San Diego’s finances are plagued by pension debt.

In San Diego, both the city and county pension funds are billions of dollars short of what they will ultimately need to fulfill retirement promises made to current and former employees.

In this week’s San Diego Explained, NBC 7’s Monica Dean and Voice of San Diego’s Ashly McGlone describe what pensions are, why their funding has declined and why that matters.

    This article relates to: News, Pensions, San Diego Explained

    Written by Kinsee Morlan

    Kinsee Morlan is the Engagement Editor at Voice of San Diego and author of the Culture Report. Contact her directly at kinsee.morlan@voiceofsandiego.org. Follow her on Facebook or Twitter. Subscribe to her podcast.

    23 comments
    Jeff Sanders
    Jeff Sanders subscriber

    If the VOSD and NBC 7’s goal was to misinform about the nature of pension debt, you succeeded. The billions of dollars shortfall in pension funding being mentioned aren't what will be needed, it's what's needed now, providing the assumed earnings rate and the actuarial life assumptions are accurate, in order to pay for the pension obligations that currently exist. The shortfall is called Unfunded Actuarial Accrued Liabilities (UAAL). They are, like funded liabilities, expressed in current dollars as a function of current pension obligations, not those that will continue to accrue. A fully-funded system means that pension compensation for past government employment was paid concurrently with that employment and not passed on to the future, again assuming those pension fund assets earn the 7% or more rate of return being used and life expectations are right.

    But the same return necessary from the pension funds assets that are there are needed for those that aren't, the UAAL. Only assets that aren't there can't earn anything and so that return has to come from additional contributions, as well as enough more to amortize the pension debt. If the interest cost isn't paid the existing debt will grow at compound interest, just like your credit card or mortgage would. If you owe $400 on your credit card at 7% per annum and make no payments on that, you will owe $428 at the end of a year. If a pension fund is $4 billion short, that requires interest-only payments of $280 million, in addition to normal contributions necessary to pay for newly accrued liabilities.

    The comparisons made to mortgages, used to acquire an asset, are fatuous. It's just government borrowing, instead of paying, for it's current labor consumption.

    Joan Lockwood
    Joan Lockwood

    Also the City pension has an expectation that the investment returns will fund at 70%- which even for the youngest employee is not very realistic

    Chris Brewster
    Chris Brewster subscribermember

    VOSD’s coverage of the pension situation has been chronically poor, as is this piece. Let’s consider the major points put forward. People are living longer. Investment returns are not what was once expected. The systems are not fully funded. (Others in comments have noted retroactive benefits being provided.)

    Yes, people are living longer. If you look at data from the Centers for Disease Control and Prevention, that’s been true for well over a hundred years. That is, on average, each year the expected lifespan of the average American has lengthened by a couple of months. (This also impacts Social Security.) That is why we have actuaries. Prudent pension systems build that into the required contributions of employees and employers.

    The view that investment returns are not what was once expected is a different matter. Investment returns are cyclical, but to assume that future returns are likely to be less than past returns is to employ market speculation. No one really knows and there is no evidence about the future. So there are two options: 1) Assume that future returns will be less than historical returns and increase contributions to the system (by employees and employers); or 2) Expect that over time returns will remain consistent with the past. Option #1 is a pay it forward concept that requires current employees and employers to pay in advance for guesses that the markets will generate poorer returns in the future than in the past. Option #2 is to anticipate that future returns on investments should be comparable to those in the past, but to understand that if they aren’t, employees and employers will have to make up the difference. Option #1 forces current employees and employers to pay more on a bet against the investment markets.

    Finally, there is the suggestion that public pension funds should be fully funded now, as if they might need to pay all the people in the plan tomorrow. This has been demonstrated to be a foolish strategy in a recently published study which is linked below. Basically, having cash on hand to pay a debt to an employee who cannot retire for 20 years makes no sense. Again, this forces employers and employees to contribute as if the debt must be paid tomorrow. Under this strategy, governments should never float bonds to pay for infrastructure, for example, because the expenditures are not "fully funded" when built.

    I noted at the start that others here have noted that a problem involves benefits being provided retroactively to employees who did not contribute over the period of their employment. That is indeed a problem. However, this involves poor political leadership. If you look back at the retroactive benefits in San Diego, they were provided by a predominately Republican city council in lieu of raises. Essentially, I’ll gladly pay you Tuesday for a hamburger today. 

    And then there is Proposition B, which removed most new City of San Diego employees from the pension system and capped wages (sort of). Among other things, that eliminated contributions to the pension system by current employees, which were used, in part, to pay benefits to retired employees. Surprise (not), Proposition B hasn't solved the problems it was promised to solve, and it has created major recruiting problems for the city.

    http://theweek.com/articles/682082/public-pensions-are-better-shape-than-think

    john stump
    john stump subscriber

    @Chris Brewster I agree that responsible pension management could have avoided any actuarial longevity challenges.  Increases in lifespans has been the known and steady goal of our society, since the 20th century.


    I do not agree with your generalized blame attribution to one political party.  Although, a gravy boat has only one handle my experience is that both sides of the political table have been pouring it on,


    I have not seen any objective evidence that there is a recruitment and retention problem at the School District or City; once you removed pension vesting an spiking incentives and you instructed your head hunters to stop trying to select only pink giraffes with a degree from the University of Antarctica.  The Unions game the system to prevent open recruitment; so as to not to interfere with pensionable overtime


    If you need evidence of the selective closed shop hiring, at the City, look at the diversity participation in Police, Fire, and Lifeguards today versus 50 years ago befor Equal Employment Opportunity became law.  There has been limited progress for women and persons of the non caucasian persuasion 


    Soon we will see if the Council keeps the gravy flowing or chooses increased services to citizens.  Councilman David Alvarez has identified Mayoral schemes to side step pension freezes by reclassifying up some 150 managers, in the proposed budget.  The new budget also includes excessive pensionable  Police and Fire overtime and special pays. The Council can go along to get along or they can stand up for communities and stop the bleed off.


    Additionally, the Police union contract is up in the Fall and this is the time to correct any pay equity issues while stopping the pension spiking and overtime abuses..  Many Cities have determined that the most effective way to manage Police is through an elected Police Commissioner like our County Sheriff.

    Chris Brewster
    Chris Brewster subscribermember

    Mr. Stump: Thanks. I'll limit my reply addressing points I raised, which you challenged. I did not blame one political party. I noted the fact, that when the retroactive benefits were given, the Council was majority Republican. The recruiting and retention problems with the Police Department are well documented, I am convinced that pay and benefits are a major reason for the problems.

    Joan Lockwood
    Joan Lockwood

    @Chris Brewster  Also the City pension has an expectation that the investment returns will fund at 70%- which even for the youngest employee is not very realistic

    Chris Brewster
    Chris Brewster subscribermember

    Ms. Lockwood: Sorry, but I don't understand your post?

    Ronald Stein
    Ronald Stein

    It’s unfortunate that future generations, unable to vote today, will bear the costs of many enacted pension programs, entitlements and boondoggle projects, requiring them to pay higher taxes and work later into their lives to pay for these promises. It’s the inmates running the pension Asylum that are loading up system with lucrative packages for themselves, to be paid for by taxpayers.

    The international business world is intelligent enough to know that DEFINED BENEFITS, neither capped nor precisely quantifiable in advance, financial disasters to any business, thus all businesses focus on the known, i.e., defined CONTRIBUTIONS alone.

    Stealing from the young who have no votes, but silently shoulder the costs and bear the burden of unfunded promises of these programs to enrich the old seems to describe the Governments expansion of entitlement benefits and other government services, along with the taxes young people will have to pay to support them, mostly to subsidize older Americans.

    The inmates know that debt for our future generations buys votes. Over the decades, the proven “concept’ practiced by voters is to defer as much financial responsibilities as possible from our current financial responsibilities to future generations, that have no votes on the subject. Simply stated, if we cannot afford it today, pass it off to the future generations to minimize any impact on our current lifestyles.

    Another insult to the taxpayers and future generations paying their pensions is that many of those early retirements collect their guaranteed pensions, and then take a second job.


    Virtually all elected officials are heavily financed by unions which are focused on entitlements for their current members. The unions, government, and other bureaucrats have been very successful in manipulating the system to enrich themselves. Thus, no changes can be expected in the foreseeable future for elected officials to ever abandon their source of votes.

    Even before those young folks can vote our Golden State schools are on track to force substantial budgetary cutbacks on core education spending, as public schools around California are bracing for a crisis driven by skyrocketing worker pension costs that are expected to force districts to divert billions of dollars.

    Bill Bradshaw
    Bill Bradshaw subscribermember

    @Ronald Stein Mr. Stein, I think you just came pretty close to describing a Ponzi scheme.  By the way, I just received my "Annual Funding Notice", a statistical report required of private sector employers to be sent to all current employees and retirees.  Mine is from Boeing, which manages numerous defined benefit plans for various groups of it's retirees.  For each plan is shown the percentage of the funding target obtained in the current and two most recent years.  The current performance ranges from 94.3% to 110.9%, and the weighted average seems to be around 97%.  


    Can someone tell me if reports like this are required in the public sector?  I believe the answer is "no".  Pity.    

    Jim Baross
    Jim Baross subscribermember

    This glossy quick-hit piece - what happened to text? - projects eventual total costs as though they are due now to unreasonably scare us. How many of you with a home mortgage know the eventual total cost? Does anyone think that they are in big/any trouble because they don't have that amount of cash on-hand ready to pay? Similarly for pension responsibilities; we don't need billions today or anytime soon. Make your annual payments based on best calculations of all the factors that contribute to eventual responsibilities.

    Citizens largely get what we pay for and the costs of providing employees with eventual retirement security are part of the cost. Yes, there are abuses, errors, and advantages taken that occur, just as in the non-public, a less scrutinized sector, But, if we want good services from qualified people, we should be prepared to provide levels of pay and benefits sufficient to attract and keep these good people working for us. 

    And, is some of the criticism of public employee pensions based on jealousy? Shouldn't every working person be able to eventually retire with some level of financial security? (Remember that City employees are not included in Social Security.)

    Kinsee Morlan
    Kinsee Morlan moderator author

    @Jim Baross The text is just an intro to the video. Did you watch the full video? 

    Jim Baross
    Jim Baross subscribermember

    Yes. Video is one way to convey info - probably more likely to be attended to by certain people (Trump types?). I may be accused of being Old-School in expecting a written report/article...

    Richard Ross
    Richard Ross subscribermember

    Mr Stump and Mr Bradshaw along with VOSD herein have summed up the problem. Just this week it was exhibited that Mayor Faulconer was adding to the pension deficit problem through two loopholes in PROP B which allows promotion to two employee job titles to increase compensation.

    Need one mention that the city paid investment consultants several years ago who "guaranteed" junk bond interest of 8.5%. Gradually it has been reduced to 7% yet should only be about 4-5%. The public has to make up the investment shortfall through cuts in services and inability to hire needed police officers.

    The question is when will San Diego be joining other cities in filing for bankruptcy?

    John Porter
    John Porter subscriber

    Couldn't find the article.  What - are we too dumb to read now?

    Kinsee Morlan
    Kinsee Morlan moderator author

    @John Porter What article are you looking for? This text is an intro to the video. Can you see the video? 

    john stump
    john stump subscriber

    Thank you for your reporting .  It was a good beginning.


    I think you need to discus the practices of gaming or spiking pensions with special pays, overtime, and leave accumulation.


    This is a timely matter because the San Diego Police contract is up for negotiations and they are crying that they can not recruit because pay, pensions, and benefits are too low


    Another interesting public pension that is under funded is City Schools. This year to balance the budget they early retired many high paid teachers.  Will next year's pension bills be higher because the early retired so many senior teachers?  Does State send higher experience based bills now?


    There are more than one elephant in the room and it looks like they want more than peanuts


    Keep up the good work

    EducatedMom
    EducatedMom subscribermember

    @john stump San Diego Unified School District's pension problem is from state actions.  In 2014, Governor Brown gave the bulk of the $74 billion (with a B) unfunded pension liability in CalSTRS (Teachers' Retirement System--most certificated employees) to the employers--school districts--with no additional funding to pay for it. The "pay-in" rate for school districts is going up annually, currently at 12.58% and rising to 19.1% by 2020-21.  The "pay-in" rate by employers for CalPERS (Public Employee Retirement System--all the other union workers in SDUSD) is also increasing, in part due to a $90 billion unfunded liability and in part due to poor rates of return on investment (so CalPERS down-rated the rate of return from 7.5% to 7.0%--which means more needs to be put in).  The district's pay-in rate is currently at 13.89%, rising to 15.8% in 2017-18 and to 21.6% by 2019-20.


    SDUSD would have the public believe that it's these increased pension costs that are the root cause of the district's current budget crisis, but that is not true.  Yes, these pension costs have put an increasing burden on school districts, but currently SDUSD is only one of 34 of the 1050 districts in the state that is having financial problems.  The CalSTRS increases have been known since 2014, but SDUSD didn't budget for them.  Instead, the district deficit-spent every year (meaning they spent more than the received) since then.  The CalPERS increase was a surprise, but it changed from 15.5% to 15.8% for 2017-18. And the Governor's January Budget for education (for 2017-18) was less than the district was expecting (because of lower state revenues--after years of growth, the economy is starting to slow).  But the increase in CalPERS plus the decrease in expected revenue from the state totaled $22 million, a small fraction of the $124 million budget shortfall for 2017-18.  In fact, the employee pay raises approved in Nov and Dec 2016 actually added more--$28 million--to the 2017-18 deficit (and every year thereafter).

    john stump
    john stump subscriber

    @EducatedMom @john stump So the problem is that City Schools spends more than they can tax the people for and they have fixed costs that consume all of the possible funds.


    City Schools have some short term one time emergency life savers 1. Sell / Lease properties either to Charter Schools or developers and change policies like out of neighborhood busing; free subsidized parking; or excessive expansive course catalogue; and also stadium level athletics with excess operating costs and lawsuit liabilities.  City Schools needs to ask itself what business they are in.


    City School is somewhat caught in the Detroit automakers quandary of trying to build cars with style, chrome, and fins and yet balance the budget.  While the rest of the world is going electric and self driving.  Their art may be very good but no one is buying

    EducatedMom
    EducatedMom subscribermember

    @john stump @EducatedMom Actually, selling properties is what got the school district into this mess.  During the recession, they sold more than $126 million in real estate and used the money to fund their operating costs (filling the budget deficit).  In the meantime, their operating costs increased, partially due to increased pension costs but mostly due to increased salaries, health and welfare benefits, and expanding programs--the latter three all under their control.  They were able to carry-over some real estate funds from year-to-year, but now those funds are gone, which is why there is such a large budget deficit now.


    As for all your other claims, try to stick to the facts rather than make random claims.  The district doesn't "tax the people" (except for school bond funds)--the state and local governments tax you and your property, and they kick back a fraction of that to school districts for operating costs.  I'm no fan of the district using funds to install (and reinstall) turf fields or build state-of-the-art athletic fields, but those funds come from school bonds, which cannot be used for operating costs and are not part of the equation.  What free subsidized parking are you talking about?  What "excessive course catalogue [sic]"?  Class sizes are stipulated, and since every student must be in a class, there is no way to expand the course offerings--only the option is to open a new course by closing another one.


    And for the record, the district isn't selling cars with accessories--it's educating children so that (at least in theory) they can become productive, tax-paying citizens to help all of us benefit from Social Security and Medicare in our old age.  We should all hope that the district succeeds in this.

    john stump
    john stump subscriber

    @EducatedMom Happy Memorial Day weekend we are close on some thing and have different experiences and understandings on others.  For full disclosure I reside and pay taxes in the SDUSD tax area and I had one child that went to Hoover HS , as 92105 City Heights has no High School.  I served on the City Schools Bond Oversight Committee and have advised several Board members on the City Schools budget.


    I apologize, if I gave you the wrong impression concerning my list of possible lifesaver maneuvers by School board to keep them afloat.  I was not advocating them I just listed them.  Unfortunately, City Schools is sinking so fast most of these lifesaver maneuvers will not work as they are in such deep cold water that a little float only prolongs the inevitable.


    The condition of City Schools clearly demonstrates that the Board is corrupt. if your definition is that they are motivated by purposes other than as trustees for the public school system.  An example of this is the Board's insistence of maintaining At Large elections.  Rather than follow the progressive democratic district election system they want to keep a "rotten borough"  system so they can appoint successors and then use developer and union monies to elect city wide .


    Bond money is tax money and the District uses as an avoidance scheme for operation budget costs.  The stadium turf scandal is illustrative of this scheme to replace maintenance costs by borrowing money to carpet rather than mow grass.  Look at the list of projects presented to the voters and what projects got built. ( The latest scheme is to team up with a developer to use bond money for a Charter school in Seaport village).


    Keep the faith and keep vigilant.  Happy Memorial Day.                                                                          






    Bill Bradshaw
    Bill Bradshaw subscribermember

    Your report is incomplete.  You list two things that have contributed to the chronic pension funding gap in not only San Diego city and county funds, but many other pension systems.  Sure, people are living longer, but that’s been known for decades, something actuaries plug into their formulas when coming up with required annual contribution amounts.  


    The second is that investment returns recently are far less than they used to be.  This is a cyclical situation, and it should have been recognized years ago by reducing the assumptions of investment returns.  But that would have required increased contributions years ago and pension administrative boards didn’t want to recognize this so they kept the assumptions unrealistically high, masking the extent of the problem.  There have been a few minor adjustments in some plans, but not nearly enough to recognize the true scope of this issue.  


    To make the situation worse, about 15 years ago there was a huge retroactive increase in pension benefits for all current employees, which instantly created a massive new, totally unfunded liability which should be paid off over a limited time.


    The structure of the plans is the main culprit, and the worst factor is the extremely young retirement ages provided.  In private sector plans,  the normal retirement age is typically sixty five, and the increased costs of earlier retirements are offset by reducing the pension amount.  In most public employee plans, including both San Diego city and county, the normal retirement age is only fifty five, with age fifty retirements allowed for cops and firefighters.  Just think about this:  the employee stops paying into the pension fund ten years earlier and draws the pension ten years longer than if the age were sixty five.  That enormous difference in total cost is increased by annual cost of living adjustments which are also compounded ten years longer.  Run the numbers with an assumption of even a one percent annual increase and see what you get over, say, a 30 year retirement that takes the employee to age eighty five.


    There are lots of other cost factors, including very generous administration of disability retirement eligibility and “pension spiking” practices that escalate the pension in the final year of service.All in all, at least in California, the situation is clearly in crisis mode, and structural changes are required in the pension programs to keep them from collapsing.Whether there is the political will to make these changes is going to be tested soon, as taxpayers see their services steadily squeezed down to provide very generous pensions to public employees, pensions far better than their counterparts in the private sector (those that still have defined benefit plans). 

    Bill Bradshaw
    Bill Bradshaw subscribermember

    @Kinsee Morlan @Bill Bradshaw Yeah, Kinsee, I watched it.  It was fine as far as it went.  My point is that this situation was totally predictable when you structure plans so generously.  The people making the decisions were, by and large, beneficiaries of the plans.  To say the least, this creates a conflict of interest and the public ends up paying the tab through reduced services and ever higher pension contributions by the city that choke out services.  The decision makers are long gone, either retired or, more likely, got new elective offices.


    I believe the decision to improve the pension plan was made in the fall of 2002.  Approving it at that time were, among others, Toni Atkins, former assembly speaker now in the state senate, Brian Maienschien, currently in the assembly, and Scott Peters, now a congressman.  By the time the full impact of the decision was understood by the public, they were off the council and the public's memory is very short.  Mine isn't, because I was involved with pension plans in my career in the private sector, and I shake my head in astonishment when I see the details of the current city pension plan, including how it is administered.