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Thursday, June 15, 2006 | The consultant that calculates how much the retirement board should bill the city every year defended his $162 million estimate for the coming year in front of a handful of City Council members Wednesday.
That figure, which was unveiled at a retirement board meeting in March, represents actuary Gene Kalwarski’s estimate about how much the city should pay in the upcoming fiscal year in order to make progress in paying down the current $1.4 billion deficit.
“In my opinion, that number is very defensible,” he said.
The annual bill has significantly shaped the city’s annual budgets since a 2004 court settlement forced the city to significantly raise its contributions.
However, the $162 million – nearly twice the pension payment the city made just three years ago – doesn’t pay off the interest costs of the pension deficit, which accumulates this year. That fact has led critics to claim that the city is continuing a tradition of pension underfunding that began a decade ago. The underfunding has resulted in a myriad of legal repercussions for the city, its pension system, and officials for both entities.
“I need help to understand – and the people of this city need help to understand – that we’re not repeating past practices,” said Councilman Jim Madaffer, who sat on past councils that approved pension payments that were less than what the actuary advised.
Wednesday’s meeting of the council’s Budget and Finance Committee provided city officials with their first direct access to the actuary, who is charged with looking at the demographics of the city work force and the pension plan’s fiscal health when crafting the city’s annual bill.
The position has become a target of blame for critics, who say Kalwarski’s predecessor, Rick Roeder, should have objected to past agreements between the city and the San Diego City Employees’ Retirement System, which effectively allowed the city relief from its bill. Both the city and a retiree have sued Roeder’s firm.
Kalwarski, and the two pension officials who flanked him, spent the morning meeting assuring the council that he was qualified, principled and independent. Mention was even made of the significance of his firm’s name, Cheiron, which was a centaur known for high morals and ethics in Greek mythology.
When asked what he would do differently than the pension system’s last actuary, Kalwarski said he would be more proactive in stating the risks of a funding plan such as the infamous 2002 pension deal “instead of simply having a sheet of paper that blesses it or doesn’t.”
Roeder was initially reluctant to embrace the 2002 deal and eventually signed off on a document that listed several statements about the deal that he affirmed were true.
City Attorney Mike Aguirre and a handful of council members asked Kalwarski and Joe Esuchanko, another actuary who Mayor Jerry Sanders hired to analyze pension dealings for the city, about the $162 million pension bill. Esuchanko said he will not conduct full actuarial studies but will present alternative ideas and ask the technical questions of Kalwarski on behalf of the city. His first analysis will be presented to the council within the next three months.
Critics, including Aguirre, wanted to know why the bill was only as big as the minimum amount that the 2004 settlement called for. The $162 million does not pay off the interest that will accumulate over the next year.
“That established a floor, not a ceiling,” said Aguirre, who has long contended that the pension system has minimized the deficit’s magnitude. “It’s important that we not repeat that mistake and downplay that amount.”
Kalwarski said he was advised to only set the bill at the amount required by the settlement, but said it was up to the city to pay more if it wanted.
“If you want to pay more, pay more,” he said.
The elected officials appeared to be most interested in the assumptions Kalwarski used in the most recent valuation, which he presented to the SDCERS board last month. Critics have assailed the accounting methods, assumed rate of the fund’s investment return and lifespan of the pension debt, and those factors that play into the pension bill’s calculation were discussed Tuesday.
Kalwarski defended some of the system’s current assumptions, but said that he did not change them for the purposes of this year’s bill because the SDCERS board should study its options before making any changes that could affect the bill. He said he has never advised a pension plan to change its assumptions in the first year of his work with that plan without study “unless there is something compelling that, if we hadn’t changed them, results in the serious funding deterioration down the road.”
The actuary said he thought the city’s practice of paying for certain benefits if the retirement fund posted exceptional returns, known as the “waterfall,” was unsound. In the waterfall, money that is earned above the fund’s assumed rate of return is set aside to pay for extra benefits. In the meantime, the plan assumes that those higher returns will compensate for years where the fund’s investments underperform the expected rate of return.
“It’s terribly flawed, it undermines the system’s financing, it gives the illusion of money that isn’t there,” Kalwarski said.
Deputy City Attorney Sharon Spivak said she expected the City Attorney’s Office to have an ordinance repealing the “waterfall” drafted and distributed to the council by next week.
Kalwarski stressed that a rash changes did not have to be made to other accounting methods or the amount of time scheduled for the city to pay off its debt, despite the urgings of Aguirre and Councilwoman Donna Frye.
Council President Scott Peters asked Eusachanko if there was anything Kalwarski said Monday that was incorrect.
Replied Eusachanko, “As ironic as it sounds, I’m almost in total agreement with everything he said.”