San Diego is facing a record-high annual pension payment of $563.2 million thanks to larger-than-expected employee pay hikes, the actuary for the city’s pension system revealed Friday.
The new payment, due July 1, will significantly worsen the city’s already bleak budget situation. It will add at least $20 million to a $110 million deficit previously projected for the upcoming fiscal year.
The actuary, Gene Kalwarski, had predicted last winter that the city’s payment would rise by less than $7 million this winter — from $533.2 million up to $540.1 million.
But Kalwarski more than quadrupled his estimate of the jump this week to $30 million.
The sharp hike comes despite a notably strong year for the stock market and the pension system’s investments, which gained $89.2 million in value.
Stock gains typically shrink the city’s 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 those stock gains were overpowered by large employee raises that kicked in last July and this month. Those raises increased the pension system’s long-term liabilities more than $140 million, Kalwarski said.
The city doling out pay raises larger than Kalwarski expects has become a recurring theme — and a recurring problem for the pension system’s long-term finances.
“There have been extra salary increases above and beyond our assumptions during many of the past seven years,” Kalwarksi told the board of the San Diego City Employees Retirement System.
City officials have repeatedly said large pay hikes are necessary to counteract the effects of a wage freeze that extended from 2013 to 2018, contending that frozen wages had left municipal salaries in San Diego far below those in other cities.
The average salary for city employees has reached $113,800, up 7.4% from just under $106,000 last year.
General employees received 5% raises last July, police officers and lifeguards got 4% last July and firefighters got 3% last July and 1% on Jan. 1.
Those raises are in addition to automatic pay hikes city employees receive when they hit certain years-of-service milestones.
The higher payment comes despite the city’s unfunded pension debt shrinking slightly, from $3.49 billion to $3.46 billion.
Smaller debt would normally mean a lower payment, but Kalwarski had predicted the debt would drop by $131 million this year — more than quadruple the actual drop of $27.9 billion.
On a positive note, Kalwarski noted that the funded rate of the city’s pension system climbed this year to 76.1%, the highest since 2008.
That 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.
He said officials could argue that the 76.1% ratio in 2026 is far better than the 78.1% ratio in 2008. That’s because the city has scaled back investment and employee longevity projections used back then that critics called overly optimistic.
Kalwarski is projecting the city’s annual payment to rise again next year to $573.2 million. The payment is then projected to drop sharply to about $500 million for five consecutive fiscal years: 2029 through 2033.
Last year was the first time the payment had ever surpassed $500 million.
Not all of the higher pension payment will affect the city’s projected general fund deficit of $110 million.
That’s because only 73% of workers in the city’s pension system are paid by the general fund. The other 27% work for enterprise funds like sewer, water or the municipal golf courses.
The city’s latest projection for its general fund pension payment — before Kalwarski revised the overall payment upward — was $383 million. The new number will likely increase the general fund pension payment to about $410 million.
The $110 million is already considered an understatement of the budget hole the city faces.
Last month, city finance officials announced a new $23 million deficit in the budget for the ongoing fiscal year, based on revenues coming in lower than expected and some expenses coming in higher than expected. They said that shortfall could force the city to consider emergency cuts this winter.
Kalwarski presented the new payment to the SDCERS board on Friday for discussion, but the board is not scheduled to formally adopt the payment until its March meeting.