San Diego’s pension liability is once again on track to exceed $3 billion, thanks to a new analysis that shows future city employee salaries and retiree benefits will rise more than expected.
The increased debt is expected to increase the city’s pension payments by more than $20 million a year, leaving city employees with less money for libraries, parks, police officers, firefighters, lifeguards and other services. Become.
The city’s Pension Commission on Friday unanimously approved increasing the pension system’s long-term projected annual salary increase rate from 3.05% to 3.25%.
The Board also increased the plan’s long-term expectation for annual retiree benefit increases based on inflation from 1.9% to 2.0%.
These changes, combined with several smaller adjustments, would increase the city’s pension liability by $194 million. The debt was calculated last winter at $2.84 billion, and with the new increase it will be $3.03 billion.
The city’s pension liability exceeded $3 billion for the first time in January 2020 and rose to $3.34 billion in January 2021. It has declined for two consecutive years since then, but Friday’s vote by the Pensions Commission will again push it above $3 billion.
This liability depends on how much difference Jean Karwalski, the city’s pension plan actuary, believes between the benefits the city needs to pay over the long term and the value of the pension plan’s investments. Based on.
For example, Karwalski said last winter that the city would have to pay $11.84 billion in pension benefits, but the pension plan’s investment value was $9 billion, a difference of $2.84 billion.
Under the changes approved Friday, the projected benefit amount would be 11.84 billion, as an increase in pay means an increase in benefit payments, and an increase in the inflation adjustment for benefits also increases the amount of benefits. This will increase the dollar amount.
This change was driven by a comprehensive triennial analysis of the pension system’s economic and demographic assumptions. Karwalski said the news from the analysis isn’t all bad.
Five years ago, the pension system significantly raised the life expectancy of the city’s retirees, and there is no need to raise it again, he said. These changes have increased the city’s pension liability by more than $850 million since 2008.
The expected rate of return on pension plan investments, which the city lowered from 6.75% to 6.5% in 2019, also doesn’t need to be lowered any further, Karwalski said.
The rate of return on investments in the pension plan impacts the City’s pension liability because a significant part of the City’s long-term repayment plan is the significant increase in value of these investments.
But Karwarkis said the pension system’s projected annual salary increases needed to be increased.
The large raises given to most city employees this year (23% distributed over the next three years) are already calculated into the city’s pension liability and annual pension payments.
The changes approved by the board on Friday are more about the future. Karwalski said the 3.05% adopted by pension systems has been routinely exceeded in recent years, reinforcing the need for change.
Of the 39 California pension plans Karwalski studied, 11 have a 3.25 percent rate and one has a 3.5 percent rate. The rest are all below 3%.
Expectations for increases in retiree benefits due to inflation should also increase, primarily due to rapid inflation during and after the pandemic.
The city caps annual cost-of-living adjustments at 2%, regardless of the year’s inflation rate, which has been much higher over the past two years. According to the city’s pension system, the inflation rate in 2021 is just over 7%, compared to about 6.5% last year.
However, if inflation is high and employees only get a 2% raise, the city will have to “save” the unpaid raises for future years if the inflation rate falls below 2%. Masu.
During the past 30 years, when inflation has been largely subdued, in years when inflation was below 2%, employees did not have enough money in the inflation “bank” to receive the full 2% benefit increase. It happened often.
But with most employees currently banking 5% from 2021 and another 4.5% from 2022, the projected long-term benefit increase should rise from 1.9% to 2%, Karwalski said. he said.
He said the change alone was responsible for $119 million of the new $194 million in pension obligations.
The increase in debt comes on the heels of the city making its largest annual pension payment ever in July. The $448 million payment was $33 million more than the then-record contribution of $415 million San Diego had to pay into the pension system two years ago.
Karwalski also told Friday’s board meeting that he formally asked the board to consider a proposal to slow down the city’s plan to pay down the city’s pension debt.
This economic slowdown will flatten the city’s annual pension payments over the next 20 years. That would reduce payments by about $100 million a year for the next few years, which critics say are artificially high.
Karwalski said in July that the proposed economic slowdown was a premature idea with significant interest costs and unconvincing benefits.
But he said on Friday that he would consider eight potential economic slowdown scenarios and present them to the pensions committee in January.