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Public Pensions Underwater

September 23, 2004

San Diego may be the next Orange County, at least in the annals of financial mismanagement. California's self-proclaimed best-run big city faces a meltdown after amassing a $1.16-billion unfunded pension liability, threatening the delivery of basic services. Other cities may well be next.

The National League of Cities on Wednesday reported that, nationwide, municipal revenues were falling behind obligations, thanks largely to the growing cost of employee pension plans and healthcare coverage. That financial pressure may force other cities to engage in the kind of creative accounting that threatens to sink San Diego.

Headlines from across the state underscore the widespread nature of the problem. A divided Orange County Board of Supervisors recently approved benefits that will allow some county workers to retire earlier with bigger pensions; the board majority's arithmetic suggests that taxpayers won't have to pay a dime. Two years ago, supervisors in Contra Costa County boosted pensions for government employees by as much as 50%. Earlier this summer, the board acknowledged that the cost would soar by $30 million over what was predicted in April.

A report commissioned by the City Council and released last week turned up plenty of explanations for San Diego's crisis. Those monitoring the city's pension obligations failed to understand complex financing schemes being used; employees who stood to benefit from its decisions dominated the pension agency's board; and scanty financial reports continually glossed over the mounting financial problems. Investigators also blamed San Diego's mess on an "eccentric" dependence on an ever-rising stock market to keep the retirement fund flush.

The city diverted money earmarked for the pension fund during good times to pay for city services -- digging a deepening hole when tax revenue later stalled and cash wasn't available to keep the plan funded. It would be easier to avoid that kind of shell game if government-run pension plans had to meet the stiff financial disclosure requirements demanded of public companies.

The promise of a solid pension long has been one reason to work for government, but something's out of whack when a city employee in San Diego can retire at age 55 and receive monthly checks higher than he or she earned while on the job. Guaranteed monthly pension checks are increasingly rare in private industry; private plans still in existence were underfunded by a record $350 billion at the end of 2003. Taxpayers risk being hit with an S&L-style bailout if the federal agency that insures private pension plans fails. San Diego's still-unfolding story presents worrisome evidence that a pension meltdown is possible across the public sector.

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