SAN DIEGO—With no elected mayor at the helm since July, and a looming $1.4 to $2.2 billion pension deficit crippling city finances and operations, America's 7th largest city teeters on the edge of bankruptcy.
Amidst the pension deficit crisis, a city credit rating barely above junk bond status, an unstable general fund, an additional $2 billion in infrastructure needs, and $500 million more in other unfunded needs, mayoral candidates vie to take on the worst financial crisis in the history of San Diego.
Though they’d love you to think otherwise, the election has become another classic contest between Democrats and Republicans, with each candidate epitomizing their respective party’s platforms.
It's Councilwoman Donna Frye, the Democrat, versus newcomer Jerry Sanders, the Republican; Frye for big government, big budgets, and big solutions, and Sanders, who touts himself as an outside reformer, for downsizing, streamlining, and privatization of city services.
At center stage in the election is San Diego's pension deficit crisis. The deficit, or unfunded liability, is the difference between what the city’s retirement system owes city employees and retirees and its assets. The deficit is currently estimated between $1.4 and $2.2 billion.
The pension deficit is number one on Sanders short list of problems the city is facing, while Frye has noted money problems for virtually every city program due to San Diego’s inability to raise funds. Both Frye and Sanders have put forward what they consider to be comprehensive plans for the city’s financial recovery.
Donna Frye’s AAA Plan
Frye claims that her financial plan, detailed on her website DonnaFryeformayor.com, will save the city $250 million from its current budget, which will be used to pay the city’s debts and fund city services, such as street repair, sewage treatment, and park maintenance; services which are lacking this year due to the city’s financial crunch.
According to Frye, “The city of San Diego has a very real and serious financial crisis, and it is not just the $1.9 billion pension liability. Retiree health costs are at least $500 million, the infrastructure deficit is over $2 billion, and there is an unfunded needs shortfall exceeding $500 million, not including police and fire.”
Raising the $250 million requires her to make good on each of her goals, and for each one to pay off as anticipated.
Key among Frye’s financial proposals, and a major point of contention in the race, is the immediate reduction of the city’s annual contribution to its retirement system by $50 million. She said she’ll be able to do that by not recognizing allegedly illegal pension benefit enhancements granted over the last decade.
Frye wrote on her website, “We have uncovered overwhelming evidence of illegal behavior in the creation of benefits, and we are obliged to declare them illegal, stop paying them, and replace that with a benefit system that is both legal and affordable.”
Although the next mayor will have the authority to mandate these types of changes under the new strong mayor system, Sanders claims a move like not paying pension benefits would open the city to lawsuits from employees and pensioners, thereby negating any savings to the city.
City Attorney Mike Aguirre, who has lead the fight to prove that certain benefit enhancements were illegal, estimates his litigation will eliminate up to $800 million of the pension deficit.
Frye’s $50 million savings goal depends on Aguirre rolling back at least $750 million of that unfunded liability. If the city pays $750 million less than it would have over 15 years, Frye says the city will save $50 million a year. Her critics say that’s a calculation that ignores the complexity of the pension fund’s economics.
Further complicating the situation, Frye’s advisors have admitted that even if they are able to roll back all the benefits they hope to, they will probably find themselves obligated to replace them with costly new benefits.
Frye’s plan also calls for the city’s pension system to be transferred to state control, a move she claims will save the city $20 million of the $22 million that the city currently pays the fund’s investment managers. Critics have noted that the city currently pays those managers .48 percent of the value of its investment portfolio, while cities that utilize the state service pay .29 percent, according to them the switch may net a savings, but nothing like the $20 million Frye is calling for.
Frye is also calling for what she calls a “true” hiring freeze, the terms of which stipulate no new hires, except for crucial emergency personnel. Coupled with the elimination of 246 city jobs, she hopes to save $12 million. She also plans to layoff 500 more city workers for a savings of $34 million annually.
The final piece in Frye’s puzzle is the collection of $20 million a year over the next ten years from Centre City Development Corp. in repayment of outstanding loans. The city, however, didn’t necessarily loan money to CCDC. The money originated from federal Community Development Block Grants that were directed to City Council District 2, which includes downtown San Diego.
Some say that if and when CCDC repays money to the city, it might have to go to District 2 and it might come laden with all the earmarks associated with federal grants.
If her measures fail to provide the “necessary” savings she’s calling for, Frye proposes a temporary half-cent sales tax increase that she estimates will generate $110 million a year. The city’s residents would have to approve such a proposal.
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The former police chief’s recovery plan is focused on the pension system, ignoring the rest of the city’s financial crisis as described by Frye.
Although he supports City Attorney Mike Aguirre’s legal challenge to pension benefit enhancements, he believes the best course of action is “outsourcing” changes in pension benefits for new hires and other labor cuts. Sanders plans to use the threat of laying off 10 percent of the city’s workforce to force labor unions into accepting sweeping changes in its labor contracts. His plan requires the unions to accept reduced pension benefits for new employees to ease the future pension burden. Sanders initially claimed he could save the city $64 million annually in labor costs, but quickly backpedaled when police and fire union officials balked at supporting him. He now says he can save the city $35 million.
Sanders, like Frye, is also unsatisfied with the city’s current wage freeze, which is in effect for the next two years. His plan is to convince the unions to relinquish the 4-percent pay increase planned for the third year of the labor contracts, avoiding a $28 million increase in the city’s salary expenses. This move would have no effect on this year’s or next year’s budget. When Sanders originally proposed this option, he claimed it would knock tens of millions off of the pension deficit annually. Now he’s increased his estimates to between $150 and $160 million annually, but one pension board member estimates the savings between $65 million and $80 million annually over three years. Sanders thinks he can save $6 million a year by requiring city employees to take one-week of unpaid leave a year, a move he says would also need to be worked out through talks with labor unions.
Opening up specific city services to private sector competition, raising employees’ retirement ages, changing how employees’ pension checks are calculated, and the reallocation of federal grant money are also major points in Sanders’ plan.
Sanders estimates that he can save the city about $10 million by privatizing such services as vehicle maintenance, certain development processes and printing services. The program would be modeled after the county’s plan.
The prevailing opinion is that the City Charter prohibits this sort of outsourcing, so voters must approve a charter amendment to make these savings possible.
Sanders’ call for outsourcing city jobs is the mainstay of his goal to downsize and streamline the city operation, as is the elimination of 100 middle-management positions, for a savings of $10 million. According to Frye, however, a number of jobs he proposes to outsource are already being outsourced. In addition, civil service laws protect many of the positions Sanders had hoped to cut. On October 21 he said the savings would likely be half of what he expected.
Sanders says the money his plan will save, approximately $160 million, plus $40 million of anticipated revenue growth, and $25 million more in labor cuts, will allow him to reach the $225 million he wants to pump into the pension system next year. The city paid $160 million this year, which wasn’t enough to keep the debt from growing.
Sanders’ critics say his plan can’t eliminate the city’s present budget deficit, and hinges on labor unions agreeing to set aside hard-won city contracts. It also hasn’t taken into account San Diego’s cooling real estate market, on which it depends for the revenue increases. Furthermore, several of Sanders’ objectives could take as much as three years before the city sees a savings at all.
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