The Morning Report
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Saturday, Jan. 13, 2007 | The city of San Diego’s pension fund experienced a resurgence in its most recent annual financial evaluation, reporting that its deficit had dropped from $1.4 billion to an even $1 billion.
The whittling of the deficit is due to an additional $108 million loan infused into the system, which the city will still be paying off for the next two decades; investment returns 3 percent higher than predicted; and a one-time $183.2 million bump because of an accounting change.
In the short term, the funding change presents the city with a smaller-than-expected pension bill, potentially easing an estimated $87 million budget deficit for 2008. The rosier funding picture also came in a year during which the pension board began accounting for certain liabilities that were previously kept off the books.
However, in the long term, the pension fund still faces a number of oncoming concerns that could accentuate the system’s annual burden on the city’s budget.
The San Diego City Employees’ Retirement System board this year will reevaluate the time period in which it asks the city to repay the pension deficit. It is currently on a 27-year program, but a legal settlement mandating that schedule expires this year, and the mayor has asked the pension board to ramp it up to a 20-year schedule.
The move would put greater pressure on annual budgets in an effort to pay off the deficit sooner.
The system has also switched to a more traditional way of accounting for its employees’ burdens on the fund, which will lead to additional funding stress in next year’s report. For example, had the new accounting been used in this year’s evaluation, the pension deficit would be $1.2 billion rather than $1 billion.
“The fact is that undue focus on the City’s retirement plan’s short-term results, good or bad, does not serve the best interest of SDCERS, its Members, the City or the citizens of San Diego,” the report’s summary states. “By its very nature, a public retirement system’s focus is long-term.”
And two of the funding changes that benefited the pension system directly simply moved obligations from the system to the city’s budget — shifting the financial burden but not necessarily lessening it.
The city leveraged more than $10 million in annual tobacco settlement revenues to secure the loan that was pumped into the system. The recognition of a tax law that forbids employees from receiving more than about $13,000 month from the pension system will require the city to pay employee pension above and beyond this figure — or $22.8 million — from a separate account.
The annual report, distributed to pension board members Friday, takes a snapshot of the fund’s health on June 30 of each year. Pension funds are guided by a complex set of assumptions, estimates and predictions. As evidenced in this year’s report, accounting tweaks can change a fund’s liabilities by hundreds of millions of dollars.
Retirement administrator David Wescoe said the report was positive news for the pension system and the city. He called it validation of changes the board has enacted. However, he said any focus, positive or negative, on a single glimpse of the fund’s health is unproductive.
“People should keep in mind this is a snapshot. And it is important to keep an eye on trends. And at the present time the trends for San Diego are positive,” he said.
The boost moves the system’s funding ratio up to 79.9 percent from 68.2 percent.
According to his five-year financial plan, Mayor Jerry Sanders expected to be billed $156.1 million for the city’s pension costs — an item that has increasingly taken up a bigger share of the city’s annual operating budget over the last few years. Instead, the city will be billed $137.7 million.
The mayor has pledged to put an additional $27 million a year into the system on top of the bill presented by the pension system in an attempt to more quickly pay down the deficit. He has also proposed using a 20-year amortization schedule.
In the financial plan, however, Sanders offered a fundamental shift in approaching the city’s financial problems by promising to take on a catalogue of multimillion and multibillion dollar deficits the city faces — moving the city’s problems beyond the scope of simply the pension system.
Wescoe said the pension board will begin to evaluate a new amortization schedule this year. Sanders’ spokesman didn’t return a call for comment.