Fact Check: Pension Savings for Neighborhoods - Voice of San Diego

Community UNVEILING THE UNSEEN

Fact Check: Pension Savings for Neighborhoods

Mayoral candidate Kevin Faulconer implied pension reform savings have already materialized; Nathan Fletcher said the city’s pension payments are beginning to come down.

Image: Mostly TrueStatement: “On the Council, I helped lead the reform of the pension system, saving a billion dollars we can now put back into our communities,” mayoral candidate Kevin Faulconer said in a recent television ad.

Determination: Mostly True

Analysis: Mayoral candidates are pledging to invest in neighborhood needs after years of cutbacks.

Republican candidate Kevin Faulconer and ex-Mayor Jerry Sanders claim those commitments wouldn’t be possible without their work on Proposition B, a pension reform measure voters approved in June 2012.

Faulconer, who has widely touted Sanders’ endorsement, has repeatedly made this case in television ads and in a Sunday U-T San Diego op-ed, strongly suggesting the initiative immediately freed up cash that can be invested in neighborhoods.

And in a recent debate, mayoral rival Nathan Fletcher claimed the city’s pension bill is beginning to go down.

Both claims appear to conflict with some basic elements of the pension reform initiative, which is projected to save nearly a billion over 30 years but also forces the city to more quickly pay off its roughly $2.3 billion pension deficit.

We decided to check these claims because Proposition B is a complicated measure that presents seemingly dueling realities: It saves the city cash in the long haul but comes with new costs.

The portion of the measure that affected new city employees got the most attention when Faulconer and other city Republicans pushed pension reform in 2012. Per the initiative, most new city workers have an option of enrolling in 401(k) plans rather than pensions.

Closing the pension system to new employees means the city must pay off its pension debt more quickly.  As a result, the city’s pension system projected the city would see larger annual pension bills for the next several years.

The measure’s touted $1 billion in savings come from another source.

The most crucial piece of the initiative was its aim to freeze the portion of workers’ salaries that contribute to their pensions.  The city’s pension system assumes staffers will receive pay hikes each year so keeping their salaries steady allows it to change its expectations and save $963 million over 30 years.

To do this, city leaders needed to get workers to sign off and this spring, Mayor Bob Filner and City Council members inked five-year deals with city unions that incorporate those pensionable pay freezes.

Assuming other variables remain the same, the savings from those agreements will offset increased annual pension payments over the next five years.

To get a sense of those offsets, I reviewed assessments the pension system’s numbers-cruncher made about Prop. B-related hikes in annual pension payments in a March 2012 report and savings projected along with the labor deals. That comparison revealed the city will see nearly $80 million in net savings over the next five years.  The savings, initially a meager $2.5 million based on these past assessments, appear likely to emerge for the first time next year.

These estimates don’t incorporate costs associated with implementing the city’s new 401(k) or a possible change by the city’s pension system that could cut into the projected savings. I simply focused on the effect on the city’s pension payment.

In light of that, let’s revisit Faulconer’s claim. He implied that Prop. B brought $1 billion in savings that can immediately be reinvested in neighborhoods but that money isn’t instantly available. It will take three decades to materialize.

Still, the city will see lesser bills starting next year that will provide more money to spend on other needs.

Put simply, Faulconer is right that Prop. B will ultimately save $1 billion but he’s leaving out an important nuance: The city is expected to reap the benefits of pension reform – namely the five-year deals it inspired – but the $1 billion in savings will come over the long haul.

That crucial fact makes Faulconer’s claim “mostly true.”

Now let’s take on Fletcher’s claim.

Image: MisleadingStatement: “The pension payment is beginning to come down. That’s gonna continue to happen and that’s gonna provide more money that can be invested in our neighborhoods,” Nathan Fletcher said at an Oct. 19 debate.

Determination: Misleading

Analysis: Five-year deals with city employees mean the city’s pension bills won’t be as high as they could have been but that doesn’t mean the city’s annual payment is on a downward spiral.

Instead, even with the five-year deals, the city will continue to see large annual pension bills for roughly the next 15 years.

In June, the pension system’s numbers-cruncher projected the city’s potential pension payouts over the next two decades.

Here’s a look at the numbers presented by actuarial firm Cheiron:

Image courtesy San Diego City Employees' Retirement System
Image courtesy San Diego City Employees’ Retirement System

As you can see, the annual bill remains high despite the five-year agreements. These exact numbers are unlikely to materialize, because the board ultimately decided against reducing the city’s 2014 pension bill, but they provide a hint of where things may be headed.  And the annual bills may be larger yet if the board decides to reduce its assumed 7.5 percent return on investment to 7.25 percent.

These bills are significantly larger than the city paid just a decade ago. In 2003, the city forked over just $58.7 million, less than its required annual contribution at the time. That trend changed under former Mayor Jerry Sanders, who pushed to pay more than the required contribution under the majority of his watch. During that time, the city paid between $162.5 million to $271.3 million, amounts it will surpass even with Prop. B reforms.

Indeed, as of this June, the pension system’s numbers cruncher projected a roughly $292 million pension payment in 2025, even despite the five-year deals.

A Fletcher spokeswoman said the former assemblyman was focused on the reduced pension payments expected along with those agreements when he made the statement about decreased payouts.

“He was referring to the fact that, because of the pensionable pay freeze, the payment is lower than it otherwise would have been, and that money can be used in neighborhoods,” spokeswoman Rachel Laing said.

It’s true the city’s annual pension bills were projected to be significantly larger without the five-year labor deals but Fletcher’s statement implied something else: that the city’s annual pension payment is on the road to decline. That’s not the case. The city won’t see pension bills under $100 million until at least 2029, about 15 years from now.

We label a statement misleading when it takes an element of truth and badly distorts or exaggerates it, giving a deceptive impression.

That ruling applies here because the city’s pension payments won’t be on a downward trajectory for years to come.

If you disagree with our determination or analysis, please express your thoughts in the comments section of this blog post. Explain your reasoning.

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