San Diego's financial landscape is facing a major shake-up, with pension payments hitting a record high that could be far more devastating than initially anticipated. The city is grappling with an unprecedented annual pension payment of $563.2 million, a figure that's sending shockwaves through the budget.
This massive sum, due on July 1st, is a direct consequence of unexpectedly large pay raises for city employees, as revealed by the city's pension system actuary. This will exacerbate an already precarious budget situation, adding at least $20 million to the existing $110 million deficit projected for the upcoming fiscal year.
The situation is even more striking when you consider the initial projections. Last winter, the actuary, Gene Kalwarski, estimated an increase of less than $7 million, from $533.2 million to $540.1 million. However, the latest assessment shows the increase has more than quadrupled to $30 million.
But here's where it gets controversial...
Despite a strong year for the stock market and the pension system's investments, which saw gains of $89.2 million, the city's annual payment is soaring. The reason? 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.
This pattern of pay raises exceeding expectations has become a recurring issue, creating a persistent challenge for the pension system's long-term financial health. Kalwarski noted that "There have been extra salary increases above and beyond our assumptions during many of the past seven years."
City officials have defended these pay hikes, arguing they are necessary to correct the impact of a wage freeze from 2013 to 2018, which left municipal salaries significantly below 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 include a 5% increase for general employees last July, 4% for police officers and lifeguards, and 3% for firefighters last July, followed by an additional 1% on January 1st. These are in addition to automatic pay increases based on years of service.
And this is the part most people miss...
While the higher payment is concerning, 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. However, Kalwarski had predicted a drop of $131 million, a figure that was more than four times the actual decrease of $27.9 billion.
On a positive note, the funded rate of the city's pension system has risen to 76.1%, 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. Officials might argue that the 76.1% ratio in 2026 is better than the 78.1% ratio in 2008, given that the city has adjusted its investment and employee longevity projections.
Looking ahead, Kalwarski projects the city's annual payment to increase again next year, reaching $573.2 million. There's a projected drop to approximately $500 million for five consecutive fiscal years from 2029 to 2033. Last year marked the first time the payment exceeded $500 million.
It's important to note that not all of the higher pension payment will impact the city's projected general fund deficit of $110 million. Only 73% of the city's pension system workers are paid from the general fund, with the remaining 27% working for enterprise funds. The latest projection for the general fund pension payment was $383 million, but it is likely to increase to about $410 million.
The $110 million deficit is already considered an underestimation of the city's financial challenges. Last month, city finance officials announced a new $23 million deficit in the current fiscal year's budget, caused by lower-than-expected revenues and increased expenses. This could lead to emergency cuts this winter.
Kalwarski presented the new payment to the SDCERS board for discussion, but the board will formally adopt the payment at its March meeting.
What are your thoughts on this situation? Do you think the city's response to the wage freeze was appropriate, or could there have been a better approach? Share your opinions in the comments below!
