San Diego Faces Record Pension Payments

San Diego is looking at an unprecedented annual pension payout of $563.2 million, a figure that has surged due to unexpected increases in worker pay, according to the city’s pension system actuary.

The upcoming payments, set for July 1, will exacerbate an already tough financial landscape, adding at least $20 million to the previously projected $110 million deficit for the next fiscal year.

Last winter, actuary Gene Karwalski had forecasted an increase of under $7 million, bringing the total to a maximum of $540.1 million. However, his revised estimate this week has skyrocketed by over four times that amount, landing at an additional $30 million.

This substantial rise comes despite a strong year for the stock market and pension investments, which saw an increase of $89.2 million in value. Typically, gains in equity reduce the city’s annual payout since a critical aspect of its long-term profit plan relies on significant investment increases by the pension plan.

Unfortunately, these stock gains were overshadowed by considerable employee pay raises implemented last July and this month, raising the pension plan’s long-term liability by more than $140 million, according to Karwalski.

Frequent larger-than-expected raises have become a recurring challenge for the pension system’s finances. “For many of the past seven years, we have had additional salary increases that exceeded our expectations,” Karwalski explained to the San Diego Employees Retirement System Board of Directors.

City officials argue that substantial pay hikes were necessary to mitigate the effects of a pay freeze from 2013 to 2018, which they believe left San Diego’s workers underpaid compared to those in other cities.

The average salary for city employees has risen to $113,800, marking a 7.4% increase from last year’s figure of just under $106,000. In detail, civilian workers received a 5% raise last July, while police officers and lifeguards got a 4% raise, and firefighters received a 3% raise last July along with an additional 1% increase this January.

These raises are also complemented by automatic increases employees earn upon reaching certain seniority milestones.

Interestingly, the rise in payments comes even as the city’s unfunded pension liability has slightly decreased, from $3.49 billion to $3.46 billion. Usually, a reduction in debt correlates with lower payments. Karwalski had anticipated a debt drop of $131 million this year, yet the actual decline is a mere $27.9 million.

On a brighter note, Karwalski highlighted that the pension plan’s funded rate has climbed to 76.1%, the highest it has been since 2008. This interest rate and unfunded debt situation is based on a long-term liability projection of $14.51 billion against an asset projection of $11.05 billion.

Karwalski suggested that while the 2026 funded rate of 76.1% may seem slightly worse than 2008’s rate of 78.1%, it’s actually an improvement with how the city has refined its investment strategies and employee lifespan assumptions, which had previously been criticized as overly optimistic.

Looking ahead, Karwalski anticipates another rise in annual payments next year, projecting them to hit $573.2 million, before subsequently dropping to around $500 million for five years, from 2029 to 2033. Last year marked the first time payments surpassed the $500 million mark.

However, not every increased pension payment will affect the estimated $110 million general fund deficit. It’s reported that only 73% of employees enrolled in the city’s pension system are funded by general funds, while the remaining 27% work with corporate funds, including those for sewer, water, and municipal golf courses.

Before Karwalski revised the total payments, the last projection for general fund pension payments was $383 million. With the new figures, general fund pension payments could rise to around $410 million, which likely underestimates the budget shortfall already facing the city.

Recently, city finance officials disclosed a new $23 million deficit in the current fiscal year’s budget, citing lower-than-expected revenues alongside some unforeseen expenses. This situation could push the city to consider emergency budget cuts this winter.

Karwalski presented the updated payment amount to the SDCERS board for consideration on Friday, but a formal adoption of the payment amount is not anticipated until the board’s meeting in March.