Transcript Document

Opening Remarks
Moderator
R. Kinney Poynter
Executive Director
NASACT
Speaker
Sharon Erickson
City Auditor
City of San Jose
Speaker
Eduardo Luna
City Auditor
City of San Diego
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Pension Sustainability in
San Jose
ALGA webinar
February 2013
Based on a Report from the City Auditor Issued
September 2010
Did costs really skyrocket in San
Jose?
Benefit Payments Grew Ten Fold Over 20 Years
$350
$300
$200
$150
$100
$50
Post-Employment Health Insurance Premiums
Pension Benefit Payments
Audit of Pension Sustainability
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
$0
1991
Millions
$250
City and Employee Contributions Up Significantly
Over the Past Decade
$300
Millions
$250
$200
$150
$100
$50
$0
2001
2002
2003
2004
2005
Pension - employee
2006
2007
OPEB - employee
2008
2009
Pension - City
2010
2011
OPEB - City
Audit of Pension Sustainability
2012
Pension Benefit Payments Have Exceeded
Contributions Since 2001
$300
Millions
$250
$200
$150
$100
$50
$0
Contributions (City and Employee)
Pension Benefit Payments
Audit of Pension Sustainability
Pension Funded Ratios Have Fallen
130%
120%
110%
100%
90%
80%
70%
60%
Police and Fire
Federated
Audit of Pension Sustainability
Most Current Estimate of San Jose’s Pension Liability
Is $6.3 Billion
 As of June 30, 2012
• $4.2 billion in assets (market value)
• $2 billion unfunded liability (market value)
• In addition, a nearly $2 billion unfunded retiree
healthcare liability
The City’s Contribution Rates for Pension and Retiree
Healthcare Increased Dramatically
70%
60%
50%
40%
30%
20%
10%
0%
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Federated
Police
Fire
Police and Fire
Audit of Pension Sustainability
What happened?
No Guarantees that Even a Fully Funded Plan will
Stay That Way
Retirement Plans’ Investment Gains and Losses
$800
$600
$400
$millions
$200
$0
($200)
($400)
($600)
($800)
Audit of Pension Sustainability
The Liability Can Grow
 Retroactive pension benefit enhancements
 Longer lives, earlier and more retirements
 Changes to the assumed investment rate of
return
Audit of Pension Sustainability
Declining Ratio of Employees to Retirees and Beneficiaries
Creates a Risk of Even Higher Future Contribution Rates
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Audit of Pension Sustainability
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
What is the impact of those cost
increases?
Rising Retirement Costs Threaten the City’s Ability to
Maintain Service Levels
 FY 2010-11 budget deficit of $118 million
• About $52 million attributable to retirement costs
• Deficit closed with cuts to services, layoffs, pay and other
employee concessions
 FY 2011-12 budget deficit of $115 million
• About $61 million attributable to retirement costs
• Deficit closed with additional cuts to services, layoffs,
additional pay and other employee concessions
 FY 2012-13 budget $9 million surplus
• Budget forecasts show deficits for next two years
Significant Reductions to City Services
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Fire staffing down 11%
Police staffing down 20%
Library staffing down 25%
Parks and recreation staffing down 47%
Inability to open and operate new library facilities
Reduction in the days and hours of operation in
libraries and community centers
How is San Jose Addressing the
Issue of Pension Reform?
Audit Recommendations (September 2010)
 Explore prohibiting pension benefit enhancements
without voter approval, and retroactive pension
benefit enhancements that create unfunded liabilities
 Pursue one or a combination of pension costcontainment strategies:
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Additional cost sharing
Eliminating or limiting retiree bonus checks
Negotiate prospective changes for existing employees
Establish a 2nd tier for new employees
Consider joining the state plan to reduce administrative costs
Audit of Pension Sustainability
Audit Recommendations (continued)
 Actuarial audits every five years to ensure
reasonableness of assumptions
 Propose ongoing budget for actuarial services
 Provide annual updates to the City Council on the
status of the plans and forecasts of pension costs
 Distribute annual summary of the plans’ financial
condition to all plan members
Audit of Pension Sustainability
Pension Reform Timeline
 November 2010 – Voters overwhelmingly pass
Measure W allowing establishment of 2nd tier
 May 2011 – City Council approved Fiscal Reform
Plan (goal to contain retirement costs and halt
service reductions)
 December 2011 – City Council considered but did
not declare a fiscal and service level emergency
 June 2012 – Voters overwhelmingly pass Measure B
amending pension plans
 September 2012 – 2nd tier for new non-sworn
employees established (arbitration for sworn)
 Today – Most provisions of Measure B pending
Key Components of Pension Reform
 For new employees, a 2nd tier pension
 For current employees, additional cost sharing
or opt-in to revised plan
 Lower cost retiree healthcare plans
 Tighter limits on disability retirements
Conclusion
 San Jose has experienced dramatic increases in
retirement costs
 Measure B changes future benefit accruals, but
implementation of most provisions pending
 $2 billion unfunded liability for pension benefits
already earned
• Plus $2 billion unfunded retiree healthcare liability
 Meanwhile, costs are outpacing revenues, and the
City’s ability to maintain service levels is threatened
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Office of the City Auditor
City of San Diego
Update on San Diego
Pension Situation
A model for other cities?
Association of Local Government Auditors
February 2013
Outline
1.
2.
3.
4.
5.
Why pension reform in San
Diego?
Ahead of the curve
How much do we still owe?
Proposition B
After Prop B passed
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Why Pension Reform in San Diego?
Documented Pension Problems
Leadership & Government Failures
Enhanced Benefits
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Ahead of the Curve
After SEC Investigation/Actions
Major reforms to government
structure and pension system
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How Much Does San Diego Owe?
Billions
$2.50
$2.00
$1.50
$1.00
$0.50
$2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
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Funding Ratio
100.0%
89.9 %
90.0%
80.0%
68.6 %
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
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Proposition B:
two main parts with many nuances
401 K for all new hires except police
“City’s initial bargaining position in
labor negotiation is zero salary
increase for the next five years”
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Prop B Fiscal Impact Analysis
$700
Does not account for 30 % wage
disparity resulting from
cumulative effect of salary freeze
$600
$500
Does not reduce $2.18 B UAL
$400
$300
$200
$100
Million
Net Pension Costs
$-
Salary Freeze Savings
Net Savings
$(100)
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After Proposition B Passed
 Litigation and more litigation
 Interim 401k deal reached
 FY 2014 Annual Required Contribution is
$275.4 million (compared to $231.1 million
in FY 2013)
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Unintended Consequences
Higher staffing costs?
Turnover?
Will other municipalities follow?
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Questions?
Moderator
R. Kinney Poynter
Executive Director
NASACT
Speaker
Sharon Erickson
City Auditor
City of San Jose
Speaker
Eduardo Luna
City Auditor
City of San Diego
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