Column: Timing will help San Diego move on from pension nightmare

San Diego Union-Tribune (CA)

San Diego finally may get a bit of a break in a decade-old pension scandal that continues to put pressure on city finances.

The rare good news may be more the product of timing than anything anyone did.

A settlement is in the offing that will put to rest the ill-fated 2012 Proposition B pension overhaul, and it might not take much of a financial bite out of the city coffers, if any. Not long ago, cost estimates of making whole thousands of workers who were denied pensions ranged from $20 million to $100 million.

But the rising stock market has lifted a lot of boats, including the 401(k)-style plans given to those employees in lieu of pensions. That could be a big factor in the settlement.

The legal dispute and the emerging resolution stemmed from the the pension scandal in the early 2000s that ripped through San Diego, creating demands for reform and setting the stage for Proposition B.

The precipitating pension underfunding scheme caused widespread economic and political damage, and tainted San Diego's image across the nation — famously earning the city the moniker "Enron-by-the-Sea."

A mayor and other top officials resigned, the city's credit rating was destroyed, financing for Petco Park was disrupted and some of those who engaged in the subterfuge called for the arrest of the whistleblower who exposed the corruption.

The pension system's costs to the city have escalated since, diverting money that could be used for public services. That is expected to continue for several years before the payments eventually start shrinking.

A handful of officials were prosecuted by local and federal authorities, though none was convicted.

But before delving too far into the past, let's get back to the present.

The yearslong court battles over Proposition B came to an end April 9 when supporters of the ballot measure declined to appeal a court ruling that ordered the city to overturn the pension cuts, according to a report by David Garrick of The San Diego Union-Tribune.

The California Supreme Court and lower courts have ruled the initiative was illegally placed on the ballot because city officials failed to conduct necessary negotiations about its provisions with municipal labor unions.

Proposition B, which was overwhelmingly approved by voters, prohibited new city employees except police officers from receiving pensions. Instead, they were given retirement plans similar to 401(k)s that were funded by contributions from both the city and the workers. The move shifted the risk of market volatility from the city to the employees.

Mayor Todd Gloria, unlike his predecessor, Kevin Faulconer, made clear it was time to end the litigation that he said had further drained city funds.

His election in November, the passing of the legal deadline, and the muscular stock market all came together to signal now is the time to move on.

Unwinding the measure will be complex but the potential market cushion may make it easier. About 4,500 employees hired since Proposition B went into effect in 2012 have been affected.

Those workers may have a choice whether to start their pensions going forward or make them retroactive. The latter potentially will cost some of the employees a lot of money — likely out of their 401(k)-type plans — but that would give them larger pensions for life.

The bottom line for San Diego is the city will get credit from the 401(k) growth in recreating the pensions. Mike Zucchet, president of the San Diego Municipal Employees Association, told Garrick that stock market earnings are such that it may cost the city nothing.

That does not mean the city's pension worries would be over. San Diego has a retirement fund shortfall of more than $3 billion and the estimated increase in employee life span along with other factors have forced the city to send more budget dollars into the system.

Those costs would grow with future raises for city employees. Studies have concluded that salaries in the city's workforce are generally lower — in some cases substantially — than in other municipalities. San Diego public employee unions and their supporters have said broad pay increases are needed, in part to keep workers from fleeing to other cities or the private sector.

There's some irony that the stock market may help the city out of this jam because, in a way, a robust market contributed to creating it.

San Diego has a history of what often is called a "structural deficit," otherwise known as living beyond its means. An audit conducted in the wake of the scandal concluded that for many years, San Diego covered budget deficits with money that should have gone into the pension system.

In 1996 and 2002, San Diego and its unions agreed to deals where the city would underfund the retirement system in return for increased benefits for workers. The thinking was that high market returns would cover the spread created by the underfunding and other questionable financial decisions.

It turned out to be a losing bet as investment returns fell off. That may be a lesson for the stakeholders in the current pension situation: Solve this while the market is still hot.

The scam was brought to light by Diann Shipione, an investment adviser who served on the pension board at the time. She raised concern about the underfunding practice and was alarmed that the information was omitted from a multimillion-dollar city sewer bond prospectus.

She was publicly vilified by other board members and city officials. Board members had threatened to put her under citizens arrest, and then call the police, if she didn't leave a board meeting. That plan was diffused when Shipione agreed to leave. Nevertheless, they voted to file ethics charges against her, which were eventually dismissed by the city's ethics commission.

The financial house of cards she warned about collapsed. Several city officials resigned and were brought up on various criminal charges involving accusations of fraud, conflict of interest and more. Then-Mayor Dick Murphy was among those who resigned, but never faced prosecution.

In 2004, Standard and Poor's suspended the city's credit rating, which wasn't restored until 2008. Among other things, that delayed the city's refinancing of bonds for the construction of Petco Park to save money.

Earlier, the city approached the pension fund board for a stadium construction loan because it was having difficulty finding buyers for bonds amid lawsuits over the project. City officials eventually found financing elsewhere, but it was expensive.

Shipione not only was proved right, but, eventually was lauded by a wide variety of organizations and individuals across the region.

The coming pension resolution may close the book on the Proposition B saga, but it won't erase this ugly chapter in San Diego's history.

This story originally appeared in San Diego Union-Tribune.

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