The Morning Report
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The San Diego City Employees’ Retirement System’s board met Friday with its actuary to discuss suggestions he made for changing the way the pension plan bills the city.
The board voted unanimously, with one trustee absent, to account for benefits that have not been paid for directly by the city.
Rather, a 2000 court settlement states that these benefits are paid only if the retirement fund’s earnings exceed a certain percentage. If the earnings that year don’t trigger the payment of these benefits, they will eventually be doled out to qualifying city retirees when the pension plan does meet its earnings threshold.
This gimmick has tapped earnings in good market years that are supposed to be stored away to make up for bad years. The absence of this buildup of earnings is cited as one of many causes of the pension shortfall.
The use of this funding method should also be erased from the city’s laws, the Kroll consultants claimed, but the City Council has not yet acted on that change. Council President Scott Peters has not received the proper paperwork to schedule a vote on the matter, according to his chief of staff, Betsy Kinsley.
Another benefit that has been sorted from the city of San Diego’s bill is an annual bonus known as the 13th check, which is also paid out of so-called “surplus” earnings from investments the pension fund makes.
Altogether, the board’s action would increase the city’s $1.4 billion pension deficit by about $110 million, according to Gene Kalwarski, the outside actuary for SDCERS.
However, there are also accounting changes that will offset the new expense for the city and others that may amplify the city’s pension tab, and the actuary advised against making new estimates for the retirement fund until the next snapshot of the fund’s fiscal health is taken in December.
“As to the totality of these changes, I don’t have an answer for you,” Kalwarski said.
The December calculation will determine the city’s annual bill for the 2008 fiscal year.
The board also decided to change the actuarial method it uses for billing the city. In 1991, the pension board allowed the city to fund the system by deferring the bulk of its payments to future years through a method called “projected-unit credit,” or PUC.
Kalwarski recommended changing the formula to a method called “entry age normal,” or EAN, which would cost the city more during the early years of an employee’s tenure with the city but would result in more stable pension bills for the city over time. The move would provide a “generational equity” for taxpayers, Kalwarksi said.
According to the actuary, about 77 percent of big public retirement plans use EAN and just 16 percent use PUC.
The switch to EAN will take effect when figuring the city’s annual pension bill for the 2009 fiscal year.
The board also began to preliminarily talk about setting a new timeline for the city to pay off its massive pension debt, but pushed off the decision to a later date.
City voters passed Proposition G in 2004 to require that the city eliminate the deficit over 15 years, beginning in the 2009 fiscal year, but the retirement board has asserted that it will make its own decision over how to schedule the debt.
Retirement trustees argue that state law prevents voters from making that decision, citing an opinion the Attorney General’s Office released last year.