San Diego pension board OKs $563M annual payment, city’s highest ever – San Diego Union-Tribune

San Diego’s pension board voted unanimously Friday to direct the city to make its largest-ever annual pension payment this July — $563.2 million.

The record payment, which is larger than expected because of recent employee pay raises, comes as the pension board considers changing crucial assumptions that could have a big impact on the annual payment.

Those assumptions include how long employees with city pensions will live, how fast the pension system’s investments will grow and whether expectations for city pay raises must be revised upward.

The board also discussed projections showing that a stock market crash — or even just a one-year downturn of notable size — would sharply raise the annual payment for several years.

The size of the payment matters because whatever the city spends on pensions reduces how much it has to spend on vital services like firefighting, law enforcement, libraries, parks and neighborhood infrastructure.

The new payment is $30 million higher than the $533.2 million the city paid in July 2025 and $23 million more than the $540 million it expected this payment to be before the employee raises were factored in.

Larger-than-expected raises — the average salary for city employees has reached $113,800 — have become a common problem for the pension system and might prompt a revision upward of long-term wage estimates.

“There have been extra salary increases above and beyond our assumptions during many of the past seven years,” actuary Gene Kalwarski told the board of the San Diego City Employees Retirement System.

Kalwarski said he will propose changes to the pension system’s long-term assumptions in September after he and his team study a wide variety of data from recent years.

That data will include salary trends, he said. The city’s annual payment would rise if the assumption of 3.25% annual pay raises per employee is revised upward.

Another key part of the possible assumption changes could be increasing the expected growth rate of the pension system’s investments.

Stock gains and investment growth 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.

The city incrementally shrank its expected growth rate — formally called a discount rate — from 8% to 6.5% during the first decade of this century.

One board member has questioned whether 6.5% might be too low based on average returns in recent years. Chris Brewster notes that the city has earned an average of 6.9% per year during the last decade.

“Is the discount rate in the right place?” Brewster asked.

A modest shift upward to 6.75% or 7% would lower the city’s annual payment by tens of millions of dollars, helping to alleviate an ongoing city budget crisis.

Kalwarski said he plans to study that possibility thoroughly this summer, but he said an upward revision is about more than recent investment returns.

“Historical returns is the least important factor — the most important is future expectations,” Kalwarski said.

Another factor, he said, is the board’s appetite for the risk that comes with higher expectations for investment returns.

Brewster suggested that willfully guessing too low on investment returns could create intergenerational inequity, with current city taxpayers covering more than their share of pensions that will be paid out long into the future.

“If our assumed investment returns now are unduly conservative, that essentially means this generation overpays,” Brewster said during the board’s January meeting.

The 6.5% rate used by San Diego is relatively conservative among the 39 California pension systems that SDCERS and Kalwarski use for comparison. Only two of those 39 use a lower rate, while 32 use a higher rate — including 27 systems that use either 6.75% or 7%.

On a related note, Kalwarski showed the board what the pension payment would be in coming years if stock market declines were to cause the system’s investments to lose 3.5% in value during the next fiscal year, instead of meeting the expectation of 6.5% growth.

In such a scenario, the city’s payment would rise notably through at least fiscal 2033: It would be $598 million instead of $573 million in fiscal 2028, $540 million instead of $493 million in fiscal 2029, $552 million instead of $489 million in fiscal 2030, $566 million instead of $488 million in fiscal 2031, $567 million instead of $494 million in fiscal 2032 and $551 million instead of $501 million in fiscal 2033.

The higher payment this year comes despite the city’s unfunded pension debt shrinking slightly, from $3.49 billion to $3.46 billion.

The debt, formally called an unfunded actuarial liability, is based on Kalwarski’s long-term liability projection of $14.51 billion compared to his long-term asset projection of $11.05 billion.