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Instead of spending the “savings” the city enjoyed in 2011 due to above-average pension investment returns, had the mayor and City Council banked those savings in reserves and held them for future years, the impacts of ups and downs would be muted.
Recently there has been some news regarding investment returns of the San Diego City Employees Retirement System for 2012 and how those returns may negatively impact the city of San Diego’s budget. According to SDCERS, approximately 70 percent of the pension benefits earned by employees are funded through investment returns. Additional funding comes from payments into the system by employees and by the city of San Diego. Each year, an actuarial assessment of the system is made and to the degree that the system is determined to be “underfunded,” the city of San Diego is required to make an additional contribution to ensure the long term soundness of SDCERS.
SDCERS anticipates investment returns over the long term of 7.5 percent. In fiscal year 2011 (ending June 30), SDCERS reported investment returns of 24.2 percent (13.4 percent in 2010). This relatively high rate of return resulted in a determination that the city of San Diego’s annual payment to the system would be lower than normal, creating a savings in the city’s budget. That savings was spent the same year. This year, SDCERS has reported an investment return of 0.3 percent. (This compares to a 7.4 percent decline in the New York Stock Exchange Composite Index during the same period, so SDCERS actually beat that particular index substantially). It has been reported that this year, due to the “lackluster” performance of SDCERS, the City’s required contribution to SDCERS will be higher than normal.
One of the cardinal mistakes the city of San Diego has made with respect to its annual pension system contribution is to make city budget decisions based on short-term market gains of SDCERS, essentially spending money based on current bounty, rather than anticipating that long-term gains and losses will average 7.5 percent over the long haul, as does SDCERS itself. Instead of spending the “savings” the city enjoyed in 2011 due to above-average pension investment returns, had the mayor and City Council banked those savings in reserves and held them for future years, the impacts of ups and downs would be muted. Unfortunately, they did not and this year the city budget will pay the price.
For those who wonder about the management of SDCERS and its investment acumen, in 2011 SDCERS reported that it had performed in the top 6 percent for public pension plans over the past ten years. Its investment record and management appear to be sound. The mayor and council should make equally sound decisions related to the city’s budget and its contributions to the pension system in context of long-term investment realities.
Chris Brewster lives in San Diego.
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