What’s Behind the City’s Higher Pension Tab

What’s Behind the City’s Higher Pension Tab

Photo by Jamie Scott Lytle

Mayor Bob Filner

 

This time last year, city officials cheered a lower-than-expected pension bill.

The city’s retirement system saw better returns than it had since 1987, meaning the city could knock nearly $20 million off its budget deficit when the San Diego City Employees’ Retirement System announced the city’s pension burden for the next year.

This year, the pendulum swung in the other direction.

The city must pay about $40 million more than the retirement system initially projected. The city’s day-to-day budget will cover the bulk of next year’s $275.4 million pension tab and new charges associated with the state’s decision to shutter the city’s redevelopment agency. The result, as we recently noted, is a likely budget shortfall.

The city’s pension bill spiked for a few reasons but the implementation of a pension reform initiative and lower-than-expected returns were the biggest culprits.

To start, the city’s pension system assumes a 7.5 percent return over the long haul but the return was only 0.9 percent this year.

That translates into an additional $8.3 million burden for the city.

The pension system’s assumption is based on historical performance and in the last decade, returns have averaged more than 7 percent, said Mark Hovey, the system’s CEO.

An outside consultant decided a 7.5 percent return was likely in the long run.

This year’s return came in far lower, a result Hovey said can largely be attributed to volatility in international markets and the system’s investments in smaller companies. Both strategies served the pension system well in 2011 but turned out lackluster results in 2012.

There were also other bills the pension system didn’t project.

Every year, the pension system make assumptions about many variables, including how many city staffers will retire or file for disability. They also predict how much city staffers will contribute to the system in a given year.

The pension system’s projection fell short by about $5.5 million this year, further boosting the city’s bill.

Proposition B, which gives most new city staffers 401(k) plans, had a much larger impact.

Barring new workers from the current pension system requires the city to pay off roughly $2.3 billion in pension debt more quickly than it would have otherwise.

That change resulted in a $27 million spike in the city’s pension bill for the 2014 fiscal year.

Supporters of Prop. B argue the city will benefit from the measure in the future. But the measure’s greatest savings aren’t guaranteed.

The initiative aims to put a five-year freeze on city staffers’ pensionable pay, which must be hashed out through labor negotiations.

In his State of the City address, Mayor Bob Filner pledged to work to reach five-year agreements with the city’s unions in coming weeks. He will attempt to include freezes on pensionable pay in those contracts.

“This will be a huge step forward in stabilizing city finances, to the benefit of taxpayers and to our loyal city employees,” he said.

Filner projected the five-year labor deals could reduce the city’s pension burden by $25 million to $30 million annually in the next 15 years.

Similar savings were projected starting in 2017 in an actuarial analysis completed last year, though Hovey said five-year agreements could bring earlier discounts.

That’s because more savings can be assumed if staffers’ pensionable pay is set for five years, something Prop. B didn’t presume.

We took a broader look at the costs and benefits of Prop. B in a March fact check:

If the pay freeze happens as proposed, the financial analysis says the city will save $963 million over the next 30 years. Subtract the 401(k) costs and you get $950 million in savings for city coffers.

If you’d like more wonky details on the city’s increased pension tab, you can check out the pension system’s latest financial report here.

Lisa Halverstadt is a reporter at Voice of San Diego. Know of something she should check out? You can contact her directly at lisa.halverstadt@voiceofsandiego.org or 619.325.0528.

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Lisa Halverstadt

Lisa Halverstadt

Lisa Halverstadt is a reporter at Voice of San Diego. Know of something she should check out? You can contact her directly at lisa@vosd.org or 619.325.0528.

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14 comments
David Cohen
David Cohen subscriber

The reporting is quite misleading, then. It starts by referencing "[t]his time last year . . ." and attributes the 0.9% return to "this year" without explaining that it was a fiscal year. Smoothing over several years would reduce the rather arbitrary influence of when each fiscal year ends.

fryefan
fryefan

The reporting is quite misleading, then. It starts by referencing "[t]his time last year . . ." and attributes the 0.9% return to "this year" without explaining that it was a fiscal year. Smoothing over several years would reduce the rather arbitrary influence of when each fiscal year ends.

Mark Giffin
Mark Giffin subscribermember

Now that the risk is shifted to the employees they not be inclined to betray the public trust.

mgland
mgland

Now that the risk is shifted to the employees they not be inclined to betray the public trust.

Chris Brewster
Chris Brewster subscribermember

To my understanding, Social Security is a defined benefit pension program.

B Chris Brewster
B Chris Brewster

To my understanding, Social Security is a defined benefit pension program.

Chris Brewster
Chris Brewster subscribermember

"The safe harbor typically says past performance is no guarantee of future returns." Absolutely true. My point was that a consultant's opinion of a rosier outcome than past performance seems unwise to follow.

B Chris Brewster
B Chris Brewster

"The safe harbor typically says past performance is no guarantee of future returns." Absolutely true. My point was that a consultant's opinion of a rosier outcome than past performance seems unwise to follow.

Chris Brewster
Chris Brewster subscribermember

The reality is that the 12 months ending June 30 was a down period for the stock market. The NYSE Composite Index was significantly lower, for example. Whereas the calendar year ending December 31 was much stronger. Chances are that this fiscal year will be another boom year for both, but time will tell.

B Chris Brewster
B Chris Brewster

The reality is that the 12 months ending June 30 was a down period for the stock market. The NYSE Composite Index was significantly lower, for example. Whereas the calendar year ending December 31 was much stronger. Chances are that this fiscal year will be another boom year for both, but time will tell.

David Cohen
David Cohen subscriber

If the investment return of 0.9% "this year" means for "calendar year 2012" and not an earlier-ending fiscal year, then it is paltry indeed. For calendar year 2012 CalPERS reported an investment gain of 13.3%. Why is there such a large disparity?

fryefan
fryefan

If the investment return of 0.9% "this year" means for "calendar year 2012" and not an earlier-ending fiscal year, then it is paltry indeed. For calendar year 2012 CalPERS reported an investment gain of 13.3%. Why is there such a large disparity?

Marc Lepen
Marc Lepen subscriber

I remember a few articles coming out explaining the problems with prop B and the essential closing of the current pension system, that fact being closing that pension system WILL increase the amount of money the city will need to pay, along with that the city matching of employees who were hired after prop B to their 401(K) plans , coupled with the additional monies the city would have to contribute to social security for these new hired employees. I hate to say this but I told you so, that this move will increase the city cost and so far it has with no additional savings what so ever

Marc
Marc

I remember a few articles coming out explaining the problems with prop B and the essential closing of the current pension system, that fact being closing that pension system WILL increase the amount of money the city will need to pay, along with that the city matching of employees who were hired after prop B to their 401(K) plans , coupled with the additional monies the city would have to contribute to social security for these new hired employees. I hate to say this but I told you so, that this move will increase the city cost and so far it has with no additional savings what so ever