Undervaluing of SD Pension Perk Could Hurt Retirees

September 24, 2007 (PLANSPONSOR.com) - The San Diego pension board's undervaluing of an employee perk could mean that current and future retirees will feel the brunt of the mistake, which led to a $146 million shortfall, according to the city's mayor.

According to Union-Tribune, Mayor Jerry Sanders’ allegation could support City Attorney Michael Aguirre’s long-held contention that San Diego was shouldering an unfair share of the expense for a program that allowed employees to purchase credit for up to five years in which they did not work.

According to the news report, the $146 million shortfall is about 15% of the city’s $1 billion pension liability and that last month the shortfall on the purchase-of-service program rose to $20 million by 2000, then jumped dramatically – by $126 million – in three years, according to a specialist working for the pension system.

More than 3,200 current city employees have participated in the purchase-of-service program.

Pensions are calculated using a formula that includes the number of years worked and the final salary earned by employees, which means that increasing one of the factors allows workers to receive higher payments once they retire.

From 1997 to November 2003, employees paid 15% to 26% of their annual salary to obtain each extra year of credit. However, the pension board raised prices in late 2003, from 27% to 50% of salary and liability to the fund has not increased since the change.

If the city uses one of the options floated by Aguirre, it would mean shifting the responsibility to retirees, who could be given the option of paying the difference in price or giving up the credits.