Pensions, state and federal policies, throw county budget a curveball

May 10--Decreased expectations for returns on pension investments and changing state and federal policies are creating troubles for San Diego County's financial planners.

The accountants and forecasters say the county is in good fiscal health, but also caution that its pension fund isn't expected to perform as strongly as in decades past, possibly forcing government to put more money into investment funds in order to write retirement checks for former employees.

Additionally, a state revenue shortfall will likely mean that counties will have to pick up the bill for some services it must provide, while changes to the Affordable Care Act could leave it responsible for paying for millions worth of healthcare for indigent people.

"With the state facing the first revenue shortfall in several years, the new federal shaking up Washington, and volatility in financial markets, we really do have to be on our toes, proactively anticipating what might be ahead," Chief Administrative Officer Helen Robbins-Meyer said.

There are no immediate plans to reduce spending, but contingencies have been prepared to cushion any financial hits.

Other California counties are cutting services and implementing hiring freezes to control spending, but San Diego will rather "glide slope programs" to accommodate new unavoidable expenses in 2018 and 2019, Robbins-Meyer told supervisors last week as she and her top staff presented their proposed $5.69 billion budget.

Three factors are causing the uncertainties.

Pensions are one of them. People are not only living longer -- they'll receive more retirement checks over the course of their life -- but investment funds aren't expected to perform as strongly as they have before, so they aren't growing as much because of the market.

"We are seeing a trend of retirement systems lowering their assumed rates of return to align pension funding with this new market reality," said Tracy Sandoval, the county's auditor and controller.

To accommodate this, the county can divert money from services into the pension fund. It can also create new retirement programs that pay new employees less, reducing the amount of money leaving the pension fund.

A new pension benefit tier was created during the county's recent round of contract negotiations with county employees. Under the new system, newly hired workers would be paid less when they retire. A new agreement, however, has not been reached with the Service Employees International Union, Local 221, a group that represents about 10,000 of the county's 17,400 workers.

A $1.6 billion state revenue shortfall is another issue.

"Our most immediate risk comes from the state," Robbins-Meyer said.

Sacramento requires that counties provide certain services to constituents, and often provides some funding, but the governor, in order to cut expenses, might require counties to take over in-home support services without providing the funds to do so. If this happens, the county could have to pick up the tab.

"This is real, and this is happening," Robbins-Meyer said.

The potential repeal of the Affordable Care Act health care law is another possible financial issue for the county. If the policy's Medicaid expansion is scrapped, the county could face $75 million in additional expenses per year to provide healthcare for indigent people.

Don Steuer, the assistant chief administrative officer and chief operating officer, said they are monitoring the impacts a new health care policy would have on the county. His statement came two days before the House of Representatives approved a new health care bill. The impacts, however, are unknown because the Congressional Budget Office has not yet completed its analysis of the legislation's fiscal effects, nor has the Senate taken up the issue.

The proposed county budget totals $5.69 billion, a 6.2 percent increase over current funding. The budget allows for the equivalent of 17,404 full-time employees, eight jobs more than the current level.

Like this year's budget, the proposed spending plan allocates the largest portion of funds to the county's Health and Human Services Agency, a department that provides social services, runs the foster care system, assists the homeless, and runs public health initiatives.

While the county is poised to spend nearly $6 billion, only a fifth of the funds can be spent at the board's discretion. The remainder of the money comes to the county as funding through the state and federal governments and must be spent in a particular, predetermined way.

There are challenges on the horizon, but the county is increasing spending in some areas. The proposed budget includes 261 new affordable homes for seniors, including 81 at The Grove in Vista, the largest of five affordable senior housing projects.

Public safety spending is increasing 4.2 percent. A memo from Robbins-Meyer noted the payments into the county's pension program, union contracts, and an increased workload in the probation program (various efforts to release people from state prisons have caused an increase in probationers). The Sheriff's Department will also start a comprehensive body camera program, there will be more prosecutors to fight human trafficking.

Twitter: @jptstewart

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