Local transit officials helped stave off a budget crisis they call a “fiscal cliff” on Thursday by shrinking the amount they’ll contribute to employee pensions over the next seven years by $37.3 million — a reduction of more than 26%.
The move will narrow projected future deficits of more than $100 million a year for the Metropolitan Transit System by freeing up more than $5 million a year to help MTS operate the San Diego trolley and more than 100 bus routes.
But the move, which the MTS board approved in a contentious 12-2 vote, also comes with significant long-term costs for the system and the taxpayers and riders who fund it.
The short-term reprieve was achieved by delaying the scheduled payoff of the pension system’s debt from 2038 to 2045 and by scheduling large annual payments during each of those seven extra years.
MTS officials said Thursday that the higher payments in later years cost more than the savings from the lower payments in early years — ultimately adding $51 million in costs.
That amount — which wasn’t included in staff materials and was only disclosed after repeated requests from the board — was characterized by MTS officials as something to weigh against potential service cuts.
“We have to look at the public benefits we’re trying to preserve,” said Sharon Cooney, MTS chief executive. “This is part of the overall strategy.”
It’s the first time since 2012 that MTS has made the bold move of essentially rebooting its pension system and restarting from scratch the payoff plan for its pension debt, which is $145.6 million.
Instead of sticking with an existing plan that would have paid off the debt in 12 years, the MTS board voted to lengthen the plan to 20 years so short-term payments could be lower.
The city of San Diego, which also faces steep deficits, tried unsuccessfully to make a similar move of its own in spring 2024. The board of the city’s pension system rejected the request, contending the city wasn’t a good credit risk.
San Diego Councilmember Vivian Moreno, a member of the MTS board who voted against Thursday’s pension move, said the overall $51 million cost increase was a big factor for her.
“I’m not comfortable with this,” she said. “What are we leaving for future boards of MTS?”
Moreno had to press MTS officials multiple times to calculate the overall cost increase of Thursday’s pension move, which was not included in the documents and other materials presented to the board.
After some lobbying by Moreno, staff provided an initial guess of $25 to $40 million and told Moreno that estimate would have to suffice.
Only after San Diego Councilmember Stephen Whitburn, chair of the MTS board, demanded a more complete calculation did staff take the time to add the numbers up and arrive at $51 million — more than double their low-end estimate.
Moreno told Cooney she shouldn’t have been surprised by the request, because Moreno had asked for it on Wednesday. Cooney noted that request came late on Wednesday for a Thursday meeting that began at 9 a.m.
Moreno was later joined in opposition to the pension move by Chula Vista Mayor John McCann.
Whitburn said he was comfortable with Thursday’s move despite the higher long-term costs.
The new payoff plan shrinks the MTS pension payment due this July from $21.9 million to $16.5 million. Similar reductions during the following six years will increase the total savings to $37.3 million over seven years — $104.8 million in payments versus $142.1 million.
The annual payment had been scheduled to rise this year from $21.2 million to $21.9 million because of salary increases during the previous fiscal year that were 3.7% larger than the pension system’s actuary had anticipated.
While critics call pension moves like the one MTS is making irresponsible and dangerous, agency officials and the actuary stressed that the move doesn’t veer from accepted actuarial principles.
The new payment plan chips away at the pension system’s debt every year with no annual increases in the debt through 2045, said Anne Harper, a principal consulting actuary for Cheiron, the firm overseeing the MTS pension system.
Harper also noted that MTS has in recent years boosted its estimates of how long retirees will live and lowered its expectations for investment returns to 6% per year — the most conservative rate in California.
It makes sense for MTS to be more conservative than most pension systems because it’s essentially a closed system, with most new hires since 2012 receiving 401(k)-style retirement plans instead of guaranteed pensions.
Because closed pension systems lack an influx of new members and because more of their members are close to retirement age, such systems typically invest more conservatively.
Projected deficits of $120 million in fiscal 2029 and $145 million in fiscal 2030 have prompted MTS officials to evaluate all the transit agency’s services for potential cuts.
Harper said MTS must strike a balance between annual payments MTS can afford and contributing enough to the pension system to ensure employees with pensions will receive their benefits when they retire.
Mike Thompson, deputy chief financial officer for MTS, said Thursday’s pension move is part of a strategy to shrink the looming deficits and make them more manageable.
“We’re trying to get through 2030 with some sustainability,” he said.