San Diego’s pension system is behaving responsibly. So why don’t we feel better about it?
The municipal government is facing a $350 million budget shortfall. City government has grown and so has the cost of providing services; city leaders were counting on an infusion of $400 million annually from a 1-cent sales tax increase proposed in November. But Measure E was narrowly defeated.
Now Mayor Todd Gloria is warning City Hall and the public at large that austere times are ahead.
There are lots of reasons for the ongoing imbalance between revenue and spending. The necessary increase in contributions to the employee retirement fund, spurred in part by higher salaries, is one of them.
A big jump in the annual payment — about $44 million over last year — will boost the amount due the pension fund to $533 million, passing the half-billion-dollar threshold for the first time, according to David Garrick of The San Diego Union-Tribune.
The pension payment, along with other costs to the city, likely will take a bite out of public services and may shrink the city workforce, but it keeps the retirement fund in relatively good financial stead.
When the going gets tough, it’s tempting to say things could be worse. But the cliché applies, certainly for longer-time residents who remember how a pension scandal a couple of decades ago plunged the city into some of its darkest days.
But the current financial challenge won’t result in the mayor resigning (as Dick Murphy did in 2005), or the city losing its credit rating and its ability to borrow money, or bankruptcy becoming a real possibility. Officials won’t face criminal prosecution.
All that happened some 20 years ago as a result of an irresponsible scheme by city officials to increase employee retirement benefits and reduce payments to the pension fund — while selling municipal bonds without disclosing essential information about the health of the retirement system.
That historical context adds weight to what Matt Vespi, the city’s chief financial officer, told the pension board last Friday.
“I can assure you that we are not a credit risk — we will make our payment each year,” he said. “But it’s a significant obligation. It’s going to be a tough run.”
Still, today’s budget crunch is more typical of what local governments and school districts tend to face on a cyclical basis than the existential financial crisis of yore.
Back then, the city of San Diego eventually righted itself with spending cuts and pension reforms, some of which worked, some of which didn’t.
Voters in 2012 overwhelmingly approved Proposition B, which put new employees other than police officers in a 401(k)-type program and not the defined pension plan. After years of litigation, the courts ruled Proposition B was illegal, requiring more city expense to offer pensions that had been denied to workers.
What did stick were more realistic, conservative projections about the pension system’s finances. The estimated lifespan for workers was increased and the anticipated rate of return on annual pension fund investments was lowered, now standing at 6.5 percent.
City and employee union officials have questioned those moves, which go beyond what many other public pension systems use. Public pension systems nationwide use an average rate of investment return of around 7 percent.
San Diego’s 6.5 percent is the lowest in the state, though some other systems use that figure as well.
San Diego officials say the funded ratio of the pension system is now just above 74 percent. Some analysts say that would be considerably higher if the city adopted the looser standards used by other pension systems. That also would mean lower annual payments, freeing up money for other purposes.
Arguably, San Diego’s pension fund could be better off than others that show a higher funded ratio but use less conservative standards.
An 80 percent funded level or above often has been cited as a benchmark for pension plans to be in reasonably good shape. The American Academy of Actuaries, however, dismissed that as “The 80% Pension Funding Myth” and said retirement systems should be fully funded at 100 percent.
No doubt the past accounting moves and efforts to hide pension debt have led to a more honest approach to managing the city retirement system, even if there’s disagreement over the particulars.
That’s the right thing to do, but the city still has to struggle with rising pension system payments and a growing retirement fund debt of about $3.5 billion.
The pension burden is a cost of doing city business and will be for the foreseeable future. Many have noted, and complained, that higher pay for municipal workers has fueled the higher pension system payments.
That’s true, and raises, like all city spending, should be closely scrutinized. But until recently, the city of San Diego’s salaries lagged behind those of other local governments and City Hall was losing workers to public and private sector competitors.
Regardless, it’s important to reiterate that the looming budget deficit is about more than pension payments.
San Diego remains a low-tax city compared with many other municipalities in the county and throughout California. That puts more pressure on City Hall to find revenue.
The city came close to shedding that reputation in November.
Had the sales tax proposal received just 3,506 more votes — out of more than 573,386 ballots cast — the angst over the city budget and its pension payments wouldn’t be what it is today.
