The Morning Report
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More than $20 million in savings the city was counting on in its budget disappeared on Friday when the city’s pension board decided not to make certain changes to the city’s pension bill. One impact Lisa Halverstadt noted: City libraries won’t have their weekly hours increased, like planned.
Over the weekend, Chris Brewster weighed in to say there are other key factors to consider:
Having listened to most of the debate on this (which is online at www.sdcers.org) my takeaways are these:
1) The pension board is composed of a variety of people from varying backgrounds whose primary fiduciary responsibility under the California Constitution is to the soundness of the pension system (not politics or the will of the voters). They must vote accordingly.
2) The pension system is currently 68 percent funded, which is significantly below recommended funding levels for pension systems. There is a plan to gradually increase that funding level, but the success of that plan remains to be seen. As well, it was noted that retirees are living and drawing benefits longer, and that increases system costs.
3) The pension system’s actuary is Cheiron. This is the organization that stated, prior to the citywide vote, that the beneficial impact of Proposition B would stem from a five-year pay freeze. In making this statement, they apparently relied upon an assumption (which I have previously stated I consider absurd) that after the five-year pay freeze ends, pensionable pay will remain depressed by the hold-back during the freeze for the ensuing 25 years. In fact it seems far more likely to me that pay would rise to market rates shortly after the freeze. During the deliberations on Friday it was stated that if that were to happen it “creates a massive liability.” Indeed so.
4) The actuary had previously (this year) provided a funding recommendation to the pension board based on no freeze (since one had not yet been agreed to). The actuary provided the board with an alternative recommendation based on the freeze, but the actuary made no recommendation as to which alternative was more appropriate.
5) The greatest irony to me is that a significant argument in favor of Proposition B was an actuarial assessment by Cheiron that it would save money due to the pay freeze, but once the pay freeze took place, they do not seem to have felt comfortable recommending a lowering of the city’s (and employees’) contributions in accordance with their prior actuarial advice that had a salutary effect on Proposition B. To me, this is a huge walk-back and more evidence that the voters were sold a pig in a poke.
All this aside: The pension system is independently obligated to run in a sound manner. The city and its taxpayers are obligated to ensure to fund obligations to members of its pension system. If the city underfunds now, it will only add to liability down the road. Better to fund conservatively and lessen payments later, if things get rosier, than to try to operate on the cheap now.
Brewster’s comment has been lightly edited for style, grammar and clarity. See anything in there we should fact check? Tell us what to check out here.