While America Aged

By summer 2005, the municipal pension fund was $1.7 billion in the hole—a debt equivalent to $6,000 for every San Diego family of four.¹ Public employees were being laid off; plans for a new, state-of-the-art downtown library had been shelved; swimming pools had been closed; hours at existing libraries had been curtailed; an after-school program for kids had been gutted, as had maintenance of the sprawling parks network, formerly one of the prides of San Diego. Some 60,000 potholes had gone unfilled.

The city had no audited financial statements, therefore no bond rating and no access to Wall Street—a condition it had endured for approximately two years, a streak of fiscal misery virtually unmatched in municipal finance. The mess was under investigation by a slew of watchdog agencies, including the Department of Justice, the Securities and Exchange Commission, the City of San Diego, as well as a special investigative team headed by the former SEC chairman Arthur Levitt.

As if all this scrutiny wasn’t enough, San Diego’s government was, at midsummer, rudderless and adrift. The mayor had resigned. The city treasurer who had presided over the pension scandal had resigned. The auditor had resigned. Six trustees of the San Diego City Employees’ Retirement System had been charged by the local district attorney with violating the state’s conflict-of-interest statute, a felony.

The national press had taken to referring to San Diego as “Enron-by-the-Sea,” a testimony to its financial, and also its moral, unraveling. But just as the real Enron was not so much an exception to corporate misbehavior as an extreme case, San Diego, too, was but a heightened version of the common hazards of public pensions.

The immediate cause of the debacle was that the city was chronically short on cash—but then, the same could be said of almost any government. The deeper cause was the extreme reluctance of local politicians to close the gap by levying taxes. In New York at least, when the boom ended and the bill began to come due, the city was willing to raise taxes and to cut services. It was willing to pay for its benefits. That is what the subway strike was about; New York realized that pensions bore a cost, and the transit agency, through the person of Kalikow, resolved to hold the line.

San Diego, though, had a very different political culture. It was not historically a union town like New York. San Diego was Republican to the core—home terrain to both Richard Nixon and Ronald Reagan. (Reagan, who made a point of ending each of his campaigns in San Diego, called it his “lucky city”).²If the residents of this deeply conservative enclave mistrusted government, they simply despised taxes.

To a succession of San Diego mayors and city officials, therefore, pensions held a particular allure. Being short on cash, these officials (over a period of many years) connived to avoid making the required and necessary pension contributions. In effect, they tapped the pension fund for every purpose that might appeal to politicians—park maintenance, policemen’s wages, new fire trucks, subsidies for sports teams.

This is what hard-pressed pension sponsors from General Motors to the state of New Jersey to United Airlines have always done—they cheat on contributions to satisfy present needs. As Roger Toussaint might say, they rob the unborn. Except that in San Diego, the abuse was deliberate and repeated in the face of mounting evidence that the retirement system was in trouble.

All of this directly flouted local law, and never could have occurred but for another aspect of the city’s culture—its endemic corruption. San Diego has a long history of scandals, among the most significant of which occurred in the early 1970s, when C. Arnholt Smith, a prominent supporter of President Nixon, was implicated in the then largest bank failure in U.S. history, and convicted of embezzlement. The embarrassment caused the Republican Party to drop San Diego as the venue for its 1972 convention. Hoping to erase the taint, Pete Wilson, the mayor, adopted a new slogan, “America’s Finest City.” The slogan stuck, but the scandals continued.

San Diego was a close-knit town—a big city in which local officials functioned like a cozy board of directors. Businessmen seeking tax breaks had open entrée to City Hall, and political back-scratching was a way of life. City officials were beholden to the public unions, and the union chiefs kept a close thumb on the local retirement board (a nominally independent body that was supposed to protect the interests of the retirees).

These alliances were critical to the unfolding drama; thus, City Hall was permitted to shortchange the pension system and to use the unspent monies to cover the holes in its budget. The unions winked at the underfunding— in return for which they were rewarded with higher benefits. And so every nest was feathered: pension benefits were hiked, the budget squeeze was alleviated, the politicians’ obligations were conveniently deferred.

The fiscal demands on the government had risen, in part because the unions had obtained a stronger foothold, and in part because San Diego, riding a tide of growth in the Sunbelt, had emerged (by the end of the twentieth century) as America’s seventh largest city. San Diegans may have loathed paying taxes, but they demanded and needed government services all the same.

And its form of government was particularly unsuited to delivering them. San Diego was governed by a city council, one of whose members included the mayor—by design, a “weak” mayor. The council delegated executive functions to a staff of bureaucrats led by a city manager. Real power was vested in the local business interests, of which the San Diego Union-Tribune has been paramount. (Its editor in the 1960s was Herbert Klein, who doubled as press agent in Nixon’s campaigns and ultimately was his White House director of communications.) For practical purposes, the reigning authority was the Chamber of Commerce, an arrangement that may have been reasonable when San Diego was more or less an oversized hacienda in between Los Angeles and the Mexican border, but it was unsuitable for a metropolis of 1.2 million.

Many government services were simply unprovided for, as evidenced by the legions of homeless who wandered unattended in the downtown business district. The disconnect between San Diego’s need for government and its reluctance to pay for it meant that officials were forever having to improvise—to find the unspent funds, to access the buried account. That it wound up pillaging the pension system seems, in retrospect, almost inevitable.

THE CITY OF SAN DIEGO is shaped like an oil can, with the spout jutting northeastward into rolling hills and plunging canyons that are dotted with affluent subdevelopments. On the western edge of the can lies La Jolla, a spectacularly picturesque seaside community ensconced in a crescent-shaped bay. The southernmost part of the city is detached from the rest, looking as though the can had sprung a leak; it borders on Mexico and is largely Hispanic. Just above it, and fronting the harbor, is downtown San Diego, home to City Hall, the courts, and the pension system.

The roots of San Diego’s problem lie hundreds of miles to the north, in the state capital of Sacramento. More precisely, they lie in California’s system of popular referendums, which leaves localities as well as the state especially vulnerable to democratic passions. In 1978, Howard Jarvis, a onetime advance man for Herbert Hoover, succeeded in placing on the ballot Proposition 13, which rolled back the property taxes collected by local governments, critically reducing their revenues. Specifically, it limited property taxes to 1 percent of assessed values, and limited increases in the assessed values to 2 percent per year.

Passed overwhelmingly, Prop 13 was a political thunderbolt. It reverberated far beyond the state, sparking a national revolt against high tax rates. In California, cities and towns suffered a devastating loss of revenue—just over 50 percent.³And the effect endured. By 2000, schools in California were receiving $600 per pupil less than the national average, compared to $600 above the average in 1978.⁴A perhaps unanticipated result was that localities furiously began to look for other sources of revenue.

It was soon after Prop 13 that San Diego began, slowly but methodically, to tinker with the local pension system, formally known as the San Diego City Employees’ Retirement System (SDCERS), which administers pensions for 14,500 or so public workers and retirees. Pete Wilson, mayor at the time, was a fiscal conservative who had set his personal sights on Washington. To win higher office he had, of course, to please his constituents, but he was loath to overload the city budget, and in any case Prop 13 greatly limited his options.

Wilson, though, found a cheap way to dispense some goodies via SDCERS (the acronym is pronounced "S.D.-SIRS”). In 1980, he and the rest of the city council fashioned a novel plum. They decreed that in any year in which the system earned more than 8 percent on its investments, half of the so-called surplus would be distributed to pensioners. (This became known as the “13th check,” similar to the Christmas bonus awarded to New York City firemen.) The 13th check was predicated on a seriously flawed actuarial premise. As in the biblical tale of Joseph and the Pharaoh’s dream, bountiful harvests should be stored for the inevitable years of lean, not consumed when the harvest is in. But by the time the lean years arrived, Wilson would be long gone from San Diego.

Wilson next tried to reach directly into the pension fund to, in effect, lend the city cash, but a local judge raised such a fuss that the idea was dropped.⁵Still eyeing retirement contributions as a potential life raft, Wilson took the extraordinary step of withdrawing San Diego from the federal Social Security system (it remains one of the few cities that is outside the system). Wilson no doubt figured that San Diego would reap a saving, as it was spared from having to pay its share of the federal payroll tax. However, the city employees, who now lacked Social Security protection, naturally demanded a heftier pension from the city and also retiree health care.

Praised for keeping government small, Wilson won two terms in the U.S. Senate and in 1990 was elected governor. This, approximately, is when the hard times in San Diego began. The immediate fiscal pressures stemmed from an upheaval in the political system. At the time, the councilmen who ran City Hall were elected “at large,” or on a citywide basis. This limited the influence of minorities, who could have prevailed in district elections but not over the entire city. It also minimized union influence. The council, though officially non-partisan, resembled an exclusive and virtually self-perpetuating club. Members would frequently resign before their terms expired, so that the mayor, conveniently, could pick their successors.

In 1988, a local attorney named Michael Aguirre initiated a voting rights suit, contending that at-large voting discriminated against minorities. A litigator with the physique and temperament of a spark plug, Aguirre had a passion for the underdog. Nearly always, he had represented the little guy—voting rights plaintiffs, retirees, migrant workers. But his real interest lay in politics. His suit shook up the city, and following a referendum, the at-large system was scrapped. Henceforth, eight of the nine council members (all but the mayor) would be elected by individual districts.

This seemingly modest reform ushered in revolutionary changes, as it splintered the city into political fiefdoms. Southern San Diego became a Mexican district, the Sixth District was working-class, and so forth. Also, the districts were small enough so that five thousand or so votes could swing an election. This gave special interests—including the public employee unions—a political clout they had never had, somewhat on a par with business interests.

The unions began to contribute more to political campaigns, with discernible effects at the polls. Naturally, councilmen felt more pressure to raise employee salaries, and to respond to other interests. But though government spending began to rise, the council still refused to tax. Unable to raise revenues through conventional means, the city balanced its budget with mirrors and one-time expedients such as selling land, some of which had first been granted to California from the king of Spain (a nonrecurring revenue source, to be sure).⁶Its budget woes worsened when the country suffered a recession in 1990 that hit California especially hard. The following year, after the Gulf War, the defense industry went into a nosedive, eviscerating San Diego’s tax base.

Once again, the city turned to the pension fund to ease the crunch. In 1991, it played a little game—actually a couple of games—with SDCERS’s accounting. First, it convinced SDCERS to switch to a more liberal method of computing its pension liability, a maneuver that reduced the city’s annual payments in the short run. It also extended the repayment period for its liability over a new thirty years (the equivalent of granting the city a fresh mortgage on its pension debt). This reduced its bill even more. However, the trustees who presided over SDCERS demanded a favor in return. And they got it: the city significantly increased benefits.⁷ In effect, the trustees could say to the beneficiaries, “Though there is less money in the fund now, more will be coming your way later.” But the fact remained that San Diego had set a dubious fiscal precedent, borrowing from the future to avoid a short-term squeeze, and offering a carrot to get the trustees to look the other way.

The state government, which was experiencing budget problems of its own, was hardly more virtuous. Once installed in Sacramento, Governor Wilson (perhaps fondly recalling his raids on SDCERS) brazenly shortchanged the California Public Employees’ Retirement System, a big state pension system. The fund sued him, but meanwhile, the state went about deliberately underfunding its pension plan by some $1.36 billion.⁸

Wilson generated even more problems for San Diego in the early ’90s when he, along with the legislature, began to siphon property tax revenues from cities and counties to the state. This cost San Diego on the order of $30 million a year—a crippling loss.⁹From then on, the city government was chronically short of cash.

Just as San Diego was absorbing this blow, it elected a new mayor, Susan Golding, an ambitious politician with a demonstrated ability to dodge potential landmines. Golding had launched her political career in the late ’70s, when she was appointed to a vacant council seat by then mayor Wilson. Her husband, Richard Silberman, a politically connected and wealthy financier, spent a bundle to help her get elected to the county board of supervisors, after which Silberman frequently called on the county government for personal favors. Subsequently, he was convicted of money laundering. Golding divorced him, and in 1992 was elected mayor.¹⁰

Despite the shortage of funds, Golding unveiled an expensive agenda, featuring headline-grabbing projects such as a new library and an expanded convention center. Shoring up the retirement system was not high on her agenda—to be fair, in those years, save for the occasional breast-beatings of Alan Greenspan about the looming Social Security deficit, pensions were ignored by most of America. Golding, in any case, was popular with local businessmen; she had a vision for moving San Diego forward, for attracting new industries and completing the city’s evolution as a big-league destination for culture and sports. She was intemperate with doubters and seemed to regard the financing of her schemes as little more than a detail.

Golding turned the funding side to her wizardlike city manager, a ramrod-straight ex-Marine named Jack McGrory—or rather, Golding ordered McGrory to figure out how to pay for it all. The indispensable cog in an overburdened machine, McGrory kept lists of the projects dear to the elected council members (including the mayor) and separate ledgers of the available city funds. These he somehow managed to bring into balance. No one quite understood how he did it, and that was his secret. He moved expenses around, shifted personnel, offset one account against the other. A favorite McGrory tactic was to charge the water or sewer departments for laying pipes under city streets, which effectively transferred costs from the general fund to water and sewer (which had the power to assess fees).¹¹Council members complained they didn’t understand his machinations, that he never explained the budget (the complexity of which one member likened to that of a Leonardo da Vinci drawing), but the truth was they were happier not knowing what McGrory was up to.¹²

When McGrory reached the limit of even his resourcefulness, he would beg the council for tax increases (which required a referendum) and/or higher usage fees. The business establishment, invariably led by the Union-Tribune, almost always thwarted him. Whereas businesses in nearby Los Angeles paid a fifth of 1 percent of their receipts for licensing fees, those in San Diego contributed one-fiftieth of 1 percent. Similarly, residents in L.A. paid $137 per capita as a utility tax; those in San Francisco $97, and in Santa Ana $75. San Diegans paid zero. Despite its appeal as a tourist haven, hotel room taxes were among the lowest in California. Home-owners in San Diego did not want to pay to have their garbage hauled away, and so, unlike virtually every other municipality on the planet, the city did it for free. Nor did the city impose on its snug denizens the indignity of parking meters along their miles of pristine beaches. Overall, the revenue collected by the city amounted to only 2 percent of household income—the lowest ratio of any big city in the state. Since the average was 3 percent, San Diego was forgoing fully a third of the revenue that presumably was available to it.¹³

Golding needed some other revenue source, and the reader will guess that she turned to SDCERS as the most practical option. Shortchanging the pension fund always seems expedient, because future beneficiaries do not have a voice. And what other option did Golding have? San Diego already was coping with a threadbare level of public service. It had fewer cops per capita; it spent less on upkeep per each acre of park; it made fewer repairs on its streets, highways, and storm drains than any city in the state.¹⁴ (Frustrated bureaucrats occasionally twisted the official slogan, referring to their hometown as “America’s Cheapest City.”) So badly outmoded were its sewers that it was under a federal mandate to improve them.¹⁵

Further cuts would have been highly unpopular. And Golding, who was hoping to use the mayoralty as Wilson had—as a springboard to the U.S. Senate—knew that to propose new taxes was political folly, even if economically it was the soundest course. Due to demographic shifts such as the aging of the workforce, the city’s pension bill was rising, but writing a bigger check to SDCERS was unlikely to win her many votes. Therefore, in the spring of 1994, she made a startling suggestion: that SDCERS give the city a one-year “holiday” from contributing to pensions at all. The SDCERS board promptly and properly rejected the idea.¹⁶

The next year, Golding again attempted to “save” money by skimping on the pension fund. Given some of her other priorities, stiffing SDCERS was a revealing choice. Golding had attended the recent Super Bowl in Miami, to cheer on the San Diego Chargers, and after the game she flew home with Alex Spanos, the team’s owner. After this apparently aphrodisiacal experience, she began to talk up the need to improve the aging, city-owned Jack Murphy Stadium—the better to lure a Super Bowl to San Diego and to dissuade the Chargers from leaving town, which is what Spanos, a real estate mogul, was threatening to do.¹⁷McGrory quietly worked out a deal (rubber-stamped by the city council) under which the city would pay for any unused football tickets, up to an attendance of 60,000, and thus ensure Spanos a guaranteed purse.

With such added burdens as the Chargers, the city could hardly afford the tab for pensions, or so Golding and McGrory maintained. It seemed a small matter, they argued, to skim a little from SDCERS, whose assets totaled $1.3 billion. No matter that its liabilities were even larger; to a city manager with a budget to meet, a pension liability seems far off indeed.

And now, the city’s tone became more insistent. Ed Ryan, the city auditor, warned that without a concession from SDCERS the city would be forced to slash police and fire budgets. That was a clear threat. The SDCERS board heatedly debated Ryan’s demand, with one member rightly objecting that the pension fund did not exist for the purpose of bailing out the city, much less its football team. However, when an auditor says he needs a break, boards find it hard to refuse. It voted 7-6 to reduce the city’s pension contribution, pending an approval from the board’s lawyer.

SDCERS’s fiduciary counsel was a San Francisco law firm, Morrison and Foerster. It recognized that the underfunding would violate the city charter, which required the city to make contributions at a rate consistent with the actuarial calculation, and the law firm said so plainly.¹⁸As far as the 1995 budget process was concerned, that ended the matter.

Why would the retirement system cashier its counsel when it had demonstrated both competence and courage? The explanation, at least in part, lies in the deeply conflicted composition of the SDCERS board. Three of its trustees were City Hall employees who represented the city manager, the treasurer, and the auditor. Additionally, four trustees were selected by the mayor and the council. In short, while it was in SDCERS’s interest to remain as flush as possible, it was in the city’s interest to minimize its contributions, and the board was controlled by the city. Indeed, the three trustees who worked at City Hall had an intimate, day-to-day involvement with the city’s budget.

Going into 1996, McGrory knew that the required pension contribution would be rising again. He was facing a real budget squeeze, which was especially awkward given that Golding was up for reelection. She was hankering for the new library, a nature preserve, daytime care for tots and after-school programs for teenagers, more police officers. And with Spanos, the Chargers owner, still whining about the team’s home, Golding was preparing to float a $60 million bond issue to pay for a stadium expansion, luxury boxes and so forth. Spanos, as it happened, was also a major Republican fund-raiser, a fact of considerable interest to Golding, who was now laying the groundwork for her Senate bid. To bolster her chances, she also wanted San Diego to host the 1996 Republican convention (its first since the lost convention of 1972). But the convention would further drain the city’s coffers. McGrory simply did not have the money to pay for everything on Golding’s gaudy agenda.¹⁹

Golding surely did not want to ask the voters to pay for it.²⁴ The rest of the country, and in particular the Republican Party, seemed to be catching up to San Diego in terms of its dislike for taxes, and Golding was a politician in glorious harmony with the moment. In her otherwise expansive State of the City address, she boasted of having further cut taxes. With regard to the proposed library, she chirped that the council had “figured out a way to pay for it, and adopted a plan to build it—all without raising taxes.”²⁰

With such promises afloat, McGrory knew that squaring the budget would be impossible. To make matters worse, the city had to negotiate new contracts with its labor unions. But maybe—just maybe—that spelled an opportunity. The most powerful union was Local 145, representing the firefighters. Local 145 was run by Ronald Saathoff, a forty-eight-year-old fire captain and decorated Vietnam veteran. Other than McGrory himself, Saathoff had more clout with the city council than anyone else in San Diego. Conveniently enough, he was also a trustee on the pension board.

Saathoff was not a firebrand labor leader in the manner of a Mike Quill. Rather than trying to fight the establishment, Saathoff had tried to co-opt it. Having been president since 1980, he was deeply versed in union matters and, significantly, he was an expert on the particular complexities of pensions. Many of the trustees shied away from the details; Saathoff reveled in them. A high school graduate who owned a car wash with his father, he was self-taught and determined. Slender and well proportioned, he had a Roman bearing and an air of authority. And the greater his mastery of pension details, he found, the more he could intimidate those who found the intricacies of pensions overwhelming—including the other pension trustees.

The city’s move to district elections was a gift to Saathoff. It gave the firefighters, as well as the other public unions, their first real influence over the city council. Saathoff used this gift wisely. He learned to soften his approach and to cultivate business and political friends downtown.

Meanwhile, the firefighters worked the streets. Candidates favored by Local 145 would wake to see firemen at fund-raisers on their behalf, firemen at bake sales, fire helmets emblazoned with messages of support. Saathoff used his influence in a very intelligent way. Formerly, when business interests lobbied for a favor—say, lower development fees—labor unions would oppose them. Saathoff’s approach, as a union official put it, was, “Why embarrass them? Let’s work with them and get a piece of the pie.”²¹

Saathoff knew that, given everything else on the city’s plate, 1996 would be a tough year for bargaining. He didn’t necessarily object to the agenda the mayor was promoting—the Chargers, the convention, and so forth. He just wanted the firefighters to get their slice.

Early in the year, McGrory drafted a budget fix that he figured would appeal to Saathoff. It was the boldest attempt yet to duck the city’s pension obligation. Basically, it would reduce the city’s contribution below the actuarial rate for a period of ten years. During that time, the city would “save” as much as $15 million a year, or a total of $110 million, though of course the money would have to be paid later. In return for shortchanging the system—this was the carrot—McGrory offered to raise the unions’ pensions.

McGrory rationalized that the pension fund, which was earning good returns in the stock market, was in better shape than the city.²²Given that Governors Wilson and others had shortchanged their state pension systems, his plan did not seem so outlandish. However, by offering the four city unions an explicit quid pro quo—a sweetener in the form of higher benefits—McGrory had crossed a serious line. He was not just asking for a favor; he was literally trying to buy the unions’ acquiescence.

But the unions would not settle cheap. In a brazen letter, Ann Smith, the lawyer for the municipal employees association, snubbed McGrory’s offer and warned that the union would accept nothing less than “a vast improvement in the retirement formula.”²³Smith tried to feign a deep fiduciary concern, as though she was truly upset that the city was “tampering with funding methods.” She added that it would require a “yeoman’s effort” to overcome her, and her members’, misgivings. By yeoman’s effort, she meant a bigger payoff than McGrory had proposed, or, as she put it, “gains [that] are clearly respectable.” This was patent blackmail. Left unstated was the inconvenient fact that if Smith were truly worried about funding levels, higher benefits would be counterproductive, since they would increase SDCERS’s liability. Higher benefits wouldn’t compensate for the underfunding, they would aggravate it.

McGrory duly improved his offer. He now proposed a one-third increase in the multiplier used to calculate municipal workers’ pensions—a staggering raise.²⁵ The other unions also got hefty raises. The uniformed services (police and fire) would now be able to retire, after thirty years, on a pension equal to 90 percent of salary—a level unheard of in industry (save for the unpardonable pensions of many CEOs).

And the formula improvements were just for starters. To further entice the unions, McGrory promised to:

• Increase the 13th check.

• Let employees buy (as it turned out, at a steep discount) extra years of service, and thus qualify for a greater pension than they had earned.

• Let employees eligible for retirement continue to work and earn a pension simultaneously—a form of double dipping.²⁴

• Have SDCERS cover retiree health care.

Such improvements would cost the city dearly. Presently, the SDCERS actuary calculated that to stay current on its obligation, the city had to contribute 8.6 percent of its payroll a year. After the benefit hikes, the tab would vault to 11 percent. But McGrory, of course, wasn’t intending to pay the full tab. According to the terms of his underfunding scheme, the city would pay only a little over 7 percent. This would further increase the liability in the following year, when the actuarial cost would rise to 12 percent. Each year of underpayment would exacerbate the deficit in the next. The plan was fiscal lunacy on its face.

McGrory had to sell it to the council—which would be committing to higher pensions forever—but the council wanted peace with labor and the plan had Saathoff’s backing. And McGrory was a consummate salesman. He assured them it was a “package deal,” meaning if the city didn’t get a funding break, it wouldn’t be on the hook for the higher benefits.²⁵

The SDCERS board was a tougher sale. Essentially, McGrory was asking the trustees to waive their duty to keep SDCERS financially sound in order to accommodate a labor negotiation. A couple of the trustees heatedly protested, with one wondering how the city would be able to come up with $100 million later if it couldn’t pay a much smaller sum now.

The board’s new fiduciary counsel, a Denver attorney named Dwight Hamilton, warned that McGrory’s plan raised “red flags,” and fretted that it would shift the pension liability to future taxpayers.²⁶But he didn’t say outright that it was illegal. The actuary, Rick Roeder, also waffled. The two advisers needed but a tiny encouragement: a face-saving.

McGrory came up with a clever mechanism to reassure them: a failsafe mechanism known as a “trigger.” Presently, the retirement system was 92 percent funded (that is, 8 percent underfunded). As McGrory described the trigger, if SDCERS fell another ten points—to precisely 82.3 percent, which is a pretty anemic level of funding—the city would immediately be required to make a big balloon payment. It was uncertain how much it would owe—at least $25 million and possibly more. The arrangement was akin to a homeowner promising to make bigger payments if he fell behind on his mortgage. It was patently illogical; if he fell behind, even normal payments would be a burden. But the trigger gave the scheme the patina of security: it was a “failsafe,” a "guarantee.”²⁷

Conny Jamison, the city treasurer and also a board member, was still dissatisfied. But Jamison was in a tough spot; as treasurer, she worked for McGrory, the plan’s author. He accused her of not being a team player and menacingly added, “I hope you’ll support me on this.”²⁸

The trustees considered the revised plan at the end of June 1996. Saathoff argued strenuously in favor of the plan.²⁹The other trustees waited to hear from Hamilton, the lawyer, and Roeder, the actuary. Pension advisers are typically unsung, but they have moments, at least potentially, of quiet heroism. Nothing but the absolute truth will do, and they cannot allow either peer pressure or a desire to please to corrupt their opinion. Neither Hamilton nor Roeder was up to it. Each gave a grudging okay and the resistance collapsed. By a vote of 8-3, the board approved its own underfunding. In July, the council kept its part of the bargain, passing the new, higher pension benefits without discussion.³⁰

The Republican convention the following month was a smashing success. The city (flush with unspent pension dollars) was able to show conventioneers its best face. The unions pitched in with the Chamber to spruce up the city, and visitors who thought of San Diego as a sleepy haven for retirees discovered it had gleaming skyscrapers (and swaying palms), too. James Brady, on assignment for Parade, likened San Diego to a second Eden—one that fell only “just short” of the original. Bob Dole, the nominee, doffed his cap toward the host city or at least toward its governing ideology, as he promised in his keynote speech no fewer than twenty-four times that if elected he would cut taxes. He was presumably unaware that San Diego had defrayed the convention’s cost by shortchanging its public retirement fund.

WITHIN A YEAR, the California Court of Appeal ruled that Wilson’s underfunding of the state system in the early ’90s had violated the constitutional right of employees to an actuarially sound pension.³¹Arguably, San Diego was also in violation.³²But no one challenged it. The city’s timing was fortunate: the stock market was booming, and SDCERS’s investment portfolio was soaring. McGrory, seeing a chance to go out on top, left the government for a lucrative job in private industry.

Two years later, Golding strong-armed local business leaders to support yet another sports project—a new ballpark for the San Diego Padres. The baseball stadium had the Golding trademark: an elaborate vision, combining sports and real estate development, that would be financed with bonds to be repaid well in the future. The proposal was expensive and encountered strong opposition, as well as numerous legal challenges.

Meanwhile, the mayor was having trouble with Spanos, the Chargers’ owner. Once the city floated bonds to pay for renovating the football arena, renamed Qualcomm Stadium, Spanos, in effect, double-crossed the city by raising ticket prices.³³Attendance flagged, leaving San Diego on the hook for millions of dollars a year in unsold tickets, which it distributed gratis to children. In addition, the city was stuck with debt service obligations on the stadium bonds of $5.7 million a year.³⁴The “ticket guarantee” was ridiculed as a costly fiasco; it ended Golding’s senatorial hopes.

But with the stock market continuing to boom, the city was under pressure to raise pension benefits again. Legislators are naturally accustomed to making short-term accommodations; a tax may be levied and then, when circumstances change, rescinded. Police forces can expand and contract with the level of crime. The trouble with hiking pensions is that the benefits are immune to cyclical fluctuations; they never go away.

But as in New York State, politicians in California regarded the bull market as an excuse not only to raise benefits but also to reduce contributions. In California, home to the dot-com industry, stock market mania was at a peak. Gray Davis, who was elected governor (with strong support from public unions) in 1998, inherited a budget surplus. He sharply cut pension contributions and simultaneously pushed through bills to increase benefits. The higher benefits trickled down to localities as well.

It is one thing to demand a wage hike every year or couple of years; a regular pension improvement is something else. Public pension benefits are typically set at a percentage of final salary; therefore, employees automaticallyget pension raises the longer they work and the more they earn. Sweetening the formula amounts to a raise on top of a raise.

In March 2000, though, SDCERS was forced to raise benefits when it settled a lawsuit brought by a group of retired employees who claimed their benefits had been miscalculated. The settlement was extremely costly,²⁶ and given that it was the second major hike in four years, some respite from further increases was presumably in order. But by the spring of 2000, the height of the dot-com bubble, considerations of prudence were demonstrably passé. In the first few months of 2000, a newly minted tech stock was doubling on its first day of trading every other day, a speculative orgy that seemed to suggest, especially in California, that any public commitment could be underwritten by some future rise in the market.³⁵Moreover, 2000 was a local election year. The unions, which were better organized, and better funded, than in previous campaigns, were pushing for higher pensions.

The council considered the issue in September—two months before various of its members stood for reelection. Saathoff got the firemen another boost; his troops could now claim their 90 percent pension at age fifty, rather than, as before, age fifty-five. In other words, they would enjoy essentially a full salary for half of their expected adult lives without doing a stitch of work. Not even Walter Reuther would have thought it possible (or feasible). The cops got more as well, and the city council passed a big hike for its own members, including Golding, who was retiring. Each of these hikes, of course, increased the system’s future liability.

By the time the increases were enacted, the stock market was well off its highs. There was mild disquiet as the mayoral election neared, a sense among the city fathers that the extravagances of the recent past needed to be tempered: the fiscal house put in order. The promise of the Golding era had begun to wilt. The Chargers’ ticket guarantee had cost the city $5 million over the past year, an expense that outraged ordinary San Diegans. As for the Padres’ stadium, construction had been suspended following revelations of corruption involving a councilwoman with close ties to the team’s owner. The much-feted, and sorely needed, library had not advanced beyond the blueprint stage. “Confidence in the mayor and City Council has ebbed ominously,” opined the Union-Tribune.³⁶But the pension was not a particular concern, and the downtown business leaders, who had always called the shots, fancied they had found the perfect antidote to the profligate and undisciplined ’90s. They had in mind a mayoral candidate who was cautious, deliberate, judicious—he was in fact a superior court judge.

Richard Murphy was fifty-seven, a conservative Republican like his mentor, the former mayor Wilson. Murphy was modest, more comfortable forging consensus than grabbing the limelight. He was a family man, a churchgoer who tended to the choir loft, neatening it before the services. He loathed disorder and was painstakingly methodical. A native of Chicago, he had gotten an MBA at Harvard and gone into banking, but it didn’t take. He got another top-drawer degree, this time from Stanford Law School, and joined a San Diego law firm. The mystery to his career, given his intellect and résumé, was its failure to really ignite. He made a point of scheduling a weekly lunch with a potential campaign donor, but for years he didn’t run for anything bigger than the city council. Once, in the ’90s, he was all set to run for Congress, but disappointed friends by changing his mind. In 2000, when he put his hat in the ring for mayor, a sympathizer warned him, “You backed off once. You won’t get another chance.”³⁷

True to his organizational bent, Murphy proposed “Ten Goals” for San Diego’s future. With Murphy it couldn’t be nine or eleven; it had to be ten. Among these, he had in mind an ethics commission to elevate the character of local government, and also a blue-ribbon committee to study the state of city finances and, indeed, to determine how to pay for the other items on his list, such as the library and finishing the ballpark. This was vintage Murphy: commissions and committees as a prelude to action. The Union-Tribune was wary of his indecisiveness but endorsed him anyhow.³⁸In Murphy’s favor was his personal rectitude, his distance from the political fray, and from special interests such as labor unions. He won handily.

By late 2000, when Murphy was installed in office, San Diego’s fortunes had noticeably turned. Valerie Stallings, the implicated councilwoman, resigned and pleaded guilty to a pair of misdemeanors for accepting gifts from John Moores, the Padres’ owner. Moores was cleared by a U.S. attorney, who explained helpfully, “It is not a crime to give gifts to public officials.”³⁹

Improbably, Donna Frye, a throaty, perpetually sunburned surf shop owner who had become disgusted with the city’s discharges of sewage into the ocean, which she said were poisoning surfers, ran for Stallings’s vacant seat and won—giving the Democrats their first majority on the council. Of more immediate moment to the new mayor, the market and the national economy cooled considerably, putting the pension fund on shakier ground.