San Diego Pension Commission Votes for Record Payment
On Friday, the Pension Commission in San Diego reached a unanimous decision to instruct the city to make its largest annual pension payment ever—an impressive $563.2 million—this coming July.
This record amount is higher than anticipated, largely due to recent pay raises for employees. While the Commission is weighing changes to critical assumptions that may significantly affect future payments, these adjustments could have wide-ranging implications.
Some of the key assumptions under review include the life expectancy of pension recipients, the anticipated growth rates of the pension investments, and potential upward revisions of salary increase projections for city employees.
There was also discussion about the possible effects of a stock market downturn. Even a single year of substantial declines in the market could lead to marked increases in annual payments over several years, which would complicate budgeting further.
The amount designated for pensions is crucial because it limits how much funding is available for essential city services like fire departments, police, libraries, parks, and community infrastructure.
This new payment reflects a $30 million increase from the previous July 2025 payment of $533.2 million and is $23 million higher than what was originally projected before accounting for employee salaries.
Employee pay raises have often posed challenges for pension systems and might necessitate upward revisions to long-term wage estimates. Currently, the average salary for a city employee is around $113,800. Over the past seven years, Gene Karwalski, the actuary, noted, salary increases have frequently exceeded expectations.
Karwalski intends to present proposed changes to the pension system’s long-term assumptions in September, drawing on various data trends from recent years.
If the forecasted annual salary increase of 3.25% per employee is revised upward, the city will face a rise in annual pension contributions. Another potential change relates to the anticipated growth rate of the pension plan’s investments, which is critical because, traditionally, higher investment gains translate to lower annual payouts for the city.
The city has been gradually lowering its expected growth rate, officially called the discount rate, from 8% down to 6.5% over the last decade.
One member of the board, Chris Brewster, questioned whether a 6.5% rate might be too conservative given that the city has averaged a 6.9% return over the past ten years. He raised an interesting point—if the discount rate were to increase to 6.75% or 7%, it could substantially reduce the city’s annual obligations, offering some relief amid ongoing financial pressures.
Karwalski stated he would thoroughly investigate this possibility while emphasizing that basing decisions solely on past performance wouldn’t suffice; what truly matters is how investments are expected to perform moving forward.
Risk appetite will also play a role in setting these expectations. Brewster cautioned that deliberately underestimating investment returns could lead to inequities between current and future taxpayers, suggesting that today’s taxpayers might bear an unfair burden if assumptions remain overly cautious.
The existing 6.5% rate is relatively conservative when compared to other California pension plans, where out of 39 plans studied, only two are using a rate as low as San Diego’s. Most plans, in fact, set their rates between 6.75% and 7%.
Karwalski shared projections indicating what future pension payments might look like if the plan’s investment value declines by 3.5% rather than achieving the growth expected at 6.5%. In such a scenario, payments could rise dramatically through 2033, significantly impacting fiscal planning.
This year’s rising payments occurred despite a slight decline in the city’s unfunded pension liability, shrinking from $3.49 billion to $3.46 billion. This liability, often referred to as unfunded actuarial liability, is based on a long-term projection of $14.51 billion in liabilities against assets projected at $11.05 billion.
