San Diego’s annual pension payment will soar to a record $533 million this year, making it harder for city officials to close a daunting $329 million budget deficit without drastic cuts to cherished programs.
The annual payment — which will be $44 million more than last year and surpass $500 million for the first time — is rising primarily because of large employee pay raises totaling 23 percent over several years.
Those raises, which increase the estimated pension payments workers will receive when they retire in coming years, have boosted the city’s pension debt to a record $3.49 billion.
The annual payment, which the city will make July 1 as part of a new budget for fiscal year 2026, is about $35 million higher than the pension system’s actuary had projected for fiscal 2026 last spring.
City finance officials said last month that they expected this year’s payment to rise more than previously projected, but they didn’t give an estimated amount.
A higher pension payment was not calculated into the $329.3 million general fund deficit city officials have projected for the upcoming fiscal year, so the new amount will widen the projected deficit.
The projected deficit won’t increase by the full $35 million because only 73 percent of city workers are paid by the general fund, with the other 27 percent are paid by enterprise funds like sewer and water.
But the higher payment should widen the projected deficit by roughly $25 million, likely forcing deeper cuts and more employee layoffs than previously discussed.
Last month, Mayor Todd Gloria ordered a hiring freeze and asked most city departments to propose 20% cuts. The only departments asked for smaller cuts were transportation, at 10%, and police, fire and homeless services at 5%.
Gloria said he will also consider new ways to raise revenue, including possibly raising city parking fees. He’s also ordered a comprehensive analysis of city contracts, which account for $258 million of the city’s $2.2 billion annual budget.
The budget crisis comes after voters narrowly rejected in November a sales tax increase that would have generated about $400 million a year and erased annual projected deficits of roughly $300 million the city now faces.
Hoping the sales tax measure would pass, the city adopted a budget last spring that avoided arguably needed cuts by relying on a wide range of gimmicks, including delays in reserve payments and other unsustainable moves.
The pay raises, which were approved in 2023 and spread over three years, are playing a key role in the crisis. But city officials say the hikes were needed to restore city salaries to competitive levels.
The actuary for the city’s pension system hadn’t previously calculated the impact of 4% raises for all workers last July and additional raises that kicked in last week with the new year: 1% for public safety workers and 2% for others.
Those raises and other pay increases have elevated the average annual pay for workers in the city’s pension system 8.1% in just one year, from $98,045 to $105,953.
The increase in the pension payment would be even higher if not for strong performances last year by pension system investments, which gained $670 million in value compared to a projected $644 million.
Stock gains shrink the city’s pension debt and 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.
But the gains were relatively modest this time. On their own, those gains would have lowered the city’s annual payment $2.3 million. By comparison, the pay raises increased the payment $37.2 million.
Another factor in the city’s pension payment increase was a recent deal to create pensions for 204 workers affected by the city’s 2012 Proposition B pension cuts, which took effect but were late 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 annual payment by $600,000.
That 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 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.
City finance officials last spring unsuccessfully lobbied the board of the city’s pension system, the San Diego City Employees Retirement System, to reduce pension payments in the coming years and increase them in later years — when they expect city revenues to increase.
The city’s record-high payment this year does not look likely to be a one-year spike. The pension system actuary is projecting an increase to $540.1 million next year and to $556.2 million in 2027.
The pension system board will discuss the city’s new payment during a meeting scheduled for 9 a.m. Friday. Traditionally, the board discusses the payment in January each year and then formally adopts it in March.
