Stanford pension researchers report that in 2009-2010, the annual service retirement benefit for miscellaneous San Diego City Employees Retirement System (SDCERS) retirees was $39,032, notably higher than the 20-system average ($31,912) and third highest among the state’s 20 largest independent pension systems. For safety retirees, the average annual service retirement benefit was $66,431, again higher than the 20-system average ($64,851) and eighth highest among those systems.

Increasing pension costs compounded the challenges posed by a sharp decline in revenues. According to Stanford pension researchers, San Diego City pension costs increased from 6.5 percent of total city expenditures in 1999 to 14.2 percent in 2011. In 1999, the city’s annual required contribution to SDCERS totaled $229.1 million, or an annual average growth rate of 15.3 percent. On average, pension costs grew 7.3 percent faster than other city expenditures. The costs continue to grow to this year’s contribution of $275 million.

For Fiscal Year 2014, the SDCERS ARC was determined by the SDCERS’ actuarial valuation to be $275.4 million as of June 30, 2012. This is an increase of $44.3 million from the Fiscal Year 2013 Adopted Budget, $27.0 million of which is due to the effects of Proposition B.

Taxpayers were told there would be savings from the “pensionable pay freeze” negotiated in labor contracts in place for the next five years that would reduce taxpayer payments to the pension.

However, on 8 November 2013 the SDCERS Board of Administration agreed to lower the assumed rate of return on pension investments which will increase the amount taxpayers will have to pay into the pension. The pension board admitted the lower discount rate will increase taxpayer contributions to the pension.

SDCERS can continue to raise the amount taxpayers have to pay into the pension system by further reductions in the SDCERS discount rate. In fact Stanford University pension experts recommend a “risk free” discount rate because it coincides with the risk free payment obligation governments assume under their pensions like the one in place in San Diego. The Stanford researchers provided a critical analysis of the San Diego City pension:

SDCERS currently fails to meet the 80 percent minimum funded ratio requirement, even at its 7.75 percent investment rate assumption. At this risk-free rate, SDCERS’ funded ratio is 44.4 percent, well below the 80 percent benchmark.
This is the third time SDCERS has lowered its discount rate since 2008, when it changed from 8.0% to 7.75%. The next change was in 2011 to 7.50. The SDCERS press release announcing the reduction to 7.25% explained:

“If the two major market downturns of the last decade have taught us anything, it’s that pension plans need to manage risk,” stated Cheiron CEO and principal consulting actuary Gene Kalwarski. “Trustees for any plan should decide how much risk, if any, they are willing and can afford to take. Based on that risk appetite, the appropriate funding and investment strategies will emerge. SDCERS has adjusted the rate based on their risk appetite and appropriate funding strategies for the long term health of the System.”

Following market trends over the past decade, lowering the discount rate has become more common among municipal pension systems across the country and within California. According to a 2012 survey by the National Association of State Retirement Administrators (NASRA), many plans have reduced their investment return assumption since 2009.

The median assumption is 7.8%; however, the number of plans assuming 7.5% or lower has increased significantly, according to NASRA.

The annual taxpayer contribution to the pension exceeds the amount the City spends on roads, library, parks and even the fire department.

Mike Aguirre was the former City Attorney for San Diego