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When PEPRA was not Enough

Rick Roeder, FSA       February 2022

We recently finished some work for San Diego County Deputy Sheriffs’ Association and had to marvel at how their benefit levels have done a full “360” over the past 20+ years.

For recent hires, the days of “3% at 50” are long gone. When such benefits were implemented in the period leading up to the 2001 “dot com” bubble, we were skeptical that these benefits would be deemed affordable in the long term. The eventual answer: they were not. San Diego County’s recent contribution rates have been hovering close to 45% of payroll. SDCERA is far from the lone ranger in dealing with sky-high rates.

In 2018, the County decided that the significant benefit reductions mandated by PEPRA were not enough for both General and Safety members. The County implemented Tier D. For example, the Tier D Safety benefit multiplier at age 55 was reduced to 2.36%, likely the lowest in California, and lower than their benefit multiplier that predated “3% at 50.” (the age 55 multiplier for the County and many other 1937 Act Systems was 2.62% before the “3% at 50” boom).

We were mildly surprised that the PEPRA benefit reductions were not enough to satisfy the County. Then we started to wonder if the County had been fully apprised of the cost savings associated with PEPRA. We perused the actuarial report of SDCERA’s System actuary and found that they did not differentiate between the Unfunded Liability amortization among the System’s multiple Tiers. Each Tier was assessed the same percent of payroll to amortize the unfunded liability. Strictly from the standpoint of the System, such treatment is not a “bad thing.” The overall amount of money flowing into the System is reasonable under this approach.

When an employer is evaluating ongoing benefit changes, the importance of determining equitable costs for each Tier becomes an essential data point. Assigning each Tier with the same amortization percent payment allocation is inequitable when assigning separate costs to each Tier. (see “Are the Actuaries Being Unfair to the California Legislature??” in a June 2021 article at the Ramble at This approach of uniform percent-of-pay amortization for all Tiers is a situation where the least-costly benefit Tiers are unfairly burdened with the “financial sins of the past.” In San Diego County, as for many entities, paying off a significant unfunded liability is a large part of the total bill.

In contrast, the City of San Diego retirement system offers a superb technical example of financing when a Tier has been shut off to new hires. When Proposition B was passed, the defined benefit program was closed off to new hires other than Police (Subsequent litigation notwithstanding). The payroll for the non-Police population was assumed to eventually decline, as would be the case for any closed Tier. Financing unfunded liability, in conjunction with relative declines in payroll, is best addressed by having the unfunded liability associated with a closed Tier financed on a level-dollar amortization basis. Any unfunded liability for an open Tier can be financed on a level-percent-of-payroll basis because payroll for that Tier is projected to increase over time.

Did San Diego County have the best information available when they made the decision to implement post-PEPRA tier D? We do not know. Sometimes, large employers will employ their own actuary, as opposed to the System actuary, when a benefit change is contemplated. Did the County rely on the system actuary’s treatment of unfunded liability costing among the Tiers? Again, we don’t know.

Our hope is that all employers will have the best available information when assessing whether to contemplate future benefit changes. The outstanding performance in post-pandemic equities has brought some welcome, temporary relief for Systems, which, in turn, reduces the impetus for any further benefit reductions. However, we feel like we have just taken a time capsule back to the year 2000. In 2022, we have the same fears when the next bear market comes — as it inevitably will.

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