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KPBS Midday Edition

Faulconer Requests Budget Cuts As San Diego Pension Costs Spike

San Diego Mayor Kevin Faulconer speaks during a news conference about the city's NFL football team in San Diego, Jan. 13, 2016.
Associated Press
San Diego Mayor Kevin Faulconer speaks during a news conference about the city's NFL football team in San Diego, Jan. 13, 2016.

Faulconer Requests Budget Cuts As San Diego Pension Costs Spike
Faulconer Requests Budget Cuts As San Diego Pension Costs Spike GUEST: David Garrick, reporter, The San Diego Union-Tribune

This is KPBS Midday Edition. I'm Maureen Cavanaugh. These are word San Diegans never wanted to hear again. Is a problem with the city's pension plan. The city Council bid committee met to help deal with the predicted $37 million shortfall in the defined-benefit pension payments to retired city workers. Mayor Kevin Faulconer is asking them to cut 3.5% for physical 18 to help deal with the shortfall. The union Tribune reporter, reporter, David Garrick joins us today. Thank you for having me. What action if any did the city Council committee take on the digit issued today. They certainly gave some direction that they understand the problem and they want the city staff to deal with it as painlessly as possible. You don't have any cuts to services are cut in the new vital programs. Help us understand it. What's behind this increase in pension costs that is propping the city to cut its budget? There no new benefits being given to anyone is just a question of how the actuate determine how much the city's long-term liability is. That's based on 1 million different factors, but key among them are the age of the pension beneficiaries. How long they are living in apparently they underestimated how long these folks with live. These retired city employees. In the city employees that may retire in the future. So the longer they live, the more the city owes and that increase the long-term liability protection. In addition, investment gains have been quite as good as predicted and that -- less revenue and more expenses. When those two lines are going in opposite directions it is deficient. The city only expects a budget shortfall for two years -- why is that? Revenue and expenses, in the short term you know what you will spend in the near future. They both seemed labor deals that will increase city expenditures. Farther out, since they don't avenue expenses, all they know are the new interest. Mayor Kevin Faulconer created a pension stabilization fund. Will that help us? How much is in it and what the city is it? $16 million for the general fund and that will help. The debt this year is $37 million and that will knock at about 40% of it. I don't think they expect use of this quickly. Maybe they did. But it's certainly good in that regard. It will force the city to make your cuts than otherwise. The city pension board could have decided to ask the city for less money for a longer period of time and they decided not to do that. Why not I think when you are pension board you face tough challenges and you want to be conservative as possible or do you want to try to allow the agencies you represent to not pay money up front and hope things improve long-term? The board chose the most in conservative approach they could. Is thought they may revisit that decision in the future, but that is the decision they made for the summer. So voters will remember proposition H. It was best to take pension savings and put them towards infrastructure projects. How is that affected by the pension spike like Assuming they don't make changes, those savings will be just as great, but further down the road. And they will be less even. It's complicated for listeners to understand. That they ideas, the city could have [ Indiscernible ] now and long-term savings that come 20 years from now. Instead they will pay upfront now, and the savings that come 20 years will come under proposition H. The scenario just mentioned, that was the kind of thing that got San Diego in trouble in the early 2000's right? I think San Diego made a lot of mistakes during that period. I think that was an element of the mistakes for sure. Help us put these proposed budget cuts in context. How big they be and how will San Diegans feel their impact I don't think they will feel the impact to much. I think the library hours and recreation hours will be restored in those things will stay as they are. This is 3.5% cuts. There may be some folks laid off and that will matter a lot to them. But I think the budget is in relatively good shape. Relative -- revenue is expected to grow. I think this is just a blip on the radar and I tell --.think it will be a big deal. I have been speaking with The San Diego Union-Tribune reporter, David Garrick. Thank you. Thank you. Goodbye. Shortfalls in the city since -- pensions plan was a problem boaters tried to solve by passing proposition reform member -- in Proposition B. Reviews of it have been mix. Editor Tom fudge looks at what the city's been through in the ongoing debate over city pensions. 10 years ago things were bad for the city of San Diego. When I became mayor, the financial situation in San Diego was they were on the verge of bankruptcy. Jerry Sanders was a former police chief when he became mayor in a special election in 2005. The previous murder -- mayor resigned against financial turmoil. The problem was under fending city pension fund while boosting city benefits. City management made those decisions. I talked to union leaders and she said our job is to ask for benefits and more money in the city's job to say no. It took many steps including a 10% cut in city workforce to write this shift. In city voters passed a referendum aimed at making sure crises are voted in the future. Proposition B change the retirement benefit for new city workers from a guaranteed pension for life to a guaranteed contribution. A 401(k). In the long-term they start saving tens of millions of dollars every single year. The primary difference between a 401(k) in a guaranteed pension who bears the financial risk. When pensions are guaranteed, the risk is on the employer who has to fill the gaps if investment returns fall short in retirement. When the contribution is defined as it is with a 401(k), risk falls on the employees who must manage their retirement plan in a volatile stock market. Michael [ name unknown ] is manager of the MEA, San Diego's municipal employees Association. It was a Lawson benefit that we knew was going to be hard fall, not only to employees, but to the city's ability to recruit qualified employees in the future. He says the city now has the highest vacancy rate he's ever seen especially in departments that offer higher salaries. This is due at least in part to pension reform. City officials say San Diego's third -- vacancy re-eight is low compared to other big cities. A study of job vacancies earlier this year did show more than 100 vacancies in engineering and capital projects, which employed many highly skilled highly paid workers. The handful of city workers I spoke with outside City Hall were reluctant to talk on record. They were unanimous in their dislike of a new system. One employee, who wouldn't give me his name pointed out city workers are not part of the Social Security system. New employee should about that before they lost their guaranteed pensions. They should have some security in place. Then everything would have been smooth. Right now, they don't have anything, so everybody thinks abscessed security, but they don't. That means at the market crashes and a 401(k) goes with it, they have no Social Security check to fall back on. Marni Cox is an economist, with the San Diego Association of government. He said pension plans have a history of underfunding and expecting returns that are unrealistic. He also says, public employees should not be left to the mercy of the stock market and all employees should have protection of either a pension or federally funded Social Security. This is the most important part, if state and local pension programs -- there a couple of states that are better off, if those go bankrupt, unit and I know taxpayers will pick up the bill. So we'll pick up the bill anyway what the -- so why don't we straighten out the program. Tax payers are propping up the guaranteed pensions of current and future employees. Next year the city's pension payment will rise from $261 million-$311 million due to increased -- incorrect life longevity for employees. Proposition B is still under review by the courts. Tom fudge, KPBS News.

City of San Diego departments are likely facing 3.5 percent budget cuts next year driven largely by a significant increase in the city’s pension debt.

San Diego City Council’s Budget and Government Efficiency Committee will meet Wednesday morning to review a five-year financial outlook prepared by Mayor Kevin Faulconer’s office. That report, released last week, shows the city’s annual pension payment is expected to increase by $37 million to $228 million in the fiscal year beginning July 1.

Pension costs are rising because members of the system are living longer than expected, according to a new analysis from the city’s pension fund. The fund grew only 1.1 percent in fiscal 2016, below a goal of 7 percent returns and a market benchmark of 2.3 percent. But pension fund board members said nearly all of the increase in pension costs was due to lower mortality rates.

The city expects a $37 million budget shortfall in 2018. Projected revenue increases will help cut down that shortfall in future years. The budget will have a $20 million shortfall in fiscal year 2019, then a $500,000 surplus in 2020, a $40 million surplus in 2021 and an $80 million surplus in 2022, according to city projections.

Faulconer set up a pension stabilization fund last spring to help deal with future pension spikes, but it has only $16 million in it.

David Garrick, a reporter for The San Diego Union-Tribune, joins KPBS Midday Edition Wednesday to discuss the impact these budget cuts could have on city services.