The Morning Report
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I was interested to read this week about the city of Denver.
It’s booming. The city government is trying to divvy up surpluses. Even cannabis has started turning a civic profit – more than covering what it costs to regulate.
The city of San Diego isn’t there.
Next year the city will face tough decisions.
Haunting the city still is its employee pension fund. We are living through what alarmists worried about more than decade ago. Despite all the reforms – and in part because of them – the bill has come due. In 2016, the city sent the pension system $261 million.
That’s not much less than the entire amount of money the city collected in sales taxes – $275 million.
This year, the city sent the pension system $325 million.
Next year, the treasurers project it could reach $329 million. Of all the bluster about pensions, that these kinds of bills might come was the heart of the concern.
The pension fund has only three sources of money. It gets money from the employees, who contribute with every paycheck. It gets money from the city, via those checks we send over, funded by taxes.
The pension fund combines that, and makes money on its vast portfolio investments across the world.
For years, the pension system assumed its investments would earn an average of 7 percent every year for 30 years.
But last week, trustees of the once chaotic and beleaguered system made a change. They decided to assume that the system would only earn 6.75 percent on its investments next year. The year after that, they decided to drop it again to 6.5 percent – the most conservative assumptions in the state.
The moment trustees tell actuaries to assume they’ll make less in investment returns, the bill gets larger for everyone else.
Indeed, next July police officers and firefighters in the system will see their take-home pay drop 0.9 percent of their salaries as the pension fund claws for higher contributions.
The year after that, police officers will have to contribute another 0.9 percent. That means that, as the city grapples with a recruitment and retention crisis in the police department, it will have to give them a nearly 2 percent raise just to keep them where they are.
The expected rate of return of pension investments is called the “discount rate.”
“I understand what they’re doing and I’m not opposed to reducing the discount rate, especially if the actuary believes returns will be below that,” said Brian Marvel, president of the Police Officers Association. “It would have been nicer if they’d done smaller amounts of lowering over a longer period of time.”
Marvel didn’t seem too concerned, though. His union is currently in negotiations with Mayor Kevin Faulconer and it expects to get raises.
The other side, though – the city and taxpayers – got a kind of break in the deal. Next year’s $329 million bill will actually be less. More like $312 million.
The employees have to pony up. How did the city get out of it?
“They took an additional step to ensure a more consistent cash flow into the system,” said Mark Hovey, CEO of the San Diego City Employees’ Retirement System.
It was a complex move but essentially they pushed off some of the pain. It surprised me because after 13 years of covering San Diego politics, one basic law I knew was that if they lowered the assumption of what they earned in the market, it would cause significant pain.
Over the long term, the bill will come but Hovey and his team argued that in the future years, the city will get an enormous break. Its pension bills will drop by more than $200 million in 2029.
Basically, when the city closed the pension to new hires in 2012 (except for police) it forced itself to pay off the debt of everyone else in just 15 years. When that’s over, taxpayers will experience enormous relief, but Hovey said the income from the city dropping that much could cause the pension system to have to sell assets or otherwise come up with cash to send out its regular monthly pension checks.
The thing is, the pension system is paying out more than it’s taking in every year. So trustees want to make sure the city has to pay more in 2029 than it would have under the old plan.
That’s the charitable view. The more cynical one is that, like past decades, the pension trustees are worried about the city and wanted to give Faulconer and his colleagues a break, especially so that they can have some funds to pay police officers more.
Val Hoy, chairman of the pension board, is a lawyer and was appointed by Faulconer.
He made comments at a board meeting in July that seemed to indicate he was very concerned about the city’s ability to give the police raises.
Hoy ended up not supporting the move that gave the city a break. He lost that vote. But still, pension board members are not supposed to really talk like that. Their only concern is supposed to be about the health of the pension fund.
So I asked him what he meant. He said he was concerned about police officer pay.
“But the point of my comments is that we have to keep the interest of the pension system as a whole in the forefront. Even though we can’t control whether or not police and fire receive pay increases, we still need to do what is best for the pension system,” he wrote in a statement.
For her part, longtime pension reformer April Boling, who is also the chairwoman of the Airport Authority, said it is obvious trustees went out of their way to give the city a break.
“There’s no other reason to do it but that,” she said.
No matter the motivation, as the city’s budget tightens next year, it will now be easier to give the police officers across-the-board raises or otherwise make the job more attractive because of the decision the pension board made.
For some, it was worth it just to see the system acknowledge that it would not get the kind of investment returns it has assumed for so long. Thirteen years ago, the idea that the city or county’s pension fund would assume returns of only 6.5 percent would have been shocking.
And yet that’s still ambitious – a lot of investors would love steady 6.5 percent returns.
Tough decisions are on the horizon. Boling said that to make room for police raises, cuts will have to come elsewhere in the city’s budget.
Overall, it’s an improvement.
“We needed to be able to see what the impact of the decisions, those things were being hidden. They were ugly but being hidden. This is ugly but not being hidden,” she said.