Municipalities make promises they can't keep too:
San Diego ... Mayor Dick Murphy will soon resign just months after his re-election. Six current and former trustees of the city pension board have just been charged with felony counts of violating a conflict-of-interest law. And the U.S. Securities and Exchange Commission and the Justice Dept. are investigating the city for not telling the truth about its finances when selling bonds to investors. But the root of San Diego's fiscal and legal woes is also the root of what could be a radical, and permanent, solution to them: San Diego's $3.5 billion pension fund.
Actually, much of that money isn't in a fund – it's just what San Diego has promised to current and retired workers. The San Diego City Employees' Retirement System faces a deficit that totals one-third of its obligations. City taxpayers must come up with more than $1 billion to plug that hole: A lot of money in a city with an annual budget of $2.5 billion.
How did this happen? San Diego is in trouble because it's done for decades just what other city and state governments around the nation regularly do: Treat its public-retirement fund as a political slush fund at the expense of taxpayers.
For decades, San Diego thought it had found the answer to an intractable municipal problem: City workers want higher salaries, but private-sector voters would rather pay lower taxes. So, San Diego kept public-sector salaries in check and made it up to workers by promising them ever-higher retirement benefits in years to come, guaranteed, of course, by future taxpayers.
Over the past 25 years, according to attorneys at Vinson & Elkins who issued an independent report on San Diego's woes last year, San Diego used temporary pension "surpluses" to, among other things, permanently hike benefits for retirees – kicking the long-term bill into the future.
Worse: It seems that San Diego pols may not have been truthful to investors about the extent of the future payouts it would have to make.
[Hmm. Hasn't Paul Krugman been telling everyone how secure defined benefit pensions are?]
A few years back, that bill started coming due. Retirees sued San Diego in 2003 to force taxpayers to shore up the growing deficit in the pension fund, after the stock market had plummeted – and Wall Street investors started to pay attention to the results of decades' worth of creative accounting.
Now, San Diego is fiscally paralyzed until it sorts out its problems. The city can't borrow for capital projects, like, say, to build roads or sewers.
[What to do? What to do?]
....San Diego's next mayor should propose to fund the current pension deficit only in conjunction with one reform that will improve the city's fiscal health forever: Switching the San Diego City Employees' Retirement System from a traditional public-sector pension, in which taxpayers guarantee benefits to retirees and must foot the bill for benefit increases, to the kind of pension system offered in the private sector.
Under a reformed, modern system, workers would pay into their own 401(k)-style retirement accounts with a matching contribution each year from the city. The workers, not the politicians and the taxpayers, would assume responsibility for investing that money wisely in diversified mutual funds managed by a professional firm.
This switch would mean that, over time, San Diego politicians would have no giant public pension fund that tempts them to repeatedly offer city workers new benefits in exchange for support. Instead, city pensions would be safely in the hands of each worker – just as most private-sector workers control their own retirement accounts.
What's more secure than economic rationality.