San Diego pension payment plunges $ 31 million thanks to robust stock market

Strong returns on investment fueled primarily by the stock market reduced San Diego’s annual retirement payment by nearly $ 31 million and reduced the city’s retirement debt to less than $ 3 billion.

The smaller payment, which gives Mayor Todd Gloria more money to spend on other priorities, comes despite the city giving substantial pay increases last year to nearly all of its roughly 11,000 workers.

Lower annual payments and reduction in pension debt are reversing trends that have seen double digits rise steadily in recent years.

The city’s annual payment climbed nearly $ 50 million last January, from $ 365.6 million to $ 414.9 million. The city’s actuary had predicted that the payment would rise again this year to $ 423.1 million, but it declined to $ 384.3 million instead.

This is mainly due to the strength of the stock market. Last year, the S&P 500 gained 26.9%, the Dow Jones Industrial Average gained 18.7%, and the Nasdaq composite gained 21.4%.

Investments in the pension system have seen a similar trend, gaining 23.6% between July 2020 and June 2021, according to a new analysis released on Thursday by city actuary Gene Kalwarski.

The equity gains reduce the city’s retirement debt and annual payment, as a crucial part of the city’s long-term repayment plan is significant growth in the value of investments made by the city’s pension system.

The city’s pension system gets the money to make these investments from city workers, who must help pay for their pensions, and city taxpayers.

The higher the return on these investments in the retirement system, the less the city has to spend in the long run of worker and taxpayer money to cover retirement payments to retired employees.

Kalwarski estimates that the city will need $ 11.48 billion to pay the pensions it owes all current employees when they retire. He estimates that the long-term value of the assets set aside to make these payments is $ 8.53 billion, leaving a gap of $ 2.95 billion.

This spread, known as the city’s retirement debt or “unfunded liability,” first exceeded $ 3 billion in January 2020. And it rose to $ 3.34 billion last January.

This year’s reversal – a decrease of $ 384 million in pension debt instead of an expected increase – means the city is also expected to pay off all debt faster, in 2033 instead of 2042.

Lower retirement debt also increases the city’s “capitalization rate” from 70.2% to 74.3%, which is relatively high among large public pension systems.

This is up from 65.8% after the city’s 2004 pension scandal that earned San Diego the negative nickname “Enron by the Seaside,” but down from the rate of 75 , 6% in 2015.

Kalwarski notes that posting a high rate is more impressive now for San Diego due to several steps the city’s retirement system has taken in recent years to become more cautious and conservative.

These measures include reducing projected investment income to 6.5% per year, which is the lowest rate in California, and revising upward estimates of people’s lifespans based on studies. more precise demographic.

The debt of a retirement system increases when investment expectations are lowered and when a retirement system assumes that people will live longer and receive retirement payments for more years.

The board of the pension system also voted three years ago to set a minimum annual pension payment of around $ 350 million until debt comes down to zero, regardless of return on investment or any other factor.

The council also limited how well the pension system can mitigate the impact of increases in debt caused by changes in long-term projections, such as investment performance or the length of life of retirees. The city was allowed to spread the impact of such changes over 30 years, but that was reduced to 20 years.

The new analysis brings good news not only for this year, but also for several years to come. He estimates that the city’s annual pension payment will be about $ 30 million lower than previously forecast for each of the next four fiscal years.

In a long-term budgeting document released last fall by Mayor Gloria, titled Five-Year Outlook, the city is expected to run deficits in the coming years in part because of high pension payments. But the new analysis reduces those payments.

In fiscal year 2024, the projected pension payment is now $ 400.1 million instead of $ 430.4. In FY2025, the payment was revised down from $ 436.4 million to $ 397.8 million, and in FY2026 it was revised down from $ 437, $ 2 million to $ 401.3 million.

The lower retirement debt this year comes despite increases of between 3% and 4% for most workers in the city. Such increases sometimes contribute to the city’s pension debt. The increases raised the average wage of the 5,000 workers who have city pensions by 1.7%, from $ 90,552 to $ 92,120.

Not all of the news is good for the retirement system, formerly known as the City of San Diego Employee Retirement System. A long-standing legal dispute over the pension cuts approved by city voters in 2012 ended last year, forcing the city to pay pensions to all new employees – not just police officers – from last july.

In addition, city officials and union leaders are negotiating a settlement of the legal dispute that is expected to require the city to allow more than 4,000 workers hired between July 2012 and July 2021 into the pension system.

City officials say it could cost the pension system millions of dollars, but cost estimates have varied widely.

The pension board is due to meet on January 14 to discuss the new pension analysis and the smallest annual pension payment. But the council typically waits until its March meeting to formally approve the new payment, which will be part of the city’s new budget approved in June.

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Elaine R. Knight