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New 5-Year Financial Outlook Forecasts Modest Revenue Gains Outpaced by Rising Pension Payment

Pension Board’s Revised Projections Create Higher Ongoing Pension Costs for City

Wednesday, Nov. 9, 2016 - NEWS RELEASE

San Diego – The City of San Diego today released its annual PDF icon Five-Year Financial Outlook, which forecasts modestly improving revenue over the next five years and a significant ongoing increase in the City's annual pension payment following recent changes by the San Diego City Employees’ Retirement System's independent pension board.

The new report projects future revenue and expenditures for the City’s operating budget, also known as the General Fund.

For Fiscal Year 2018, the outlook for projected revenue shows a 5 percent increase in property taxes to $532 million, a 1.5 percent increase in sales tax to $271 million and a 5.7 percent increase in the transient-occupancy tax to $120 million. Those revenue streams – the three largest sources of revenue in the operating budget – are projected to grow to $612 million (property tax), $293 million (sales tax) and $146 million (transient-occupancy tax) by 2022.

The rise in projected expenditures is largely driven by changes to how SDCERS calculates the City's annual pension payment. The portion of the pension payment from the City’s operating budget is projected to increase by $36.7 million, from $191.2 million in FY2017 to $227.9 million in FY2018.

The increase stems from changes in actuarial assumptions calculated by SDCERS, such as projected longer lifespans for retired employees, and lower-than-expected investment returns in the past fiscal year. The increase is not from any new benefits granted by the City.

The result is a projected $37 million shortfall projected for FY2018 in the General Fund.

Earlier this year Mayor Kevin L. Faulconer won City Council approval to create a Pension Stabilization Reserve Fund to act as a safety net for the operating budget (which funds neighborhood services) when pension costs go up. The reserve fund currently has $16 million set aside for the operating budget that will help lessen the budgetary impact of the pension spike.

“I pushed to save for rainy days just like this so we’ll be able to keep fixing streets and investing in our neighborhoods, and that decision is already helping to preserve the City's financial health,” Mayor Faulconer said. “The good news is that our local economy keeps growing and with continued fiscal responsibility we will balance next year’s budget. But the reality is that we're still paying off the pension promises made by past City leaders, and that's money that could be going to our neighborhoods. It's yet another reminder that unsustainable pension benefits cast long shadows and City Hall must continue to live within its means and follow through with pension reform.”

Proposition B, approved by voters in 2012, reformed the City's retirement program by closing the pension system to all new non-police employees and providing a 401(k)-like benefit. It also spurred a pensionable pay freeze to reduce the growth of additional pension debt.

“The City is obligated to pay in full the annual pension payment determined by the independent pension board. The pension payment funds the vested pension benefits for employees who are grandfathered into the old system, and SDCERS is now projecting that they will live longer than previously anticipated,” said Mary Lewis, the City’s Chief Financial Officer. “Combine this with the fact that SDCERS' investment returns are lower than expected and it means that the cost to fund the pension system has increased even with no new retirement benefits. These are challenges that are impacting cities and pension programs across the nation.”

To achieve a balanced budget and minimize impacts to neighborhood services, the City’s Financial Management Department will be requesting budget reductions from all City departments as it develops the FY2018 budget over the next several months. 

The Financial Outlook is not a budget document, but rather a projection of future revenue and expenses that City leaders can use to plan for the future. It provides the City Council and the public information to facilitate an informed discussion during development of the FY2018 budget regarding the allocation of limited resources to meet the service needs of San Diego residents.

Mayor Faulconer will present his balanced FY2018 budget proposal for the City Council’s consideration in April 2017.

View the PDF icon FY2018-2022 Five-Year Financial Outlook.

CONTACT: Craig Gustafson at (619) 453-9880 or [email protected]

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