City's pension liability zooms up by $937 million

The City of San Diego's pension liability as of June 30 has soared to $2.65 billion, up by $937 million since June of 2015, according to a report by Cheiron, the actuarial firm used by the San Diego City Employees' Retirement System (SDCERS).

Former city attorney Mike Aguirre said today (December 21) at a press conference that the city is essentially bankrupt. I sought a response from SDCERS, but none had come prior to publication.

Major reasons for the increase are changes in economic and demographic assumptions, which raised the net pension liability by $620 million in the year. These include interest rates, salary increases of 3.05 percent, and cost of living adjustments of 1.9 percent.

Interest rates are critical. During the 2015-2016 period (mid-year to mid-year) the Federal Reserve kept short-term interest rates far under 1 percent, often close to zero. Lower interest rates produce a higher pension liability. A one percent decrease in the discount rate increases the net pension liability by 12 percent, according to the report.

Conversely, an increase in rates lowers the liability. The Federal Reserve has raised short-term rates over the recent period and says it intends to raise rates even more in 2017. This should lower the liability, other things being equal.

Net investment income plunged from $935 million in 2014, to $208 million in 2015, to merely $64 million in 2016, according to the Cheiron report. Investment gains or losses are measured over a five-year period. Assumption changes knocked $620 million off investment returns during the year. SDCERS will recognize $207 million in the current year, and the same amount in each of the next two years, according to the report.

"Pension-fund managers are once again hiding the size of the pension debt," says Aguirre. "They have managed the pension for their own selfish purposes and basically put the city in bankruptcy."

The report came out November 30 but didn't cause a ripple. Aguirre came across it when working on a case. Mayor Faulconer has mentioned that pensions will take up more of the city's money but hasn't been specific. The increased liability should come into the deliberations of whether the Chargers will move to Los Angeles or be able to wangle a subsidized stadium from San Diego.