Reform 4.13: Pension Investment Risks

Explore Benefit from Requiring City Employees to Share Equally in Pension Investment Risks.

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The analysis shows that the City stands to gain potentially gain from a sharing of investment losses. This reform – known as “Sub-Equal for Investment Gains/Losses” – was originally raised by the Pension Reform Committee in 2004 and has been raised consistently by our office. In spring of 2010, City Attorney Jan Goldsmith, with the support of the City Council, brought suit against SDCERS over this issue. SDCERS has “argued that in a defined benefit plan the employer is generally responsible for the unfunded actuarial accrued liability.” However, in her Tentative Ruling, Judge Joan M. Lewis has stated that “[i]n this case, the City’s Charter and, specifically, Section 143 contains language requiring the City to contribute only an amount ‘substantially equal’ to that required of the employees for normal retirement allowances, as certified by the actuary, but shall not be required to contribute in excess of that amount, except in case of financial liabilities accruing under any new retirement plan or revised retirement plan because of past service of the employees.” As such, she “reject[ed] the argument that as a matter of law and with what is before [the Court] at this time, the City must entirely fund the UAL.” We obtained an actuarial model of various investment return assumptions, as well as the impact of sharing investment losses/gains between the City and employees, beginning July 1, 2001. We obtained this modeling due to the legal actions being currently pursued by the City to force SDCERS to apply “substantially equal” contributions to investment experience. It is important to note that the possibility that City employees were not contributing adequately (adequately is used here to refer to contributions as required by the Charter) to the pension system was raised as early as 2004 in the Pension Reform Committee “Final Report.”16 Some of the initial progress that has been made resulted in an approximate $2 million reduction in the City’s ARC payment paid on July 1, 2010 as determined by the revised June 30, 2009 actuarial valuation, which followed the SDCERS Board adoption of new contribution rates at its May 28, 2010 meeting. 17 While the ultimate resolution of this case is still to be determined, the notion that investment losses are not the entire responsibility of the City due to the City Charter has not been dismissed. Given the remaining uncertainty, however, we do not apply any potential savings from investment gain/loss sharing to the FY 2012 budget. Nevertheless, as the City seeks to reduce its long-term pension costs to free up finite General Fund revenues for service provision, this looming possibility may help to bolster the viability of the options explored further below due to the increased negotiating leverage gained as a result of the potential Charter-required increase in contribution rates for City employees.

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