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Wednesday, May 04, 2005 | Although city of San Diego officials often publicly trumpet the fact that this year the pension system will receive its first full payment in nearly a decade, many also admit that the increased payment isn’t likely to stop the system’s $1.37 billion shortfall from growing.
“To keep from going backwards, we should pay more,” said City Manager Lamont Ewell in an interview Tuesday, a day after revealing a fiscal year 2006 budget that proposes to eliminate more than 300 positions, curtail services and increase fees to close a $50 million gap.
In the budget proposal, the city takes steps to address what has been a decade of neglect to the San Diego City Employees’ Retirement System. It shifts the costs of retiree health care to the city from the pension system, a move applauded by many – although it doesn’t find a long-term way to cover its costs. The city also is slated to pay $163.5 million into its pension system, an improvement of more than $30 million from last year’s contribution.
But how the city arrived at that $163.5 million figure is the point of some contention. And even some of those that agree the payment should be substantially higher don’t believe it’s possible considering the enormity of cuts and layoffs already present in the city’s $857.7 million general fund budget.
“The pension is one thing the City Council has to deal with, but we also need to keep up basic services going while trying to dig out from this hole,” said Councilman Scott Peters.
April Boling served as chairwoman of the city’s Pension Reform Commission, which was tasked last year with recommending the solution for a pension system that struggled with a decade of inadequate city contributions, increased benefits and some investment losses.
By her calculations, the city should be paying slightly more than $200 million into the pension system this year to simply keep the pension deficit from growing. That payment includes $82.9 million in annual costs, an estimated $9.4 million in so-called “contingent” benefits that aren’t included in the system and an additional $109.5 million to cover the interest accrued on the $1.37 billion shortfall.
“I think it’s insufficient,” Boling said of the city’s budgeted payment. “And it’s going to make the unfunded liability an even larger problem in subsequent years.”
But the city isn’t bound to incorporate all of the costs that Boling mentioned, including contingent benefits that must be accounted for annually, thereby lowering the obligated payment. The pension system’s actuary told a council committee last month that the city’s contribution should be $155 million.
Pension observers such as Boling stress that the city needs to account for the system’s real costs, whether mandated to do so or not. She accused officials of “hiding behind legal fiction.”
“Legally, they can’t say they are making an insufficient contribution,” Boling said. “So they’re coming up with these schemes so they can pay an amount less than needed to dig themselves out that are legal.”
Many agree that part of the funding problem is linked to a 30-year amortization schedule that allows the city’s annual contribution to be eaten up by interest costs. The city is slated to change to a 15-year amortization schedule beginning in 2009.
“It’s not until that amortization change that we will start making the impact we need to be making,” Ewell said.
Mayor Dick Murphy said through a spokeswoman that a $200 million payment would certainly be desirable but cannot be achieved without further cuts to city services. He said the city should be able to reduce the pension deficit through a number of concessions being sought in labor negotiations, including pay freezes, increased employee contributions and eliminating some benefits for new employees.
The 2006 budget also proposes to continue to fund retiree health benefits on a pay-as-you-go basis rather than on an amortized schedule, further widening another pension-related deficit that is currently estimated at $500 million to $800 million. The retiree health care benefits cost an estimated $26 million last year; a total of $16.5 million has been budgeted for 2006.
As long as the city continues on a pay-as-you-go-basis, or until it takes action to alter the medical benefits offered to employees, the $500 million to $800 million deficit will continue to grow.
Based on the actuary’s assumptions last year, the city had an unfunded liability of $545 million for retiree medical benefits. That shortfall would grow by approximately $44 million in interest in fiscal year 2006, based on those assumptions.
Funding the benefit on an amortized schedule would bring the city’s annual payment to a total of about $70 million this year for retiree health care, but would allow it to at least stem the deficit’s growth.
Beginning July 1, 2007, the city will have to report a portion of the retiree health care debt to investors under new laws issued by the Governmental Accounting Standards Board. At a breakfast last week, the pension system’s actuary Rick Roeder said that figure will likely not affect an entity’s credit rating unless it is between two ratings.
The retiree health care conundrum is one faced by many municipalities, and it was referred to in an investigation into city fiscal problems last year as a “snake in the grass.”
Pension reformers want the city to move quickly on solving that issue as well. But the weight of federal and local investigations, budget problems, delayed audits and a suspended credit rating may be too much for now.
“We’d like to get started on that this year, too. It’s too early to tell,” Peters said.
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