Pension Reform

Annual payment up $44M from last year

By Craig Gustafson
Jan. 11, 2013 – 5:02 p.m.

The city’s budget continues to get squeezed with news that the voter-mandated switch from pensions to 401(k)s has pushed San Diego’s annual pension payment to $275 million for the coming fiscal year, an increase of $44 million from a year ago.

The sharp increase was expected given the pension fund’s lackluster investment returns and the passage of Proposition B by city voters in June, and it reaffirms the city faces a budget deficit approaching $40 million and possible cuts to services that were restored just last year.

Proposition B, which replaced guaranteed pensions with 401(k)-style plans for all new hires except police officers, is the main driver of the cost increase. The city has to ramp up payments because it is closing the pension system to the vast majority of its future workers. The pension actuary said the initiative was responsible for $27 million of the overall $44.3 million increase.

Investment returns also played a role. The fund projects an average return of 7.5 percent, but, for the fiscal year that ended June 30, the returns were 0.9 percent. The poor performance increased the city’s payment by $8.3 million.

The fluctuation caused by investment performance was one of the major reasons why Proposition B supporters wanted to shift the investment risk from taxpayers to employees by using 401(k)s. Of course, boom years result in major benefits to the city budget. Last year, for example, the pension fund had returns of 24.2 percent and the city saw no increase in its annual payment. Those returns were a major reason why former Mayor Jerry Sanders was able to restore previous cuts to libraries and recreational centers.

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