The Morning Report
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The city of San Diego’s retirement trustees today decided to accelerate the time in which the city has to pay down its estimated $1 billion deficit. The vote is designed to ensure that the city’s annual pension payments are large enough to keep the deficit from growing and will force the city to set aside a larger share of its budget to do so.
The city was in the third year of a 30-year repayment schedule, but the trustees’ decision ramps that up to 20 years. It is an effort to avoid what’s known as negative amortization, a phenomenon in which annual payments are less than the interest accrued on the debt and allow that debt to grow.
But a flat 20-year schedule would have allowed for negative amortization for the first two years, so the San Diego City Employees’ Retirement System board included a provision that tacks on an additional bill to the city if an annual payment would lead to negative amortization.
Voters in 2004 passed Proposition G, which ratcheted down the amortization period to 15 years. However, the retirement board’s fiduciary counsel, Harvey Leiderman, said the proposition was unenforceable because no party can impose such decisions on the board.
Trustee Mark Sullivan said the board’s motion fulfilled the spirit of Proposition G even though it didn’t go to 15 years. “I believe that the intent of the voters in Prop. G was to guarantee that the liabilities didn’t grow,” he said.
City Attorney Mike Aguirre threatened to sue the board and its consultants if they didn’t go all the way to 15 years, saying that such action would display a lack of fidelity to San Diego voters.
The Mayor’s Office had independently planned to pay down on the deficit over a 20-year period and ensure that no negative amortization occurred. Because of those increased payments to the pension system and seven other looming liabilities, Mayor’s Office forecasts an $87 million budget deficit for the upcoming fiscal year and deficits of more than $100 million in each of the four years after that.
The pension system’s actuary, Gene Kalwarski, said negative amortization had taken on a life of its own in San Diego — unlike anything he’d seen in 30 years in the business. He cautioned that it would make the city’s payments into the system more volatile because annual investment earnings and losses would be more acutely absorbed in a shorter amortization schedule.
Check back for complete coverage later today.