SAN DIEGO PENSION PAYMENT SPIKES

City can cover $50M increase using federal COVID-19 relief funds

San Diego’s pension board has unanimously approved a $50 million spike this June in the city’s annual pension payment, a nearly 14 percent increase caused by employees getting paid more and living longer.

The $49.3 million increase, from $365.6 million during the ongoing fiscal year to $414.9 million during the fiscal year that begins July 1, could have crippled the tourism-reliant city because revenues are sharply down during the COVID-19 pandemic. But San Diego expects to get $306 million in federal pandemic aid as part of the $1.9 trillion stimulus bill President Joe Biden signed Thursday, erasing the city’s $240 million projected deficit and allowing some new spending. The higher pension payment, which was first proposed in January, was already built into the $240 million projected deficit.

The pension board, which approved the increase 12-0 last Friday, has taken several steps in recent years to shore up the city’s pension system by making its assumptions and projections more realistic.

Each of those moves has increased the city’s pension debt, which has climbed from $1.2 billion to $3.34 billion since 2007. The greater the debt, the higher the annual pension payment must be to pay off the debt.

The payment is projected to continue climbing in coming years, to $423.1 million in fiscal year 2023, $430.4 million in fiscal 2024 and $436.4 million in fiscal 2025.

Those higher payments are projected to help reduce the city’s pension debt to nearly zero by 2041.

The city’s pension debt — which is the difference between the projected long-term value of the pension system’s assets and the projected cost of paying employees the pensions they are owed — was expected to decrease $152 million this year.

But it ended up increasing $328 million because of larger-than-expected employee pay increases, disappointing investment returns, and a new study showing that more employees will live into their 80s and 90s.

On Friday, the city’s actuary, Gene Kalwarski, said the changing

assumptions about employee longevity account for police officers and firefighters living shorter lives than other employees, which studies have shown.

The results of the longevity study prompted Kalwarski to increase the city’s pension debt by $291 million.

Alice Alsberghe, who works with Kalwarski, said

Friday that the changes are less about actual city employees living longer and more about actuaries using a different standard for longevity that takes into account improvements in health care.

“So the future improvements are called fully generational improvements, which is the idea that mortality improves year over year as people age, so a 65year-old today will have a different mortality assumption than a 65-year-old 20 years from now,” Alsberghe said.

The debt increased an additional $66 million because of a 7.5 percent increase in overall employee pay, which is more than double the 3.05 percent annual increase built into Kalwarski’s model. The average city salary rose from $84,204 to $90,552 in fiscal 2020.

The third component of the increase was the pension system’s investments falling $122 million short of projected gains for the year.

Those three factors combined to increase the pension debt $480 million, so instead of the projected $152 million decrease in debt, there was a $328 million increase — from $3.06 billion to $3.34 billion.

The $3.34 billion is based on Kalwarski estimating that the city will need about $11.2 billion to pay the pensions it will owe workers long term, and that the long-term value of the pension system’s assets is about $7.9 billion.

The higher debt will require city employees with pensions to contribute more. Police will see a 2 percent spike in their pension contributions, while general employees will see a 1.4 percent increase.

Another reason the annual pension payment is spiking is pension board policies adopted in recent years that force the city to more quickly pay off new debts.

The city previously took as long as 30 years to fully pay off new debts, spreading them over the city’s pension payments many years into the future. But new policies require debts to be paid off in either 10 or 15 years, depending on the type of debt.

While such moves are characterized as a more responsible way to handle the debt, they make it harder for the city to make its annual pension payment and continue paying for cherished amenities like libraries and parks.