San Diego's financial landscape is facing a major shake-up, with pension payments hitting a record high and potentially quadrupling the initially projected pain. This is a situation that demands our attention, as it directly impacts the city's budget and, by extension, its residents.
The city's annual pension payment is soaring to a staggering $563.2 million. This surge is primarily due to unexpectedly large pay raises for city employees, as revealed by the city's pension system actuary.
Let's rewind a bit. Last winter, the actuary, Gene Kalwarski, estimated a much smaller increase in the city's pension payment, predicting a rise of less than $7 million. However, the latest figures show a dramatic increase, with the actual jump being more than four times the original estimate, a whopping $30 million.
This increase significantly worsens the city's already challenging budget situation, adding at least $20 million to the existing $110 million deficit projected for the upcoming fiscal year.
You might be thinking, "But what about the stock market?" Well, despite a strong year for the stock market and the pension system's investments, which gained $89.2 million in value, the impact was overshadowed by the hefty employee raises. These raises, which took effect last July and this month, increased the pension system's long-term liabilities by over $140 million.
And this is the part most people miss... The city's tendency to grant pay raises exceeding the actuary's expectations has become a recurring issue, creating ongoing challenges for the pension system's financial health. Kalwarski himself 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 effects of a wage freeze from 2013 to 2018, which left municipal salaries 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 details of these raises are as follows: General employees received 5% raises last July, police officers and lifeguards got 4%, and firefighters received 3% last July and 1% on January 1. These raises are in addition to automatic pay increases based on years of service.
Despite the increased payments, the city's unfunded pension debt has slightly decreased, from $3.49 billion to $3.46 billion. However, the actuary had predicted a much larger drop in debt, more than four times the actual decrease.
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 the actuary's long-term liability projection of $14.51 billion compared to the long-term asset projection of $11.05 billion. Officials may argue that the current ratio is better than the 78.1% ratio in 2008, given that the city has adjusted its investment and employee longevity projections.
Looking ahead, the actuary projects the city's annual payment to increase again next year, reaching $573.2 million. However, the payment is expected to drop to approximately $500 million for five consecutive fiscal years from 2029 through 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 directly impact the city's projected general fund deficit of $110 million. This is because only 73% of the city's pension system workers are paid by the general fund, with the remaining 27% employed by enterprise funds. The latest projection for the general fund pension payment, before the upward revision, was $383 million. The new number will likely increase the general fund pension payment to around $410 million.
But here's where it gets controversial... The $110 million deficit is already considered an understatement of the city's financial challenges. The city recently announced a new $23 million deficit in the current fiscal year's budget due to lower-than-expected revenue and higher-than-expected expenses. This could lead to emergency cuts this winter.
Kalwarski presented the new payment details to the SDCERS board for discussion, but the formal adoption of the payment is scheduled for their March meeting.
What do you think? Do you believe the city's pay raises are justified, or should more emphasis be placed on controlling costs? Share your thoughts in the comments below!
