San Diego’s Pension Debt Up Another $200M As Workers Live Longer

San Diego's pension debt, which surpassed $3 billion for the first time last winter, is increasing another $200 million because a new analysis found city workers are living longer than previous studies had shown.

The spike in debt will increase the city's annual pension payment, which has floated around $350 million the last few years, another $24.1 million starting with the fiscal year that begins in July 2021.

City officials expect another spike in debt later this year from the stock market downturn prompted by the COVID-19 pandemic, but a modest rebound this summer has softened how much stock losses are expected to increase the debt.

The larger the city's annual pension payment, the less money there is to spend on libraries, parks, firefighters, police officers and other city services.

The new analysis also will increase the contributions employees must make to their pensions beginning next July.

The timing is not ideal for San Diego's city finances, which have been hit hard by the pandemic because they rely heavily on tax revenue from tourism.

This is the second time in four years that an increase in estimated employee longevity has spiked the city's pension debt. A similar study in 2016 increased the debt $568 million, more than double the new increase.

But the new increase will have a significant impact on the city's upcoming annual pension payments because of a new policy the city's pension board has adopted for paying off new debt.

The board voted unanimously in 2019 to limit how much the pension system can soften the impact of increases in debt caused by changes in long-term projections, such as how well the stock market will perform in coming years or how long retirees will live.

Previously the city had been allowed to spread the impact of higher employee longevity rates or lower investment returns over 30 years, but the board voted to shrink that to 20 years in all future instances.

The new longevity study, which the city's actuary presented to the pension board in July, is the first instance of new debt arising under the more conservative policy.

The change in policy brings the city in line with best practices throughout the state for delaying such impacts, which is called "smoothing." Most pension systems in California already use 20 years, with only a few still using 30 years.

Moody's Investors Service, one of the nation's "big three" credit rating agencies, praised the city last year for its more conservative approach.

In addition to the debt policies, the pension board set a minimum annual pension payment of about $350 million until the debt shrinks to zero, which is projected to happen in roughly 20 years.

While the more conservative policies have spiked the city's pension debt, city leaders and the pension board say it's crucial for the city to take a more realistic and responsible approach to estimating its debt.

"It's good for the city to be 'on it' like this," said Michael Zucchet, general manager of the city's largest labor union – the Municipal Employees Association. "This hasn't always been the case."

Gene Kalwarski, the city's actuary, told the pension board last month that the results of the new longevity study are somewhat surprising after city officials thought they had corrected the problem after the 2016 longevity study.

He said the main factor in the new spike was more retired city employees living into their eighties and nineties, and more current employees expected to live that long.

While the analysis also covered retirement, termination and disability rates, Kalwarski said the key source of change was longevity.

Zucchet agreed that the study was a bit surprising, but he said the city must plan accordingly.

"I agree that it was such a significant change in 2016 that to have another one a few years later is maybe not expected," he said. "It just is what it is."

While the city's pension debt has grown from $1.2 billion in 2007 to about $3.2 billion today, the portion of the debt that's actually funded has climbed above 70 percent in recent years.

Kalwarski has said the city's funded ratio puts San Diego in the top half of comparable pension systems.

Roughly 60 percent of San Diego's 11,000 employees have pensions. The other 40 percent have 401(k)-style retirement plans instead, because they were hired after city voters approved Proposition B in 2012.

The ballot measure eliminated pensions for all new city workers except police officers.

The state Supreme Court ruled in 2018 that the measure was not placed on the ballot legally, but a legal solution to that problem is still being determined in lower courts.

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