Light at the End of a Scandal

It would have been impossible to imagine a few years ago, but San Diego may now represent a model for cities looking to close deficits in their pension and retirement health accounts.

In 2005, San Diego Mayor Dick Murphy resigned after an investment adviser learned that the city had for years been shortchanging its public pension fund. Murphy’s was part of a raft of resignations at City Hall and did nothing to stem an endless spate of local and federal criminal investigations. Worse, the city was left with a $1.4 billion deficit, along with a ruined reputation as “Enron by the Sea.”

But all that scrutiny did some good. San Diego has not quite gotten its fiscal ship in order, but it has made deep and lasting changes -- not just to its pension system, but its municipal pay structure as well. In May, Mayor Jerry Sanders announced a deal with the city’s unions on retirement health-care benefits that is expected to save the city more than $700 million over the next 25 years.

The scope of the pension scandal “forced us to step up and solve the problems, before others were even aware they had big problems,” Sanders says. “As much as you can call it a benefit, the benefit was that we hit the wall before anyone else.”

Sanders isn’t ready to declare victory. San Diego continues to carry a structural deficit from year to year -- although that’s down to about $40 million -- and the pension fund still isn’t completely sound. Todd Gloria, who chairs the City Council’s budget committee, likens the work to the pain an individual feels when they finally get serious about paying off long-accumulated credit card debt.

But not only is San Diego in far better shape than it used to be, it’s also on much firmer footing than other cities such as San Jose and Los Angeles. Like Sanders, Gloria says that the city’s “horrible” period leading up to 2005 helped San Diego get ahead of the curve in areas such as retirement benefits. And the bad publicity and stark nature of the budget problems helped bring the city’s unions to the table. Most of the changes have been implemented with the cooperation, if not delight, of labor.

“Cities get themselves in these problems when they keep granting better benefits and they simply don’t pay for the ones they’ve already given, like retirement health,” Sanders says. “After we’re done with next year’s budget, we’ll be even.”