San Diego county and city pension funds have nearly $7 billion less in the bank than they need to cover benefits already earned by current and former employees, a deficit that’s risen 90 percent in just two years, new reports show.
Assets held by the county pension fund topped $10.2 billion last fiscal year, but are more than $4 billion short of the money needed to fulfill retirement promises in the coming years. Despite county reforms in 2009 and state reforms in 2012 that lowered retirement payouts for new employees, the funding gap is growing.
Meanwhile, the pension fund for city employees topped $6.3 billion in assets – $2.7 billion below what it needs to satisfy pension obligations. Another $21.8 million is lacking in the city pension fund for airport employees, and $136.6 million is lacking for Port of San Diego employees, according to market numbers reported in actuarial valuations for the San Diego City Employees’ Retirement System.
The imbalance persists despite major reforms in the city of San Diego. Voters eliminated guaranteed pensions for all new city employees – except police officers – in 2012. This followed a previous decrease of new employee pensions. Employee salaries were also frozen for several years to keep pension liabilities from spiking. But that has ended and several employee groups expect across-the-board raises.
Pensions are calculated based on salaries, so any increase in across-the-board wages beyond what is expected by pension trustees increases the long-term liability.
The $4 billion county pension deficit amounts to more than $3,700 per household countywide, up from $1,900 in 2013-14, while the three city pension fund deficits equate to $5,900 per city household, up from less than $3,400 two years ago.
The rising figures, called the unfunded accrued liability, reflect the widening gap between pension fund assets and liabilities – a nationwide trend that can be hard to reverse and can threaten other government services sometimes cut to make higher pension contributions.
Driving the problem: longer life expectancies and poor market gains for years. Each year pension fund investments fail to reach targeted gains (usually 7 percent or more), the problem grows. Decreasing investment expectations to bring them closer to recent realities also has the effect of growing the liability, sometimes by millions.
The latest shortfalls mark new troubling heights for each pension fund, surpassing levels that rocked the city during the pension scandal of the early 2000s. San Diego was dubbed “Enron by the Sea” when news surfaced that city officials moved to underfund pensions while boosting benefits and failed to disclose growing liabilities to bondholders.
“The magnitude of the City’s unfunded liabilities was enormous,” a 2006 cease-and-desist order by the Securities and Exchange Commission said. “For example, the City knew that by 2009 the unfunded liability would reach $1.9 billion and its actuarially required contribution would be approximately $240 million compared to $51 million in FY 2002.”
Those once-alarming numbers seem a bit paltry today.
Despite annual contributions above $250 million in recent years, records show the city employee pension fund has remained more than $1.5 billion short in the last five years and now approaches the $3 billion mark. The city’s annual pension payment will exceed $261 million this year and $324 million next fiscal year, putting a pinch on the city budget.
Mayor Kevin Faulconer highlighted “skyrocketing” pension payments in his State of the City address earlier this month, saying, “Sales tax revenue, property tax revenue, and tourism revenue are all up. But all of this revenue growth – and more – will be entirely consumed by this year’s increased pension payment.”
To address rising pension costs, each of the city’s general fund departments is working to cut at least 3.5 percent of its budget for next year.
“The bottom line is taxpayers continue to pay for the financial mistakes of past city leaders,” said Craig Gustafson, a spokesman for Faulconer, in an email. “The city has fully funded its pension payment every year since 2006 and will continue to do so.”
Despite having the largest pot of assets, the county pension fund’s health has also taken a turn for the worse in the last two years. Unfunded pension liabilities rose more than 100 percent – doubling from $2.03 billion in 2013-14 to $4.09 billion, as of June 30 last year.
The county’s contributions to the fund are expected to rise 19 percent from about $394 million this year to nearly $469 million next year. This does not include payments of $81 million made every year to pay off pension obligation bonds – loans the county borrowed a decade ago to invest more in its pension fund.
County spokesman Michael Workman said the county “has proactively and strategically prepared to address increased contributions” so they “will not result in a reduction of services.”
Much of the jump was caused by a recent half-percent decrease to expected investment returns, said Mary Montgomery, spokeswoman for the San Diego County Employees Retirement Association. “If all current actuarial assumptions are met, the plan will be fully funded in 2036.”
But for that to happen, investments must earn at least 7.25 percent annually, far above the 0.48 percent market earnings posted last year and higher than average gains seen over the last five and 10 years, records show.
How the county ultimately bridges the gap will make all the difference for employees, recipients of county services and taxpayers. Montgomery said employee pension contributions may need to rise.
The pension fund for airport employees has seen the most dramatic rise in its unfunded liability. Two years ago, the airport pension fund had a surplus of $3 million in assets. Now, the fund has a nearly $21.8 million deficit. Airport pension contributions will rise from $3.8 million this year to $5.4 million next year.
The Port of San Diego’s unfunded liability nearly doubled in the last two years, rising from $71 million to $136.6 million. Pension contributions from the Port will rise from $14.6 million this year to $17.7 million next year.
Port spokeswoman Tanya Castaneda said some relief is coming. Beginning in 2026, Port contributions will drop off to $12 million to $13 million a year thanks to reforms implemented in 2003 and 2009, including a hybrid pension-401(k) retirement plan for employees hired after 2009.
“We do not expect any material impacts to Port operations,” Castaneda said of the rising costs. “We anticipated the need to reform the pension plan, and thanks to the Port’s forward-thinking actions, the pension contributions are projected to decrease in future years.”
As unfunded liabilities rise, another key measure of pension fund health – funding ratios – are falling, despite gaining some ground in recent years. The lower the ratio, the more likely it is the fund will run out of money before all owed benefits are paid.
According to new actuarial reports, pension funding ratios for the county, city and Port are now below the trigger minimum level of 82.3 percent that helped precipitate the city’s pension scandal when officials postponed making accelerated contributions.
City employee pensions dropped from 80.1 percent funded in 2013-14 to 70 percent last fiscal year. In the same two-year span, the Port of San Diego pension fund fell from 83.6 percent to less than 73 percent funded, and the county pension fund fell from 83.3 percent funded to 71.5 percent based on market figures, records show.
The airport pension fund – which was more than 102 percent funded in 2013-14 – fell even more to 86.8 percent last fiscal year, but remains the most funded of the bunch.
Board policy requires the airport pension fund to remain at least 95 percent funded, so action will be taken to return to that level in the coming years, said Airport Authority spokeswoman Rebecca Bloomfield.
“Our funding ratios are exceptionally high in comparison to many state and local agencies pension funds,” Bloomfield said in an email, adding that plans are in place to ensure rising pension costs “would not impact the level of services provided to the traveling public.”
The San Diego City Employees’ Retirement Association – which manages pensions for the city, Port and airport – downplayed the shortfalls in FAQ sheets posted on its website.
Having an unfunded liability “is not in itself bad, any more than a mortgage on (a) house is bad,” the city’s pension fund site says, adding that the “liability does not represent a debt that is payable today.”
That’s true, but the retirement checks will come due, and there are currently 7 billion reasons to be concerned.
(Note: Market value numbers were used throughout this report, which reflect current fund realities, rather than actuarial numbers “smoothed” differently for each fund.)