San Diego Business Journal

Pension Issues a Stark Tale of Two Jurisdictions
Government: County Looks to Public Market as S.D. Grapples With Probe


When it comes to underfunded employee pension plans, both the county and the city of San Diego face shortfalls, but the county did something last week the city cannot: borrow money from the public markets.

To boost its funded liability for its employee pension system over the next 20 years, the county will issue about $450 million in pension obligation bonds this week.

County CFO Don Steuer said when the pension fund's unfounded liability, the difference between the current value of the fund compared to what it must pay out in the future, fell to 75 percent of its obligations, the county Board of Supervisors decided to increase its contributions.

"The funding of the pension system is something (the board) considers non-negotiable," Steuer said.

The county also went ahead with the bond issue to take advantage of a rapidly closing low interest rate window and to retire $77 million in pension bonds issued in 1994 at higher interest rates.

The new pension bonds carry both fixed and variable rates, but will average paying about 5.4 percent, Steuer said.

"We'll be saving an estimated $127 million over the 20-year term in today's dollars," he said.

Pensions are touchy subjects in public circles these days as news of heavy losses suffered during the three-year stock market downturn caused increased funding shortfalls to the pension systems. In the county's case, the approximate loss for a three-year period ending last year was about $1.4 billion.

That loss was the approximate shortfall to the pension fund's future liabilities as of June 30, 2003, and prompted the county to look into increasing contributions to the fund.

In contrast to the county's actions, the city of San Diego's funded ratio of its pension system as of June 30, 2003 , the most recent report available , was 67 percent, down from 93 percent as of June 1997, according to city financial reports released in March.

Like many other cities, San Diego's pension fund suffered major losses caused by the stock market downturn from 2000 to 2003, but unlike some, it deliberately held back funding the pension system as losses mounted.

As of June 30 of last year, the unfunded liability of the city's pension fund was $1.1 billion.

Compounding the city's pension shortfall is an inability to issue new debt to pay off the higher interest debt it now has. That's because the city is facing a dual investigation from the Securities and Exchange Commission and the U.S. Attorney's Office prompted by mistakes the city made on annual financial reports to bond underwriters.

Since last September, the city has delayed planned bond sales for a slew of capital improvement projects, ranging from water and sewer projects to refinancing bonds issued to pay for the city's share of Petco Park.

To ensure the city's financial situation is transparent, it hired Final Four accounting firm KPMG to conduct another audit of its 2003 financial reports, and until the results of that audit are released, the city isn't likely to issue new bonds.

The extent of the city's borrowing restrictions was underscored earlier this month when it was forced to secure a loan from a commercial bank. Because it pulled back a planned $500 million sewer refinancing bond, the city was forced to borrow $152 million from Bank of America to pay for the ongoing sewer replacement projects.

The short-term loan carries an interest rate of 2 to 3 percent for a six-month term, according to a report from the city's treasurer.

In addition to the loan, the city has also arranged for a $150 million line of credit, also from BofA for other needs it previously used tax anticipation notes, which carry very low interest rates.

City Councilwoman Donna Frye said for the city to get its financial house in order, it has to complete the audited financial report, and then have the federal investigation resolved, but she had no idea when that would occur.

Frye blamed earlier decisions by the city's employee retirement board that underfunded the pension fund, while increasing the amount of benefits retirees would receive as reasons behind the fund's $1.1 billion liability shortfall.

In approving the county's pension obligation bonds, several supervisors pointed out the differences in how the city and county are dealing with their respective pension funding deficits.

"The contrast is night and day, and the differences (between the city and county) are stark," said Supervisor Dianne Jacob. "Issuing the pension obligation bonds was a very smart fiscal decision. Because of it, we'll be able to save about $100 million over the next 20 years."