San Diego pension fund has $2.1 billion deficit, city happily pays out $5.2 million in retiree “bonuses”

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San Diego paying retiree pension bonuses, as city slips into financial meltdown

While the City of San Diego is scrambling to figure out how to manage its massive $2.1 unfunded pension liability, including a possible bankruptcy filing called for by some critics, bonus checks were just mailed to 6,630 retirees, thanks to a known flaw that’s been in the retirement system for over 30 years.

The bonus checks, on average of about $784 each, are part of calculation that provides for a so-called 13th check to be paid out, whenever the current year’s investment returns in the pension fund exceed 7.75 percent.

The extra benefit was started in 1980 as a response to retirees whose pension benefits were not keeping up with inflation during the 1970’s.  Back then, the pension fund was enjoying year after year double-digit investment returns which created a fund surplus. Buckling to union pressure, city leaders agreed to an extra pension benefit payment to retirees, whenever the fund had a very good year.

During the period between 1980 and 2002, the city gave away bonuses totaling over $60 million, even though the fund was recording deficits. In 1995, before the stock market experienced the dot-com meltdown in the early 2000s, the deficit amounted to $96 million.

Unfortunately, the way the program was structured, the fund could experience investment losses year after year, creating mounting deficits. At the very next instance of year in which “excess” profits were experienced, the fund would be required to pay a bonus, no matter how large the accumulated deficit.

In the last two years alone, the numbers show how bad the bonus program is for the city, and how good it is for retirees. During the pension fund’s 2009 fiscal year, the fund lost $309 million. The most recent year ending June 30, saw the fund earn about $234 million. Collectively between the two years, the fund lost $75 million, yet the San Diego’s Employee Retirement System just issued $5.2 million in bonus checks.

In October 2008, former City Attorney Michael Aguirre attempted to make changes to the municipal code that would have eliminated the payment as long as the fund was in a deficit position. The current City Attorney Jan Goldsmith, has taken the opposite position saying that the payments are required by law.

“It’s yet another example of how outrageous the benefits package has become in the city of San Diego pension system,” according to Councilman Carl DeMaio. “It’s indefensible. Now whether you can get rid of it is a question, of course, that people are debating.”

Two auditing firms that are investigating the city’s crumbling finances have denounced the practice, saying that high returns in healthy years are essential to offset losses and low returns in other years. Instead, they say, the city is paying out bonuses as though it were free money.

San Diego Union-Tribune

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