, pipelines, royalty trusts, etc. But I never say I "made" money in the market. I say the paper value of my financial assets has luckily risen. I realize I can be slaughtered.) Best, Don Bauder

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JustWondering Oct. 25, 2013 @ 11:22 a.m.

Damn that auto complete feature... it is a nuisance - sometimes. LOL

I know you've said in the past you pick and choose your answers to points raised in our comments. This time you chose not to respond to my question; " Why hasn't the 13th check been stopped?" Do you have some thoughts, factual or opinion, I'm just wondering.

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Don Bauder Oct. 25, 2013 @ 1:08 p.m.

JustWondering: Why has't the 13th check been stopped? I don't know. I suspect it's the same reason so many ill-considered things happen in San Diego: incompetence. I do know continuation of the 13th check stinks. And I hope at least one mayoral hopeful starts raising hell about it. Best, Don Bauder

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JustWondering Oct. 25, 2013 @ 11:28 a.m.

Paper profits...Maybe it's time to take some profits and turn them into real dollars, or would that push you much closers to the 1%er than you want to be??? Wink n nod!

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Don Bauder Oct. 25, 2013 @ 1:11 p.m.

JustWondering: Changing my portfolio in any way would not push me into the 1% -- in income or in net worth. I can assure you of that. Best, Don Bauder

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