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SAN DIEGO - The San Diego City Council adopted on Monday Mayor Jerry Sanders' plan to infuse the city's grossly underfunded pension system with $100 million by a vote of 5-2. The plan calls for the city to borrow the money against capital from a tobacco settlement, and repay the loan at an interest rate of approximately 6.45 percent.
If the council follows through with the proposal as is, the city will pay $10.3 million a year for 17 years, ultimately paying $75.1 million in interest. The bond, however, would be structured to mature in 2027, raising the potential price tag to $116.3 million.
The deal won't be sealed until March, when the council must decide whether or not to approve the legal documents for the bond transaction.
Sanders proposed the measure last week as a component of his plan to reduce the pension deficit. Several of the key elements of his plan, such as bond sales and the sale of city property, will have to wait until the city issues three overdue annual financial audits and completes an inventory of its real estate holdings. Until the annual audits are released the city can't borrow money from the bond market at a competitive rate.
The pension deficit is conservatively estimated at $1.4 billion, though some city officials, including the mayor, believe the deficit is closer to $2 billion. If Sanders' estimate is correct, the payment will account for only five percent of the deficit, which grows every day at an unknown rate. Coupled with the fact that the city could end up repaying the loan at more than two to one, the wisdom of this course of action has been questioned by several public figures, including Pat Shea, who ran against Sanders for mayor in the special election last year.
"The city of San Diego is really good at doing two things: nothing and overreacting," said Shea.
Councilman Tony Young and Councilwoman Donna Frye both voted against the plan after asking how the payment would improve the retirement system's funded ratio—a question that went unanswered.
According to Young, "We really need a much bigger influx of money on a continual basis for years to really address this issue if we really want to make sure we solve this problem."
Council President Scott Peters recused himself of the vote and left the meeting, citing his financial interest in two companies involved in the deal.
The mayor's plan is strikingly similar to one proposed by former City Manager Lamont Ewell last September. Ewell wanted to put $600 million into the pension fund, but was blasted by City Attorney Michael Aguirre, who argued that following Ewell's plan would cause the city to incur vast pension obligations in the years to come.
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