In its next fiscal budget, the city of San Diego is going to face an estimated $8 million increase in its annual pension fund payment.
Naturally, how to deal with that increased payment is going to be decided by whoever wins the November mayoral election.
The San Diego City Employees’ Retirement System, or SDCERS, earned 0.4 percent on its investments in the just-finished fiscal year. The fund’s assumption is that it will see an average 7.5 percent annual return on its investments.
The annual return on SDCERS’ investments helps determine how much the city needs to pay into the system.
While the yearly contribution smoothes out year-to-year volatility so that the city’s payment doesn’t fluctuate too wildly between good and bad years, the city nonetheless pays more following a bad year and less following a good year. Just a year ago, for instance, the fund saw a 24 percent return on its investments, and the city’s payment fell by more than $25 million, to $231.3 million.
Ultimately, the poor performance means the city will have to pay more in its next budget than had been anticipated.
The increase isn’t final, but is expected to be roughly $8 million, or between $5 million and $10 million. The issue compounds in the following year, increasing the payment by more than $15 million.
Deciding how to fit the increased payment into the city’s budget will fall to the next mayor.
One option would be dipping into the city’s reserve fund, which currently sits at $119 million, or 11 percent of the $1.1 billion annual budget, well above the 8 percent target range.
Money for the payment could also come from cuts to projected service levels.
Rep. Bob Filner acknowledged that the budget strain would mean reduced city services.
"This is just another example of why getting control of the city's pension expenses is so important," he wrote in an email. "The $5-$10 million is going to have to come directly out of services for residents.
"My plan to cap pensionable pay will save the city nearly a billion dollars in pension-related liability," he wrote referring the cost savings associated with freezing pensionable pay for city employees over the next five years. Filner also plans to put a $99,9999 cap on pensions. *
Councilman Carl DeMaio, meanwhile, said if elected he’d make the payment without either having to dip into the reserve fund or reduce service levels.
Taxpayers have been propositioned with a false choice between “gutting service levels” or “raising revenues,” he said.
He says he’d save the additional $8 million by finding cost efficiencies within city hall.
“It may require that we’re more aggressive with labor costs in the city,” DeMaio said. “This is a cost of labor. If pensions cost us more money, we might try to find more savings in labor contracts. That’s what a business would do.”
Specifically, DeMaio said he’d be more aggressive implementing managed competition and eliminating “unsubstantiated bonus payments” currently given to city workers in order to make way for the increased payment.
But those two cost-cutting mechanisms are already part of DeMaio’s balanced budget proposal, Roadmap to Recovery. The plan says it can increase service levels and infrastructure spending without increasing revenues.
Does that mean the increased payment would require a decreased service level compared to the baseline scenario proposed in Roadmap to Recovery, rather than compared to the status quo baseline?
Not according to DeMaio.
“There’d have to be more savings in our labor contract to offset the increased labor costs from the increased payment,” he said.
Through its various cost reforms, DeMaio’s budget proposal projects a $28.86 million surplus in fiscal 2014 and a $25.44 million surplus the following year.
“The $8 million increase makes it harder, but the cost savings I produce are in the tens of millions, so I’m confident,” he said.
In addition to the increase in the city’s pension fund payment, the new mayor will also be tasked with budgeting for the $51 million cost of implementing Proposition B, the voter-approved initiative to switch most new city hires into a defined contribution retirement plan.
That implementation cost is expected to be $27 million in the first year of the initiative, though it’s not currently known which year that will be. Proposition B is delayed by a pending court case between the city and the state public employee relations board.
That means the next mayor could be dealing with $35 million in unanticipated costs during his first budget, if the $27 million Proposition B implementation cost coincides with the $8 million increase in the city’s SDCERS payment.
On the other side of the ledger, another SDCERS assumption when computing the city’s annual payment is that employee pensionable pay will remain frozen for the next two years, followed by 4 percent annual increases thereafter.
Proposition B stipulates that the city impose a five-year pensionable pay freeze, unless it’s overturned by a two-thirds vote of the City Council. The current composition of the council makes such a vote unlikely.