San Diego County Grand Jury • 2009-2010

San Diego City’s Financial Crisis the Past, Present, and Future

Published: June 30, 2009 22 pages Consolidated Report
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Note: Missing finding numbers detected: F24

Findings 26 findings

F01
General Fund revenue for FY 2010 is at least $11 million short of expectations due primarily to shortfalls in projected property, sales and transient occupancy taxes. 3 /2010 (filed June 8, 2010)
F02
The required pension contribution by the City for FY 2011 is $231 million, approximately $19 million more than the anticipated $212 million contribution, necessitating potential additional service cuts in General Fund departments.
F03
Absent an increase in General Fund revenue, the projected increases in the required annual pension contribution in future fiscal years will necessitate even more service cuts in General Fund departments.
F04
Switching to the Teeter method of receiving property tax allocations from the County may stabilize that source of revenue and may result in an increase of about $2 million per year for the City’s General Fund.
F05
The City’s Finance Office has the expertise to select an alternate for the replacement of SDCERS, if need be.
F06
All of the above pay-down projections are actuarial estimates based on an analysis of the pension fund’s fiscal condition at the close of FY 2009. In projecting the financial reconciliation, various officials indicated this is a dynamic economic condition that the City and the pension fund are facing. If it is examined at a different point in time, the unfunded liability and the projected ARC payments may differ.
F07
These pay-down projections are based partially on the assumption by SDCERS that its pension fund portfolio will earn at least 7.75% each and every year. Earnings over the past three years have been a negative 1.84%.
F08
The supposition that pension underfunding can be paid down by amortizing the unfunded pension obligation of $2.2 billion over thirty years is unrealistic, according to top City officials. Fact—Set Four SDCERS Investment Portfolio Performance Fact: The majority of SDCERS pension fund portfolio was, and still is, in equities rather than fixed income. Fact: For the period from June 2001 through June 2004, in part because of the “Dot.com” stock market crash, SDCERS earnings fell significantly. By October 31, 2001, the fund’s portfolio lost $900 million of its value. (See Perry, “Fall From Frugality Puts San Diego on Fiscal Brink”, L.A. Times, Sept 1, 2004, p. 1). Fact: During 2008-2009, SDCERS experienced an unanticipated drop in the value of its $3.5 billion portfolio. Stocks fell to a twelve year low in early 2009. The Standard & Poor’s 500 Index fell 42% from June 2008 through June 2009. SDCERS pension assets fell $1.3 billion or 30% during that same period. (SDCERS June 30, 2009 Actuarial Valuation for City of San Diego, p. 19). Fact: SDCERS indicates that in the year since its last snapshot of debt due to the economic factors impacting investments, as of June 30, 2009, a 15% return on investment has been recouped, equating to an addition of $600 million into the pension fund. FINDINGS
F09
SDCERS indicated that investment losses in FY 2009 were approximately 19.2% of its portfolio while the average for investment losses in the United States was 25%-30%. 8 /2010 (filed June 8, 2010)
F10
For every year SDCERS does not reach an investment return of 7.75 %, the City is required to increase its contribution to the retirement fund.
F11
The rate of return on SDCERS investments has been a negative 1.84% over the past three fiscal years, FY 2007- FY 2009. Fact—Set Five Enhanced Retirement Fringe Benefits DROP, SPSP, COLA, 13th Check, Pick-up, Purchase Service Credit, Retiree Health Care THE DROP PROGRAM Fact: In 1997, MP1 ushered in the Deferred Retirement Option Plan [DROP Program] on a trial basis. DROP became permanent on April 1, 2000. This program allowed certain designated City employees, including employees of SDCERS and City staff, to retire at a fixed pension. Under DROP, employees defer collecting a pension, return to work up to five more years at their salary rate [plus any raises in salary given], and simultaneously deposit a maximum of five years of retirement allowance in an interest bearing account at SDCERS. Fact: Salary increases earned by DROP participants are not factored into the calculation of retirement allowances. Fact: From its inception DROP was intended to be cost neutral. Fact: The reason given for the implementation of the DROP program is that it would keep experienced workers on the payroll, resulting in more efficient and effective service delivery, while reducing the costs associated with providing benefits and training to new employees. Fact: According to SDCERS, as of January 31, 2010, there were 1,992 individuals enrolled in the DROP program: 812 were on the job; 1,180 were retired. FINDINGS
F12
SDCERS reduced the guaranteed interest rate for DROP employees from 7.75% to 3.54% effective July 2009; there was a further reduction to 2.91% effective January 1, 2010. In order to maximize their benefits, some seventy to eighty veteran fire fighters and a like number of senior police officers locked in the then existing 7.75% interest rate on their DROP accounts by leaving the work force on or before June 30, 2009, rather than accepting the reduced interest rate. This negated some of the expressed effect of keeping experienced personnel on staff.
F13
DROP is not deemed to be a vested benefit for those employees who have not yet entered the program, according to San Diego City Attorney Opinion Number 2010-1, dated January 21, 2010.
F14
No actuarial study confirming the cost neutrality of DROP has been published to date. 9 /2010 (filed June 8, 2010)
F15
For FY 2011, the City’s contribution is more than three times the contributions of City elected officials. Fact: The projected FY 2011 budget allows for $7.9 million for retirement offset payments.
F16
The concept of “substantially equal” contributions, shared by the City and its employees, to date has not been applied when determining responsibility for increased ARC payments resulting from SDCERS investment losses. For example, for FY 2011, the City’s ARC payment includes over $70 million it alone is paying to make up for SDCERS investment losses in FY 2009 . Purchase Service Credit Program Fact: City employees are offered the opportunity to purchase up to five years of additional service credits. This additional purchased service time can raise an 11 /2010 (filed June 8, 2010) employee’s pension percentage rate and gross pension dollars because the allowance is based on years of service. Fact: City Council members and other elected officials are allowed to buy five years of service credits even though under term limits they are limited to eight years of service. This allowed elected officials to be paid pensions as if they had served thirteen years rather than eight years. Fact: On August 14, 2007, SDCERS actuarial consultants reported a $146 million actual cash loss to the Purchase Service Credit Program because the liability created by those purchases from 2000 to 2006 was based on an incorrect rate structure that did not cover the actual cost that should have been charged to City employees. (Letter from SDCERS Actuary to SDCERS’ Retirement Administrator). The City has yet to recoup its loss. Retiree Health Care Fact: For FY 2011, $32.8 million is budgeted on a “pay-as-you-go” basis to cover the healthcare costs of over 4,700 City retirees; an additional $25 million is budgeted to pre- fund a retiree health benefit trust. Fact: The full ARC payment for retiree health care for FY 2011 is $120.3 million; the City is funding only about 27% of that amount. (This ARC for retiree health care is not to be confused with the ARC for the pension system, which the City funds at 100%). Fact: In addition to the unfunded pension obligation of $2.2 billion, the taxpayers are faced with an unfunded liability of $1.3 billion for retiree health care. Fact: The unfunded liability for retiree health care coverage stands at $1.3 billion dollars as of June 30, 2009. The City’s funding ratio for health care was only 3% at that time. These payments are made from the City’s General Fund, not from the retirement fund administered by SDCERS. Fact: In the “State of the City” address on January 31, 2010, it was asserted that: “No one will again receive pensions that take advantage of the taxpayers”. However, the DROP Program, Healthcare Coverage, the Supplemental Pension and Savings Plan, the Purchase Service Credit Program, the 13th Check Program, Pick-Ups and Offsets continue, despite the fact that certain of these benefits are additional employee benefits granted by the City, at taxpayer expense, through labor negotiations and are not deemed to be vested. Fact—Set Six Additional City Structural Deficits Fact: There is a backlog of deferred maintenance projects conservatively estimated at $1 billion. Fact: Cities typically issue bonds to borrow money for large and costly projects such as sewer and water treatment plants, pump stations and pipe replacement or rehabilitation, and street maintenance. San Diego recently borrowed $1.3 million to fund deferred maintenance projects, such as filling potholes. Fact: The City’s bonded indebtedness totals $2.6 billion. 12 /2010 (filed June 8, 2010) Fact: The following areas must also be addressed in order to restore or preserve the fiscal integrity and meet the legal obligations of the City: (1) funding the reserves for each City department, (2) funding new obligations under storm water runoff permits of approximately $25- $30 million, (3) funding the Americans with Disabilities Act (ADA) obligations of approximately $50-70 million, (4) funding the City (self-insured) worker’s compensation fund against outstanding claims, currently estimated at $161 million, and (5) funding of the City’s (self-insured) public liability fund against lawsuits that could drain the General Fund for years to come. As of June 30, 2009, the City faces $129 million in claims. (IBA Report #09-10 issued Feb 14, 2009) FINDINGS
F17
These aforementioned obligations, liabilities and debts amount to $7 billion.
F18
Proposed methods of enhancing revenue fall far short of satisfying these obligations, debts and liabilities; revenue enhancements may be insufficient to address budget shortfalls resulting from the projected increases in the City’s ARC payments over the next five years. Fact: In an effort to reduce the pension deficit, there was a recent reduction in pension benefits for new hires after July 1, 2009. The City imposed a hybrid pension plan with a cap of 80% of pensionable salary on retirement allowances.
F19
The implementation of a hybrid pension system for employees hired on or after July 1, 2009 will do little to reduce the burden on the taxpayers for decades, at which time these employees will reach retirement age. Fact: In the State of the City address on January 30, 2010, it was indicated that the public would have to wait eighteen months to hear the plan to resolve the City’s structural deficit. Fact: It has been suggested that the City should fire 1,500 City workers saving millions of dollars in personnel costs and/or slash the budget of all City departments by 10%-15%.
F20
Performance audits of the major City departments may identify operational efficiencies and expenditure reductions.
F21
There are desirable City owned parkland properties such as Mission Bay Park, Balboa Park and Torrey Pines Park.
F22
By charging minimal fees for each book, DVD, or other service provided, hours of operation could be increased to generate more revenue; library hours may not have to be reduced from forty-one to thirty-six hours per week, as they have in recent budget cuts. Fact: Riverside County, California outsources its library system and reports substantial cost saving and improved service. 14 /2010 (filed June 8, 2010)
F23
Charging a fee for residential trash collection could save the City approximately $54 million per year.
F25
City Hall acted improvidently in cutting the public safety workforce for FY 2010 and FY 2011.
F26
A proactive dialogue as to the efficacy of a Chapter 9 reorganization cannot be removed from any discourse as to the City’s financial health.
F27
A Chapter 9 filing would result in a federal determination of which fringe benefits and collective bargaining agreements could be restructured. The fringe benefit total is $423.7 million, according to the FY 2011 Proposed Budget.

Recommendations 16

No Responses Found 1

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