Moody’s Investors Service, one of the nation’s “big three” credit rating agencies, is praising San Diego’s pension system for adopting new policies to accelerate paying off its $2.76 billion pension debt.
While Moody’s didn’t elevate the pension system’s rating of Aa2, the third highest the service gives, Moody’s said the new policies are “credit positive” and reduce the chances San Diego will face long-term budgeting problems.
The pension system’s board voted unanimously last month to set a minimum annual pension payment of about $350 million until the debt shrinks to zero, a significant departure from previous plans to let the annual payment drop to $250 million in 2029.
The more aggressive approach seeks to reduce the debt to zero by 2037, 11 years earlier than projected under the previous plan.
The board also voted unanimously to limit how much the pension system can soften the impact of increases in the debt caused by changes in long-term projections, such as how well the stock market will perform in coming years or how long retirees will live.
The city has previously been allowed to spread the impact of higher employee longevity rates or lower investment returns over 30 years, but the board voted last month to shrink that to 20 years in all future instances.
The change brings the city in line with best practices throughout the state for delaying such impacts, which is called “smoothing.” Most pension systems in California use 20 years, and only four systems use 30 years.
“The new contribution rules are credit positive for the city, because more rapid repayment of unfunded pension liabilities will reduce the chances that San Diego’s long-term costs unexpectedly challenge future budgets,” Moody’s said in a recent report.
The report, written last month by senior analyst Thomas Aaron, said San Diego’s pension system was already in solid shape even before the new policies.
He noted that San Diego pays down its pension debt each year according to long-term projections by a professional actuary, and that the pension system in 2017 reduced the estimated rate of return on its investments to one of the lowest levels in the nation.
“They exceed a threshold we call our ‘tread water’ indicator,” he said.
When the city projects lower stock market returns, it increases the pension debt because that debt projection is based partly on how much the pension system’s investments are expected to increase in value in the long term.
Aaron said the more conservative estimates of investment returns will allow the pension system to more rapidly build its assets and allow pension administrators to reduce the expected volatility risk of its portfolio.
The new policies are part of a comprehensive effort to avoid repeating the pension underfunding schemes from the early 2000s that earned San Diego the nickname “Enron by the Sea.”
Aaron, however, noted the city’s pension system faces some risk stemming from the state Supreme Court ruling last year that San Diego skipped a key legal step in taking pension reform to the voters in 2012.
Proposition B, which was approved by more than 65 percent of city voters, replaced guaranteed pensions with 401(k)-style retirement plans for all newly hired city employees except police officers.
The court ruled in August that city officials failed to negotiate with labor unions before pursuing the measure, making it invalid. A state appeals court is expected to prescribe a remedy for the situation this year.
“The city’s costs and/or the magnitude of new pension liabilities associated with the adverse judicial decision are currently uncertain,” Aaron said. “If defined benefit accruals are retroactively granted to employees impacted by the 2012 reforms, it is currently unknown whether the pension system would change any of the rules surrounding its setting of contribution rates.”
The city’s projected pension debt has increased from $1.2 billion to nearly $2.8 billion since 2007.
Because of that increase and other factors, the city’s annual pension payment is projected to range from $337 million to $355 million over the next 10 years, about $100 million more than usual.
The first spike was the stock market crash of 2008 and 2009, which accounts for $754 million of the increase in pension debt — formally called “unfunded actuarial liability.”
The second spike was a new demographic study in 2016 showing that city employees with pensions are projected to live longer than expected, which accounts for $568 million.
The third spike was two recent decisions to lower the city’s investment return projections based on long-term concerns about stock market performance, which accounts for $549 million.
The city lowered the expected investment return rate from 7 percent to 6.75 percent, and then to 6.5 percent, the lowest in the entire state.
While such increases in debt could be characterized as bad news, officials have said it’s a positive thing to have a more accurate and realistic projection of what long-term financial challenges the city faces.
This article provided by NewsEdge.