San Jose's pension boards weigh faster and slower debt payoff as funding improves

SAN JOSE - A strong year for investments has left San Jose's two city pension plans in very different shape, and their boards were asked last week to respond in opposite ways.

Both plans earned more than expected in the year ended June 30, according to slides from Cheiron, the boards' actuary (a firm that projects pension costs). The police and fire plan is now estimated at 96% funded on a market basis, up from 88%. The plan for most other city workers, the Federated City Employees' Retirement System, is estimated at 72%, up from 65%.

Police and fire: a chance to lower high payments

For the police and fire plan, Cheiron offered the board a choice for the payment schedule on its unfunded liability, the gap between promised benefits and money on hand. The option would line up the plan's debt "layers" from 2016 to 2026 on one schedule. Older loss layers would be stretched out and newer gain layers paid off faster.

Cheiron's slides say the current schedule keeps city payments high even after the plan is projected to pass 100% funded. Under the option, the city's projected rate for 2027-28 falls from 67% of police and fire payroll to 60%.

The slides list the trade-offs. The option would cut very high payments and could be a better use of city money. But it could be seen as changing the method to help the city rather than the plan, and it leaves less surplus as a cushion. Keeping the current method keeps policy consistent and builds that surplus.

On Oct. 21 the board voted 8-0 "to accept all the recommendations from Cheiron," according to the draft minutes the Office of Retirement Services posted. The draft minutes do not say whether that includes the new payment schedule.

Other city workers: pay the biggest debt faster

Cheiron's slides say the Federated plan "has consistently been one of the lowest-funded in California." They say the drop in police and fire payments gives the city room to pay this plan's debt faster while still lowering its combined bill.

The proposal would pay off the 2009 debt layer, by far the largest, in 11 years instead of 13. It would phase that layer's payments out over three years, so they don't drop by about $100 million in a single year. It would also slow the yearly growth of debt payments from 2.75% to 2.5%.

The benefit, the slides say, is reaching full funding in 2037 instead of 2039, with much lower payments from 2037 to 2040. The cost is about $19 million more from the city in 2027-28, about 3.6% of payroll.

The Federated board took up the proposal Oct. 22. Its minutes have not been posted yet, so this story could not confirm the outcome from the official record.

Source: Police and Fire board meeting record and Cheiron slides, Oct. 21; Federated board meeting record and Cheiron slides, Oct. 22. Meeting video: police and fire, Federated.