ALAMEDA, Calif. — It has been more than six years since San Diego dropped its disclosure bombshell about failing to tell investors of the city’s pension underfunding.
The city accepted the resulting Securities and Exchange Commission sanctions, and only returned to the public bond market 20 months ago after a more than five-year hiatus. But it is still battling in court with the city’s pension system about its pension funding obligations.
Last week, city attorney Jan Goldsmith won a key tactical skirmish in one of its cases. Superior Court Judge Joan Lewis refused to dismiss his lawsuit that argues the city charter requires employees to share the pain of the system’s pension losses.
The most recent actuarial valuation of the city pension fund, for June 30, 2009, found the system to be 66.5% funded, with an unfunded accrued actuarial liability of more than $2.1 billion.
That’s after the pension fund was slaughtered in the market turmoil of 2008-2009. A year earlier, the funding ratio was 78.1% and the unfunded liability was $1.3 billion.
If Goldsmith is right, the city’s employees could be on the hook for half of those investment losses. He filed suit against the San Diego City Employees’ Retirement System in May.
The suit argues that the city charter requires employees to join the city in making contributions to make up for those investment losses. At the very least, Goldsmith argued, it prohibits the pension board from unilaterally limiting how much employees are required to contribute.
It is very unusual to ask employee participants in a defined-benefit pension to make up for a year’s investment losses.
And even if the city attorney is successful, he is unlikely to set a precedent many other governments can use.
Goldsmith cites unique provisions in San Diego’s city charter as the basis for his arguments.
The charter specifies that contributions to the pension system are to be split between the city and its employees, and says the city cannot be required to contribute more than the employees, Goldsmith argues.
“Whether the city caps employees’ contributions is an issue for negotiation between labor and management, not something to be imposed by the pension board,” Goldsmith said in May when the suit was filed. “The city charter is clear that city taxpayers and city employees are substantially equal partners in our pension plan and share in profits and losses unless specifically agreed otherwise.”
SDCERS disagrees. “Ignoring decades of policy and precedent, this lawsuit seeks to suddenly include investment losses within the 'substantially equal’ calculation,” system board member Susan Gonick said in a statement after SDCERS hired an attorney to fight the case.
“For decades the city has acknowledged its sole obligation to assume payment of the [unfunded accrued liability], including any investment risk, and has happily pocketed the resulting profits,” she said. “Now, however, in a time of world-wide economic losses, the city conveniently seeks — for the first time — to reverse long-standing policy and precedent, and demands that SDCERS members now share the city’s risk.”
Though what he is asking for is unusual among pension systems, Goldsmith said it fits the language of the city charter.
“The charter does not say that the system will be conducted as a typical defined-benefit pension plan,” he argued in a brief prepared for last week’s hearing.
Lewis’ Sept. 24 ruling simply allows the city’s case to proceed. Further proceedings are expected in February, according to the city attorney’s office.
A favorable ruling could give San Diego leverage to bargain with employees to reduce vested benefits and contribution rates if they want to avoid sizable increases in payroll deductions to fund their pensions.
“Although I am pleased that our basic legal analysis was upheld, this is only the first step in the lawsuit,” Goldsmith said in a statement. “I believe the ultimate resolution of this ongoing pension-funding problem is at the bargaining table. I would urge the city, labor organizations, and SDCERS to get together and work on a global resolution, ending all lawsuits, based upon a reasonable workout plan.”
The city’s pension disclosure shortcomings — which developed after city officials cut a deal with the pension system board to both increase benefits and reduce the city’s required contributions — ultimately led the SEC to sanction the city government in 2006.
San Diego officials have struggled to get a handle on the city’s retirement obligations to its employees, and have spent a lot of time in court as a result.
Goldsmith’s predecessor, Michael Aguirre, took an even more combative approach toward the city’s pension system, filing a lawsuit that sought to roll back retirement benefits granted to city employees in 1998 and 2002 labor contracts.
The retirement system prevailed in state trial court and appeals court.
San Diego in 2009 prevailed in a federal appeals court ruling that the city’s retiree medical benefit program is not a vested right, as pension benefits are.
