San Diego’s pension debt surges above $ 3 billion for the first time
A new analysis shows that San Diego’s pension debt surged above $ 3 billion for the first time, forcing the city to reduce its annual pension payment by more than 11 million this year despite a projected budget deficit of $ 84 million US dollar increase.
The $ 3 billion surge continues a long and steady spike in pension debt, which was $ 1.2 billion in 2007.
The greater debt has increased the city’s annual pension payments by about $ 100 million in recent years – from $ 250 million a year to $ 350 million a year – and capped how much the city can get from its annual budget of Spend $ 1.5 billion on parks, libraries, and other amenities.
The larger debt will force the city to make an annual pension payment of $ 365.6 million this June. That’s $ 15 million more than the city paid last year and $ 11 million more than previously forecast by the city’s actuary.
The city’s pension committee said Friday that while debt levels are a significant concern, almost all of the sharp increases in recent years have been due to the board’s more realistic and responsible approach to estimating its debt.
Debt – which is a projection of how much the city will owe retirees in the long run, compared to what the city has allocated to cover those payments – has risen sharply mainly because of two important measures.
More than $ 1.4 billion of the $ 1.8 billion increase since 2007 is due to the city’s use of more accurate projections of worker life expectancy and more conservative estimates of growth in pension system investment.
As workers are expected to live longer, the length of time they receive pension payments from the city increases, adding to debt.
Lower investment returns also increase pension debt, because the higher the return on investments in the pension system, the less taxpayer money the city will have to spend on pension payments to retirees in the long run.
Board members said Friday that it would have been irresponsible to continue using overly optimistic assumptions to create the appearance that the city has a lower projected pension debt, which they call an uncovered liability.
“Almost half of the unsecured debt could be wiped away if we chose to be like a bunch of other pension funds out there,” said board member Almis Udrys. “This body is probably the most responsible and realistic large body in the state, if not the country.”
Udrys said the board had made positive changes in the face of daunting challenges, including the heavy investment losses during the Great Recession and a pension scandal that earned the city the nickname “Enron by the Sea” in 2004.
“It takes some time to dig out a hole and I think this board should be proud of the measures we have taken over the past few years to more realistically, systematically and aggressively address uncovered liability,” he said.
Board member George Kenney said it was disappointing when people were shocked about the size of the debt without knowing the context.
“The unfunded liability is self-inflicted and I think people need to get that,” he said. “That’s discipline.”
Although the city’s pension debt rose from $ 2.98 billion to just over $ 3 billion this year, the proportion of debt actually financed rose from 70.8 percent to 71.6 percent.
That’s an increase of 65.8 percent after the 2004 scandal, but a decrease of 75.6 percent in 2015.
According to Gene Kalwarski, the city’s actuary, San Diego ranks 71.6 percent in the top half of comparable pension systems.
The debt surge to over $ 3 billion has postponed the projected payout date from 2034 to 2037.
And there seems to be a great chance that debt will rise again in the next year.
Kalwarski said he plans to do a new analysis of employee life expectancy, length of a typical city career, number of disability pensions and other factors this spring.
Such studies usually force the pension council to change its assumptions and projections in the negative direction, thereby increasing projected debt.
However, Kalwarski said it was unlikely to lower its return projections again, pointing out that the 6.5 percent projected rate of return used by San Diego is among the lowest of any pension system in the state.
The results of the new analysis will be presented to the board in July, he said.
Another cause for concern is that all six of the city’s unions have contracts signed on Jan.
While Kalwarski’s actuarial projections show an increase of 3.05 percent per year for each employee, city workers have seen larger increases in the past two years.
These increases are the main reason the city’s debt and pension payments will rise this year.
All employees except police officers received 3.3 percent increases on July 1, and police officers received even larger increases to encourage recruitment and retention and to fill a range of positions.
All police officers received a 7.3 percent increase on July 1 and an additional 5 percent increase on January 1. Officials with more than 20 years of experience also received an additional 5 percent in July.
The median salary for city workers with a pension increased from $ 76,378 last year to $ 84,204 this year.
Kalwarski said the employee salaries increase in pension debt was somewhat of a surprise and that he is meeting with city officials to find out what exactly happened.
“We have spent a lot of time lately to find out what is causing this,” Kalwarski told the board on Friday. “We’ll provide the city details so you can maybe see where it’s coming from.”
The Pension Committee discussed Kalwarski’s new analysis on Friday, but the board will not officially approve the new pension payment until its March meeting.
The board’s more conservative approach in recent years has benefits that not only give the city a more realistic picture of its long-term commitments, said board member Thanasi Preovolos.
The city is now more likely to avoid bankruptcy and meet its obligations to employees with pensions, he said.
“Making a promise is one thing, but keeping a promise is another,” he said.