San Diego's financial landscape is facing a major shake-up, with pension payments soaring to unprecedented levels. The city is grappling with a record-high annual pension payment of $563.2 million, a figure that's significantly more alarming than previously anticipated. This surge is primarily fueled by larger-than-expected salary increases for city employees, according to the city's pension system actuary.
This isn't just a number; it's a stark reality that's set to exacerbate San Diego's already precarious budget situation. The increased payment, due on July 1st, is poised to add at least $20 million to a previously projected $110 million deficit for the upcoming fiscal year.
The actuary, Gene Kalwarski, initially estimated a much smaller increase. Last winter, he predicted the city's payment would rise by less than $7 million, from $533.2 million to $540.1 million. However, his most recent assessment has more than quadrupled that estimate, projecting a $30 million jump.
But here's where it gets controversial... This sharp increase comes despite a robust year for the stock market and the pension system's investments, which saw gains of $89.2 million. Typically, such investment gains help reduce the city's annual payments. However, these gains were overshadowed by substantial employee raises implemented last July and this month. These raises increased the pension system's long-term liabilities by over $140 million, according to Kalwarski.
The city's tendency to offer larger-than-expected pay raises has become a recurring theme, and a persistent problem, for the pension system's long-term financial health. Kalwarski noted that salary increases have often exceeded assumptions over the past seven years. City officials have defended these raises as necessary to offset a wage freeze from 2013 to 2018, arguing that it left municipal salaries in San Diego lagging behind those in other cities. The average salary for city employees has now reached $113,800, a 7.4% increase from the previous year.
The specific raises included a 5% increase for general employees last July, 4% for police officers and lifeguards, and 3% for firefighters last July, with an additional 1% on January 1st. These raises are in addition to automatic pay hikes based on years of service.
Despite the higher payments, the city's unfunded pension debt has slightly decreased, from $3.49 billion to $3.46 billion. Normally, a smaller debt would translate to lower payments, but Kalwarski had predicted a much larger drop in debt.
On a positive note... Kalwarski pointed out that the funded rate of the city's pension system rose to 76.1% this year, the highest since 2008. This rate and the unfunded debt are based on Kalwarski's long-term liability projection of $14.51 billion compared to his long-term asset projection of $11.05 billion. He suggests that the 76.1% ratio in 2026 is an improvement over the 78.1% ratio in 2008, as the city has adjusted investment and employee longevity projections.
Looking ahead, Kalwarski projects the city's annual payment to increase again next year, reaching $573.2 million. However, the payment is then expected to drop to approximately $500 million for five consecutive fiscal years, from 2029 through 2033. Last year marked the first time the payment exceeded $500 million.
Not all of the increased pension payment will directly impact the city's projected general fund deficit of $110 million. Only 73% of the workers in the city's pension system are paid by the general fund, with the remaining 27% employed in enterprise funds like sewer, water, or municipal golf courses. The city's initial projection for its general fund pension payment was $383 million, but the revised figures will likely increase this to about $410 million.
The $110 million deficit is already considered an underestimate of the budget challenges. Last month, city finance officials announced a new $23 million deficit for the ongoing fiscal year, stemming from lower-than-expected revenues and higher-than-anticipated expenses. This shortfall could necessitate emergency cuts this winter.
Kalwarski presented the new payment details to the San Diego City Employees Retirement System (SDCERS) board, but a formal adoption of the payment is scheduled for their March meeting.
What do you think? Do you agree with the city's approach to employee compensation, or do you foresee further financial strain? Share your thoughts in the comments below!
