Mayor Declares Mission Accomplished On Structural Deficit is Déjà Vu
March 2, 2012
By Michael J. Aguirre
The Oxford English Dictionary defines déjà vu as the correct impression that something has been previously experienced; tedious familiarity.
In the past few days the Mayor declared the City’s budget deficit was solved. Mission Accomplished, as far as the Mayor is concerned. Consider the last time the Mayor declared the city’s budget “Mission Accomplished.” In a 2007 interview with Tom Blair in the San Diego Magazine:
TB (Tom Blair): San Diego was on the brink of bankruptcy, and you inherited a horrendous mess when you moved into City Hall. Is the city in better or worse shape now?
JS (Jerry Sanders): I think it’s in much better shape. We’ve got payment schedules worked out with this five-year plan and the budget we just adopted for fixing most of the major financial issues. That’s whether it’s the pension system, which is on a 20-year [payback] schedule——and we’re actually paying in more than we’re required to——or whether it’s the retiree health-care issue, which nobody had even anticipated.
When Jerry Sanders took office the present value of future benefits (the amount of money we need to have in the bank today earning an assumed rate of return 8%) was $6.475 billion it is now $7.716 billion, a growth of $1.3 billion. During the same period pension assets have grown from $3.9 billion to $4.7 a growth of $800 million. In other words pension liabilities grew about twice as fast as pension assets. This is the heat of the structural deficit and Mayor Sanders has not laid a glove on this aspect of the problem.
It is not assumed city pension assets will grow 7.50% when Sanders took office the assumed rate was 8%. The half percentage point reduction is tangible improvement made during his tenure. Stanford researchers however say the assumed rate should be 4.14%. Their logic is pension returns need use a risk free rate of return in order to pay what are risk free (required) pension payments. Our inflated and volatile assumed rate of return is a second part of the structural deficit.
The pension payment this year is between $231.3 to $239.8 depending on whether it is paid upfront or over the court of the year. If we were not running the deficit the payment would be between $54 and $56 million. This amount would cover the “normal” costs of the pension which is the amount employees actually earn each year.
Why do we have to pay $180 million over the normal costs? Because we pay the 7.50 % interest on the $2 billion deficit! Yes, we pay more each year for interest on the debt than we pay for actual employee costs earned. We have to pay $180 million, more than 3 times what we should be paying just to cover the interest on the deficit. This is the structural deficit we have to solve.
And to solve it we need to know what caused it. City officials under mayors Golding and Murphy granted hundreds of millions of dollars of retroactive, unearned and unpaid for benefits. The only way to get rid of the structural deficit is to get rid of the pension debt that was created in violation of our City Charter, State Constitution, and state law.
Sanders made the problem worse when he pushed through another $1.8 debt to cover retiree health care without regard for ability to pay.
Unless and until we can educate the public about the dynamics of our structural budget deficit we can never get it behind us. Sanders awarding himself a victory trophy for an accomplishment that was not achieved does not help. It does no good for our city to pretend this problem away.
The City’s budget deficit means a worse future for those who live in San Diego’s neglected neighborhoods. When the Mayor declares the financial problems solved when they remain it only makes things worse for our children. It means we push the problems on them.
With higher water rates, gasoline prices, electricity bills, bank fees its hard enough to make ends meet. It is important to many that the libraries, and recreation centers remain open and that our roads, streets and allies get repaired. We need our elected officials to do more than just play public relations games.
Sanders declared the City’s budget problem solved in 2007 in his interview with Tom Blair. His statements were made to look foolish in the months following. His on the eve of departure announcement that the budget deficit is over is déjà vu.
Michael J. Aguirre is a lawyer in a private practice at Aguirre Morris & Severson LLP, and is the former City Attorney for the City of San Diego.