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This time last year, city officials cheered a lower-than-expected pension bill.
The city’s retirement system saw better returns than it had since 1987, meaning the city could knock nearly $20 million off its budget deficit when the San Diego City Employees’ Retirement System announced the city’s pension burden for the next year.
This year, the pendulum swung in the other direction.
The city must pay about $40 million more than the retirement system initially projected. The city’s day-to-day budget will cover the bulk of next year’s $275.4 million pension tab and new charges associated with the state’s decision to shutter the city’s redevelopment agency. The result, as we recently noted, is a likely budget shortfall.
The city’s pension bill spiked for a few reasons but the implementation of a pension reform initiative and lower-than-expected returns were the biggest culprits.
To start, the city’s pension system assumes a 7.5 percent return over the long haul but the return was only 0.9 percent this year.
That translates into an additional $8.3 million burden for the city.
The pension system’s assumption is based on historical performance and in the last decade, returns have averaged more than 7 percent, said Mark Hovey, the system’s CEO.
An outside consultant decided a 7.5 percent return was likely in the long run.
This year’s return came in far lower, a result Hovey said can largely be attributed to volatility in international markets and the system’s investments in smaller companies. Both strategies served the pension system well in 2011 but turned out lackluster results in 2012.
There were also other bills the pension system didn’t project.
Every year, the pension system make assumptions about many variables, including how many city staffers will retire or file for disability. They also predict how much city staffers will contribute to the system in a given year.
The pension system’s projection fell short by about $5.5 million this year, further boosting the city’s bill.
Proposition B, which gives most new city staffers 401(k) plans, had a much larger impact.
Barring new workers from the current pension system requires the city to pay off roughly $2.3 billion in pension debt more quickly than it would have otherwise.
That change resulted in a $27 million spike in the city’s pension bill for the 2014 fiscal year.
Supporters of Prop. B argue the city will benefit from the measure in the future. But the measure’s greatest savings aren’t guaranteed.
The initiative aims to put a five-year freeze on city staffers’ pensionable pay, which must be hashed out through labor negotiations.
In his State of the City address, Mayor Bob Filner pledged to work to reach five-year agreements with the city’s unions in coming weeks. He will attempt to include freezes on pensionable pay in those contracts.
“This will be a huge step forward in stabilizing city finances, to the benefit of taxpayers and to our loyal city employees,” he said.
Filner projected the five-year labor deals could reduce the city’s pension burden by $25 million to $30 million annually in the next 15 years.
Similar savings were projected starting in 2017 in an actuarial analysis completed last year, though Hovey said five-year agreements could bring earlier discounts.
That’s because more savings can be assumed if staffers’ pensionable pay is set for five years, something Prop. B didn’t presume.
We took a broader look at the costs and benefits of Prop. B in a March fact check:
If the pay freeze happens as proposed, the financial analysis says the city will save $963 million over the next 30 years. Subtract the 401(k) costs and you get $950 million in savings for city coffers.
If you’d like more wonky details on the city’s increased pension tab, you can check out the pension system’s latest financial report here.
Lisa Halverstadt is a reporter at Voice of San Diego. Know of something she should check out? You can contact her directly at email@example.com or 619.325.0528.
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