When the board of the San Antonio Fire & Police Pension Fund approved a proposal last September that would allow the city to reduce its annual pension contribution by $4.3 million, board members were sure it would be greeted with enthusiasm by city staff.
After all, City Manager Sheryl Sculley has argued that swelling public-safety costs are choking San Antonio’s fiscal health, and city staffers have long called for some relief on annual pension costs.
Imagine the surprise, then, for pension-fund reps, when city staff came out in opposition to the plan, which goes before the City Council on Thursday.
An actuary hired by the pension fund has projected that the proposal would save the city $225 million over the next 30 years, but the plan will die if the council follows the staff’s direction and rejects it.
Council approval would send the proposal to the state Legislature, where all changes to the pension fund must be made.
What is the thinking behind the city’s opposition to a proposal at least partly designed to cut public-safety costs? Jeff Coyle, intergovernmental relations director for the city, puts it this way: “It’s short-term savings with long-term costs.”
First off, let’s look at some basic facts about how the pension fund works. Police and firefighters each contribute 12.3 percent of their salaries to the fund, and the city double-matches those contributions by putting in 24.6 percent.
In fiscal year 2014, the city spent $76 million on the pension fund, and $38 million of that outlay went to paying off the pension’s unfunded liability.
The pension fund is currently 93 percent paid off, and the pension-fund board’s recommendation would stretch the timetable from six to 11 years to get it 100 percent funded, by allowing the city to reduce its contribution to 23.25 percent of its payroll. That’s how $4.3 million would be freed up for the city.
Two arguments against the pension-board’s legislative package were presented to the council at a Jan. 27 B Session by Ben Gorzell, the city’s chief financial officer, and Jorge Rodriguez, head of public finance for Coastal Securities Inc., a Houston-based financial adviser to the city of San Antonio.
One argument was that if the city bites the bullet and maintains its contributions at the current level, after six years it can start saving the $38 million a year it’s currently spending to pay off the unfunded liability. According to this theory, it’s better to pay an extra $4.3 million a year for six years if it means saving $38 million a year forever after.
It’s an argument that makes a lot of sense, but it comes with a serious complication.
Pension Fund Executive Director Warren Schott points out that the eventual $38 million savings would happen only if the Legislature passes a bill allowing it, and he says legislators are unlikely to do that if one of the involved parties — in this case, the pension-fund board — disapproves.
“The city is working on the presumption that all parties would agree to that in six years,” Schott said. “The city staff’s opinion on this is misguided. It’s very unlikely that the city would be able to reduce its annual contribution by $38 million in six years, and have all the parties agree to that.”
Gorzell agreed that if the unfunded liability is eliminated after six years, it would make sense “to have a conversation about some small portion of that benefits package going into overfund,” to provide the pension fund with a financial buffer against possible economic downturns.
“But there would be an opportunity for the city to have a substantial reduction in its contribution,” Gorzell added. “It wouldn’t make sense for us to continue to fund that.”
The other argument offered by Gorzell against the pension-fund board’s legislative package is that carrying on the unfunded liability for an extra five years could put the city’s AAA bond rating at risk with national rating services.
Schott countered that actuarial experts have told pension-fund reps that they would be “very surprised” if the legislative package impacted the bond rating. Rodriguez, who assessed the package for the city, conceded that the plan alone “should not lead to rating changes, they will place additional pressure on calculated measures.”
Think of it as a game of legislative chicken that both sides are playing, and the casualties might not be clear for a few years. firstname.lastname@example.org Twitter: @gilgamesh470