SDCERS’ interpretation of Charter stands; ends litigation with City for first time in more than a decade
The San Diego City Employees’ Retirement System (SDCERS) today announced it has reached a settlement agreement with the City of San Diego in the Substantially Equal lawsuit. While there was no final judgment from the court, the settlement lets stand SDCERS’ decades-long application of the "substantially equal" requirement of the City Charter, puts an end to years of litigious spending and marks the first time in more than a decade that there is no open litigation between SDCERS and the City.
"The City Attorney chose to pursue this case in the wake of one of the most significant declines in the stock market since 1929,” stated SDCERS CEO Mark Hovey. “Over all time periods since SDCERS began tracking investment performance, annualized returns have exceeded 8 percent. Returns above the 7.25 percent actuarially assumed rate of return serve to reduce City costs. Applied historically, this lawsuit would have served to increase the City’s pension deficit, not reduce it. I am grateful to the City Council for doing the right thing for the pension system, the City and for San Diego taxpayers.”
Under the terms of the settlement agreement, SDCERS will continue to allocate 100 percent of the Unfunded Actuarial Liability (UAL) to the City. The City will enact an ordinance ratifying SDCERS’ past, current and future allocations of the UAL, which cannot be amended or repealed unless the City and its bargaining units first comply with the meet-and-confer provisions of the Meyers-Milias-Brown Act.
The focal point of the lawsuit was SDCERS’ interpretation of City Charter section 143. The section requires financial liabilities, accruing because of past service of the employees, to be excluded from the substantially equal share of pension costs shared between the City and its employees. SDCERS, the City's pension administrator, requires annual contributions from the City and its workers in order to pay current and future retiree benefits. The City, however, maintained that the substantially equal requirement applied to actuarial and investment gains and losses in addition to the normal cost of normal retirement allowances. For more than 70 years, City leadership and SDCERS have interpreted the Charter section to exclude actuarial and investment gains and losses. Virtually all public pension plans allocate responsibility for actuarial gains and losses to the plan sponsor -- a widely accepted characteristic of public sector defined benefit plans.
“Since inception, SDCERS has been confident in its position,” stated Board President Ed Kitrosser. “The City spent more than $4 million suing itself at an interest rate of 7.25 percent over an interpretation of the City Charter that was ultimately left to stand. The City is obligated to pay for SDCERS’ legal expenses through operating costs that are bundled into the City’s annual pension payment, also known as the Annual Required Contribution (ARC). I commend the City Council for ending this wasteful spending so that the City and SDCERS can move forward.”
SDCERS actively pushed for City leadership to find resolution to save taxpayers money and move the City and the pension system forward. Most notably, in April 2013, former SDCERS Board President Herb Morgan joined then Mayor Bob Filner to publicly urge the City Attorney and the City Council to settle or drop the lawsuit. Subsequently, the case was docketed for several City Council Closed Session hearings where agreement terms were developed, negotiated and then settled.
SDCERS administers defined benefit plans for the City of San Diego, the San Diego Unified Port District, and the San Diego County Regional Airport Authority and provides service retirement, disability retirement, death and survivor benefits to more than 20,450 members. As of September 30, 2013, SDCERS had approximately $6.3 billion in net investments.
To read a copy of the settlement, click here.