Blogging Employee Benefits

August 8, 2006

Independent Audit Report Assails San Diego City Pension System

Filed under: PERS — Fuguerre @ 9:35 pm

San Diego officials cultivated and accepted a culture of financial management and reporting premised on non-transparency, obfuscation, and denial of fiscal reality. Under the pressure of short-term needs, City officials gave expedience a higher priority than fiscal responsibility and came to view the law as an impediment to be circumvented through artful manipulation.

Investigation into the San Diego City
Employees’ Retirement System
and the City of San Diego Sewer Rate Structure

San Diego’s approval of special agreements that led to its pension fund’s $1.4 billion deficit violated city, state, and federal laws, according to an audit report issued by an independent committee that included former SEC chairman Arthur Levitt and former SEC Chief Accountant Lynn Turner. Beyond violations of the California Constitution, the San Diego City Charter, and fiduciary duties of the pension system’s Board, the audit report points out violations of plan qualification requirements and prohibited transactions under the Internal Revenue Code.

Agreements proposed by the City Manager in 1996 through 2002 enhanced retirement benefits for members of the San Diego City Employees’ Retirement System, while reducing the City’s contribution to the pension fund below the rate required by the system’s actuary. According to the audit report, the 1996 action “was, quite simply, an improper agreement by the City and the SDCERS Board to grant immediate benefits while making no corresponding provision for paying for them.” The system’s legal counsel and actuary are faulted for blessing the agreement on the basis of superficial analysis that failed to consider the legality of the changes. Beginning in 1998, a portion of City contributions to SDCERS treated as pension contributions were actually being diverted to pay for retiree healthcare benefits. Liability arising from settlement of a separate dispute were improperly characterized by the system as “contingent,” since proper inclusion of the liability would have forced painful accelerated funding. The system’s problems were compounded by supposedly cost-neutral permissive service purchases subsequently found to have been only 50% funded by member contributions.

When reality caught up with the City and SDCERS in the form of drastic stock market losses in 2000 and 2001, the response was to increase certain retirement benefits for some of the decision-makers in exchange for an agreement to wave aside the City’s pension financing responsibility. One dissenting SDCERS Board member’s characterization of the 2002 agreement as “ethically questionable at best, if not blatantly corrupt,” was simply ignored in what the current audit report characterizes as “a low point in [the City’s] management of pension funding issues.” Not only did these pension agreements lead to severe pension underfunding, but the agreements and their financial consequences were not properly disclosed in the City’s financial statements (including treatment of a potentially damaging report on the pension system’s declining financial health, which was delayed and revised out of concerns that the truth might adversely affect a bond offering dedicated to the city’s ballpark). Settlement of 2003 litigation challenging the legality of the agreements partially unwound the knot, yet even that settlement allowed the City to continue to underfund the pension system, for instance to this day continuing to base pension financing on actuarial assumptions that have been frozen in place since 2003.

Separately, legal action is being pursued against several individuals whose activities perpetuated SDCERS’ pension crisis, and the SEC and U.S. Attorney’s Office continue further investigations. SDCERS has also initiated voluntary correction requests through the IRS’ Employee Plans Compliance Resolution System.

Even today, there are serious indications that the City government has not completely come to grips with the depth of its problems and the need for fundamental reform. . . . Even as to the $1.4 billion pension deficit, City government does not seem prepared to face up to fiscal reality. It has been suggested that the City address the deficit through the issuance of pension obligation bonds which would use borrowings from investors to increase pension assets, but which would not reduce the City’s underlying obligation to fund the pension liability. In so doing, the City would continue to push off the funding of these obligations to future generations of taxpayers while avoiding the difficult fiscal decisions that must be made.

The audit report recommends implementation of a detailed Remediation Plan aiming toward enhanced accountability, greater transparency, increased fiscal responsibility, and independent oversight.

Several previous posts here on San Diego’s pension woes: Report Published on San Diego PERS (1/21/2006); San Diego Mayor Wants Voter Approval of Future PERS Improvements (2/3/2006).

1 Comment »

  1. Announcement of City Remedial Plan, Remarks by San Diego Mayor Sanders, 8/24/06. And Fact Sheet: Sanders Embraces Kroll Remedial Recommendations as “Opportunity to Move City Forward,” 8/24/06.

    Comment by Fuguerre — August 26, 2006 @ 12:31 am

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