A Permanent Pension-Fund Fix For San Diego

San Diego is the nation's Ground Zero for municipal ignominy: Mayor Dick Murphy will soon resign just months after his re-election. Six current and former trustees of the city pension board have just been charged with felony counts of violating a conflict-of-interest law. And the U.S. Securities and Exchange Commission and the Justice Dept. are investigating the city for not telling the truth about its finances when selling bonds to investors. But the root of San Diego's fiscal and legal woes is also the root of what could be a radical, and permanent, solution to them: San Diego's $3.5 billion pension fund.

Actually, much of that money isn't in a fund � it's just what San Diego has promised to current and retired workers. The San Diego City Employees' Retirement System faces a deficit that totals one-third of its obligations. City taxpayers must come up with more than $1 billion to plug that hole: A lot of money in a city with an annual budget of $2.5 billion.

How did this happen? San Diego is in trouble because it's done for decades just what other city and state governments around the nation regularly do: Treat its public-retirement fund as a political slush fund at the expense of taxpayers.

For decades, San Diego thought it had found the answer to an intractable municipal problem: City workers want higher salaries, but private-sector voters would rather pay lower taxes. So, San Diego kept public-sector salaries in check and made it up to workers by promising them ever-higher retirement benefits in years to come, guaranteed, of course, by future taxpayers.

Over the past 25 years, according to attorneys at Vinson & Elkins who issued an independent report on San Diego's woes last year, San Diego used temporary pension "surpluses" to, among other things, permanently hike benefits for retirees � kicking the long-term bill into the future. Worse: It seems that San Diego pols may not have been truthful to investors about the extent of the future payouts it would have to make.

A few years back, that bill started coming due. Retirees sued San Diego in 2003 to force taxpayers to shore up the growing deficit in the pension fund, after the stock market had plummeted � and Wall Street investors started to pay attention to the results of decades' worth of creative accounting.

Now, San Diego is fiscally paralyzed until it sorts out its problems. The city can't borrow for capital projects, like, say, to build roads or sewers.

But even at this late date, San Diego's proposed fixes are all too predictable: Push the politicians most immediately associated with the debacle out of office to regain Wall Street's confidence, issue more debt to fund the pension deficit and wring modest give-backs from the unions.

San Diego should instead pursue a revolutionary fix and become a good example for cities and states across the country with their own pension woes (including the state of California).

San Diego's next mayor should propose to fund the current pension deficit only in conjunction with one reform that will improve the city's fiscal health forever: Switching the San Diego City Employees' Retirement System from a traditional public-sector pension, in which taxpayers guarantee benefits to retirees and must foot the bill for benefit increases, to the kind of pension system offered in the private sector.

Under a reformed, modern system, workers would pay into their own 401(k)-style retirement accounts with a matching contribution each year from the city. The workers, not the politicians and the taxpayers, would assume responsibility for investing that money wisely in diversified mutual funds managed by a professional firm.

This switch would mean that, over time, San Diego politicians would have no giant public pension fund that tempts them to repeatedly offer city workers new benefits in exchange for support. Instead, city pensions would be safely in the hands of each worker � just as most private-sector workers control their own retirement accounts.

Workers would scream at first � but controlling their own retirement money is in their best interest. Right now, their entire retirement fate is controlled by the city � and by future politicians who may not want to hike taxes to fund benefits promised decades before.

Perhaps San Diego's crack-up, and the real possibility of higher taxes, will force taxpayers to pay attention to the issue � and now, voters have plenty of information available about how state pols use California's $300 billion public-retirement funds to pursue their own political interests. The Manhattan Institute recently released a report at www.triallawyersinc.com that chronicles how CalPERS and CalSTRS, as huge investors in corporate America, are now at the forefront of initiating class-action lawsuits against Wall Street firms, alleging securities fraud and other improprieties and raking in millions in fees for the trial lawyers.

But, back to San Diego. If the city doesn't take this opportunity to lead the state and the nation on pension reform, the risk that San Diego will face a similar disaster a decade hence will persist. San Diego's pension fund, even if shored up by new cash contributions from city taxpayers, is still an open invitation for future political and fiscal shenanigans.

Consider: San Diego was able to play games with its pension funds for more than 20 years, through good times and bad � all under the eyes of the media and Wall Street analysts.

This newspaper, for one, published a prescient editorial nearly a decade ago, quoted in the lawyers' independent report: "Reduced (payments) to the retirement system will have to be made up somewhere down the line. And future taxpayers may get stuck with the bill �," the editorial noted. But Wall Street didn't care � Bond-raters were indifferent to the city's pension-fund system until it started to implode in 2003.

Wall Street allowed San Diego pols to dig taxpayers into a fiscal hole � because investors knew that union-centric local pols would force the taxpayers to pay up eventually.

It won't stop � until the pension's billions are taken away from the pols entirely � and put into fully funded personal accounts controlled by each worker.