Reform 4.4: Service Credits
Incorporate Reform of Rates Charged for Purchase of Service Credits Into FY 2012 Budget. Other Information:
Over the years city employees have been provided the opportunity to purchase additional service credits. After a legal judgment
in favor of the City, SDCERS is in the process of correcting the practice described below, which incorrectly resulted in the
City picking up the cost associated with employee purchases of service credits at prices below what they should have been.
On this issue, the city’s Municipal Code section 24.1312 requires that: “provides that an employee cost to purchase…[a] PSC
must be the amount the Board determines to be both the employee and the employer (plan sponsor) cost for that service, SDCERS
was not permitted by law to delay implementation of the new rates once it determined a new rate [in 2003]. The City ended
up paying for the underfunding through it Unfunded Accrued Liability (UAL). As a result, the affected PSC contracts were not
legally authorized…because SDCERS had no legal authority to continue to offer the old rates once it had determined that the
new higher rates were required to comply with the Municipal Code. SDCERS is prohibited from requiring the City to make up
the underfunded amount by including it in the City’s UAL, and from permitting retirement benefits to be paid to members based
upon contracts issued using the legally unauthorized rules.” 7 In anticipation of savings from this legal ruling, the City
underpaid the FY 2011 ARC by $4 million. This underpayment of the pension payment was not brought before the City Council,
nor is the methodology (thus, appropriateness) used for calculating the $4 million underpayment known. There are two issues
to consider surrounding this underpayment: 1) If the underpayment is accurate, the City will have $4 million of appropriated
funds from FY 2011 to carry over to FY 2012, assuming that the funds are not needed to bridge any FY 2011 budget gaps that
may arise. 2) If the underpayment resulted in the City remitting an ARC payment that was too low, the City is accruing compound
interest on that underpayment of 7.75% annually. Further, if SDCERS investment experience is favorable, the opportunity cost
of not making the full pension payment increases. Note: The proportion of the $4 million underpayment made to SDCERS that
is attributable to the General Fund is unknown. Given the financial condition that the City finds itself in and the potential
for accruing interest owed to the pension system that would otherwise not be owed under a July 1 full payment scenario, we
recommend that this issue be resolved as soon as possible at the Budget and Finance Committee.
Indicator(s):
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