Big changes could be coming this week to San Diego’s plan to pay off its mounting $3.4 billion pension debt, which is threatening to cripple city finances and force deep budget cuts.
A variety of proposals to pay off the debt less aggressively and shrink the city’s annual pension payment will be presented Friday to the 13-member board that oversees the city’s pension system.
Each of the proposed alternative payoff plans would reduce how much the city must pay during the next five years, but most of them would increase how much the city must pay during years that are further into the future.
Pushing pension debt into the future earned San Diego the nickname “Enron-by-the-Sea” two decades ago.
But city and pension system officials say these proposals are financially responsible and don’t rely on the kind of gimmicks that garnered that reputation, such as overestimating pension system investment returns or shrinking estimates of how long city retirees will live.
One of the proposed plans would save the city nearly $200 million between fiscal years 2026 and 2030, pay off the debt one year earlier than previously planned, and add a relatively modest $118 million to the city’s long-term payoff costs.
While city officials have urged the pension system to consider a major revamp to its existing payoff plan, they stress that the pension system board is independent.
A city ballot measure approved after the Enron-by-the-Sea scandal prohibits multi-year agreements between the city and the pension system board and establishes detailed qualifications for each of the board’s 13 seats.
Friday’s hearing about the revamped payoff proposals will come just a few days after the pension system’s actuary issued new calculations showing the city’s projected debt has surpassed $3 billion again to reach its highest point ever, $3.36 billion.
The new calculations also mean San Diego’s annual pension payment will surge this spring to $526.6 million, the highest ever by a wide margin. That’s 27 percent more than the $415 million the city paid in spring 2021.
San Diego’s pension payment will now account for nearly 20 percent of city spending, second only to what the city spends on its police department.
The $526.6 million payment is especially problematic for the city because it’s already facing a projected $115 million deficit for the fiscal year that begins July 1.
And that projected deficit was based on an estimate by city finance officials in November that the new pension payment would be $478 million — nearly $50 million less than the payment announced this week.
The calculations by the pension system’s actuary, Gene Kalwarski, show that the payment is so much higher than expected because of large pay raises given to nearly all city workers and projected increases to pension benefits as a result of inflation.
Most city workers got raises last year totaling around 25 percent over three years. City labor costs have jumped more than $111 million per year since 2021.
Concerns about growing pension payments prompted city finance officials last year to ask the system to consider significantly revamping its plan for paying off the growing debt.
In response, the pension system’s actuary is proposing a variety of ways the city could more slowly pay off the debt, some more radical than others.
Four of the seven proposed payoff plans would completely reset the city’s pension system for the first time since 2007 in the aftermath of the Enron-by-the-Sea scandal.
City finance officials have lobbied for a complete reset, contending the existing payoff plan makes no sense in relation to city revenue.
The existing plan forces high payments during its early years and much lower payments in later years, while city revenue is projected to rise slowly and steadily over time.
So a more sensible plan, city finance officials say, would have pension payments steadily rising as city revenues steadily rise, making the payments a more stable and steadily affordable part of the city’s annual budget.
One of the proposed payoff plans, called Scenario 5 by the actuary, appears to match what city officials have been asking for.
Compared to the existing payoff plan, payments would be roughly $40 million lower per year during fiscal years 2026 through 2030. They would then be roughly $70 million higher than the existing plan during the second five-year period, fiscal years 2031 through 2035.
But city officials say they almost certainly would be in better position to handle those higher payments by then, because city revenue is projected to rise steadily. The largest annual payment of $653 million looks high now, but it’s scheduled for 2039 when city revenues are projected to be much higher.
That proposed scenario would keep the city’s annual pension payment close to 15 percent of projected revenues for the entire duration of the plan.
That’s in stark contrast to the existing payoff plan, where the pension payment is now about 19 percent of city revenue but will drop sharply to about 11 percent in future years.
Scenario 5 also pays off the entire debt by 2039, one year earlier than the existing payoff plan in 2040.
Matt Vespi, the city’s chief financial officer, declined this week to say which of the seven scenarios city officials prefer.
“We’ve reviewed the information, and we’re interested to hear the presentation from the actuary,” he said, referring to Friday’s pension system board meeting. “It seems like there could be a viable option that both meets the fiduciary responsibilities of the pension system while also reducing the city’s near-term costs.”
Kalwarski, the pension system actuary, is recommending the more conservative Scenario 3. Instead of completely resetting the pension system, Scenario 3 would change how the long-term debt is calculated by basing it on percentages of employee salaries instead of actual salaries.
Scenario 3 would provide about one-third as much budget relief during the first five years as Scenario 5 — $75 million versus $195 million.
But it would be much more friendly to the city’s future budgets than Scenario 5 during years six through 10, when it would not raise payments at all above the existing plan. Scenario 5 would increase total payments during that same period by $345 million.
Scenario 3 would pay off the debt in 2042, two years after the existing plan and three years after Scenario 5.
Both Scenario 3 and Scenario 5 are far more conservative than Scenario 8, which would reset the system with a 20-year payoff plan and eliminate a payment floor adopted by the pension system board in 2018.
Scenario 8 would provide the most immediate budget relief, $450 million total during the next five years. And payments would only rise about $10 million per year over the existing plan during the second five-year period.
The drawbacks of Scenario 8 are that it includes a $686 million payment in 2044 and it balloons the city’s long-term payoff costs by $1.18 billion. That’s far more than Scenario 3, which would increase long-term payoff costs $406 million, and Scenario 5, which would increase those costs $118 million.
Scenario 8 also delays full payoff of the debt to 2044, the latest of any of the proposals.
It’s not clear how the pension board will react to the proposals. In July, several board members criticized the idea of slowing down debt payoff. But that was before any comprehensive proposals had been created.
The city’s pension debt was calculated as $2.84 billion last winter, so the jump to $3.36 billion this winter is an increase of more than $500 million.
The debt is based on the gap between the estimated long-term value of pension system investments, which is now $9.72 billion, and the long-term estimated payouts to employees the city must make, which is now estimated at $13.08 billion.
Friday’s pension board meeting is scheduled to begin at 8:30 a.m. at the downtown headquarters of the pension system, the San Diego City Employees Retirement System. The address is 401 West A Street.
