San Diego’s pension board unanimously approved Friday a record-high $533.2 million annual pension payment for the city due July 1.
The half-billion-dollar payment, which comes with the city facing a large budget deficit of roughly $250 million, is $44 million higher than last year and $35 million higher than the pension system’s actuary had projected last spring.
This is the first time San Diego’s annual payment has ever surpassed $500 million.
The actuary told the pension board Friday that his early projections indicate next year’s payment will be even larger at $547.6 million. But that number could change over the next 12 months, particularly based on the stock market.
Stock gains shrink the city’s pension debt and its annual payment, because a crucial part of the city’s long-term payoff plan is significant growth in the value of investments made by the pension system.
Because the market has been so volatile lately and because it plays such a key role in the city’s annual payment, the actuary presented positive and negative stock scenarios Friday that showed next year’s payment could range from $517 million to $563 million.
Next year’s payment is tentatively expected to rise primarily because of the final installment of generous multiyear pay raises given to nearly all city workers in 2023.
City officials say the hikes were needed to restore city salaries to competitive levels, but they’ve ballooned the city’s annual pension payment and may continue to do so next year.
General workers are due raises of 5% when the new fiscal year begins July 1, while police and lifeguards are due 4% hikes then. Firefighters will get 3% raises July 1 and another 1% on Jan. 1, 2026.
The raises given before the upcoming fiscal year raised the average annual pay for workers in the city’s pension system by 8.1% in just one year, from $98,045 to $105,953.
The actuary, Gene Kalwarski, didn’t provide a new estimate for what the average annual pay will be after the raises that are slated to kick in this July and next January.
The raises — which also increase the estimated pension payments workers will get once they retire — have boosted the city’s pension debt to a record $3.49 billion.
Kalwarski said that number would be $3.55 billion if the upcoming raises were included. But because the city is making such a large payment this year, he projects the debt will drop to $3.4 billion by next spring.
The city’s pension debt, which is formally known as an unfunded actuarial liability, surpassed $3 billion for the first time in January 2020 and climbed to $3.34 billion in January 2021.
It then fell two years in a row before starting to rise again, to $3.36 billion one year ago and to a record $3.49 billion now.
That amount is based on the pension system having assets and investments with a projected long-term value of $10.32 billion, while facing projected future obligations to retired workers of just under $13.82 billion.
The debt had been projected to drop by $114 million this year but instead rose by $129 million. The pay raises pushed it up $267 million, which was partly mitigated by $26 million from stock gains.
Another factor that increased the debt was a recent deal to create pensions for 204 workers affected by the city’s Proposition B pension cuts, which took effect in 2012 but were later overturned in court.
These workers were hired after Proposition B took effect in July 2012 but were no longer working for the city when pensions were restored in July 2021. Giving them pensions raised the debt by $1.7 million and the annual payment by $600,000.
The agreement leaves only one group of workers still mired in Proposition B controversy: roughly 1,000 police officers who have been denied pension credit for six months they spent in the police academy.
The actuary provided comparisons Friday of San Diego’s pension system against others in California and the nation.
Compared to roughly 250 other pension systems analyzed by Boston College, San Diego has among the most conservative estimates of stock market returns.
On funding ratio — a measure of how much money has been set aside compared to what the city expects to owe — San Diego’s 74.7% ratio places it in the top one-third of the plans in the study.
In California, Kalwarski said San Diego is roughly in the middle of the pack for funded ratio. For stock market return estimates, only two of the 39 California pension systems studied are more conservative than San Diego.
The higher-than-expected pension payment this July will worsen San Diego’s general fund budget deficit, but not by the entire $35 million by which it exceeds Kalwarski’s previous estimate.
That’s because only 73% of city workers are paid by the general fund; the other 27% are paid by enterprise funds like sewer, water and golf courses.
But the higher payment should widen the projected deficit by roughly $25 million, likely forcing deeper cuts and more employee layoffs.
City officials have been using $250 million as the estimated deficit for the new fiscal year for months, but that number doesn’t reflect many recent city moves and other changes.
The city has raised a wide variety of fees, doubled parking meter rates and increased the cannabis tax rate.
But city finance officials have twice had to revise downward projected sales tax revenue. And projected employee overtime is higher than expected, worsening the projected deficit.
Mayor Todd Gloria is scheduled to release a proposed budget by April 15.
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