— San Diego's "EEEK" shriek was not, unfortunately, the "EEEK" heard round the world or the country or county or city or even city hall, where it should have set off a cry, "The Red Ink Is Coming!" Nobody acted on the economic warning -- even Mayor Dick Murphy, with his undergraduate degree in economics, his master's in business administration from Harvard, and his Stanford law degree. Now the city is beset with a $2 billion pension/health-care deficit and is under federal and local investigation for concealing it. The city can't sell bonds, so its infrastructure continues to rot.

"EEEK." The word was first e-mailed in October of 2001 but, in fact, should have been shouted as early as 1990, when San Diego began making bad decisions that ultimately led to the current pension crisis.

In 2001, San Diego had a rule: if its pension system fell below an 82.3 percent funded ratio, the city would have to plunk hundreds of millions of dollars into the workers' pot. That pot was in jeopardy: the stock market had been in a downspiral since early 2000. "By late 2001, city officials began to fear that these plummeting [investment] returns were likely to pull [the pension system's] funded ratio below the 82.3 percent floor," says the Vinson & Elkins report, which the city commissioned last year.

On October 11, 2001, Terri Webster, then assistant to auditor Ed Ryan and now acting auditor and comptroller, lamented in an e-mail to another city official that portfolio earnings as of August 31 were "$15 million compared to $53 million same time 2000...a 71 percent drop! BEFORE 9-11-01!" (Stocks had taken another big hit after 9/11, but those results had not been reported to her yet.) She went on to say that the pension fund had "to build its equity and halt cost increases to ride through the next few years."

The title of her e-mail: "EEEK."

Ryan -- who abruptly resigned early last year -- and Webster were "conduits to Murphy," says Mike Aguirre, city attorney. "Ryan and Webster were both staffing the blue-ribbon commission," which was preparing a paper on city finances for the mayor. On February 12, 2002, the actuary reported officially that the system had been only 89.9 percent funded in mid-2001. But more than two weeks later, on February 27, the blue-ribbon commission said in a report to a city-council committee that the system was 97 percent funded. On April 15, 2002, the full city council got the report, which stated the 97 percent figure.

It was not credible. The stock market had continued dropping after the "EEEK" memo six months earlier. The folks with the blue ribbons seemed oblivious. "The commission doesn't say anything about the contents of the 'EEEK' memo," notes Aguirre.

He has unearthed other documents showing that in mid-February of 2002, people connected with the pension system were concerned that the pot was getting down close to that 82.3 percent trigger.

There was something else going on that suggests that city officials weren't simply blind or in denial about the pension deficit: they were deliberately distorting information. The ballpark bonds were coming out. From conception forward, ballpark discussions and projections had been marked by institutional dishonesty. The ballpark bond prospectus came out on February 14, 2002, two weeks before the blue-ribbon commission report.

The Vinson & Elkins study notes that Ryan had provided some information on pension woes to the blue-ribbon commission. "The ballpark official statement, however, dated February 14, 2002, overlapped with Mr. Ryan's work on behalf of the blue-ribbon commission, yet makes no mention of these issues," says the report.

The blue-ribbon commission report warned of underfunding in general terms but used rosy numbers that were out of date. "Why didn't the commission warn of an impending trigger?" asks attorney Michael Conger, who successfully sued the city over the pension issue in a suit settled last year. "It's like having your house inspected, and the inspector doesn't notice that you don't have a roof."

In spring of 2002, armed with rosy, outdated information, the city concluded labor negotiations with three of its municipal unions. The basic retirement benefit would zoom 25 percent over two years. Pension-board member Diann Shipione warned that the city was headed over the cliff. The auditor was nervous about the underfunding. But in November of 2002, 13 months after the "EEEK" memo, with the stock market still cratering, both the council and pension board approved the measure boosting the benefits while continuing the underfunding and eliminating the balloon payment that would have to be made when the trigger was hit. Shipione and another pension-board member opposed it. Councilmember Donna Frye was the sole opponent in council chambers.

"Did the auditor keep the information from Murphy?" asks Aguirre. I would ask some further questions: was Murphy even aware that the second-worst bear market since the Great Depression was going on? And short of a miraculous turnaround, that it would certainly push the funding ratio below 82.3 percent? And the city would have to chip in $500 million in 2004 and 2005? And that this money was nowhere in sight? Was he afraid that revelation of these matters would burst the ballpark euphoria or turn off ballpark-bond buyers? Did anyone teach him at Harvard Business School that higher payouts and lower pay-ins can lead to deficits?

While stocks and the pension system's funded ratio plummeted, did anyone take Murphy aside and shout, "EEEK"? If not, why not? With his educational background in business and economics, did he really have to be told? Aguirre and federal investigators are probing the key question: who knew what when?

Actually, somebody should have been shouting "EEEK" 15 years ago. As Shipione explains, the system was funded by local taxes until Prop. 13 came along in 1978. The city then shifted gears and by 1981 had a new, more tightfisted pension plan. But by 1990, "All the employees who had been hired under the 1981 plan had been rolled into the older, more generous plan. That created a larger deficit," she explains.

So in the early 1990s, the books were cooked. In calculating contributions, the city shifted from the conservative Entry Age Normal plan to the permissive Projected Unit Credit method. The latter plan, seldom used by other municipalities, "bumps the funded ratio up and artificially reduces employers' and employees' contributions," says Shipione. In subsequent years, the pension system kept saying it wanted to return to Entry Age Normal but never did. Hence, realistically, the funded ratios were even lower than reported. Last Friday, the actuary reported that in 2004, the funded ratio plunged to 65.8 percent. Under Entry Age Normal, it would have been 62.3 percent.

Throughout the 1990s, employees got fatter benefits. One was the Purchase Service Credit program. Employees could buy five years' worth of retirement benefits. Trouble is, they bought the benefits at steep discounts -- for example, councilmembers were paying less than one-third of the cost that would have been actuarially neutral. "It was a gift of public funds," says Dave Wood, one of the plaintiffs in the pension suit against the city settled last year. The pension system lost $56 million after this windfall was enacted in 1996, according to Vinson & Elkins. Last year, the city actuary reported that 2983 city employees had purchased 13, 302 years of "permissive" service since the program began.

In 1997 came the so-called "temporary" adoption of the quintessential double-dipping program: the Deferred Retirement Option Plan, in which employees get double their pay in their last five years and then can retire with both a lump sum and a monthly paycheck. (Try asking for that in the private sector.) It was made permanent in 2002, retroactive to 2000.

City employees, on average, make more than $50,000 a year. The average civilian San Diegan (including government workers) makes less than $40,000. City workers have civil-service protection and get early and generous retirements. There are not adequate funds to pay for such munificence, but the politically powerful workers' unions will fight to retain these benefits. EEEK.

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