San Diego’s annual pension payment will be $10.6 more than expected, worsening projected budget deficits

Analysis of recent large raises for police officers shows they will eventually increase the pension payment more than $30 million a year

The city’s pension debt has increased from $2 billion to $2.76 billion in just two years

San Diego must pay $10.6 million more than expected to its pension system this year, deepening a projected budget deficit that is expected to require significant cuts this spring.

Things don’t look any better the following year, when pay raises of more than 25 percent given this past fall to police officers begin to spike the city’s pension payment.

A new analysis estimates those hikes will eventually increase the annual payment more than $30 million a year. But pension system officials said last week they may decide to spread the impact more evenly over several years.

The city must pay $322.9 million to its pension system on July 1 this year, an increase of $10.6 million over the $312.3 million payment included in a five-year financial outlook presented to the City Council last month.


The higher amount, which was presented Jan. 12 to the board of the city’s pension system, is based on an annual analysis of the system’s assets and liabilities that found employee salaries are increasing faster than expected.

That analysis also showed an increase in assets of just over $100 million from investment earnings of 13.5 percent, primarily because the stock market had a historically strong year.

City officials anticipated that windfall would drop the annual pension payment from $324.5 million last year down to $312.3 million.

But the city must pay $322.9 million instead, primarily because of a $40 million increase in liabilities from salaries growing faster than expected.


The average salary of a city worker increased to $70,271 in the budget year that ended last June 30, up nearly 2 percent from $68,924 one year earlier.

The higher pension payment increases projected deficits in the city’s general fund over the next three budget years of $10.1 million, $34.6 million and $19.8 million.

But the impact will be less than $10.6 million because only about 73 percent of employees are paid by the general fund, with the rest paid by the city’s sewer and water funds.

Another factor in this year’s pension payment is a decision by the pension board in September to adopt the most conservative long-term investment return projections in the state.


The board lowered the system’s projected long-term investment returns from 7 percent to 6.5 percent, which will require higher contributions by taxpayers and city workers to make up for the lower anticipated returns.

The effect of that change was softened this year by the board’s decision to push much of the financial impact several years down the road through a process called “smoothing.”

The board voted to artificially increase the city’s pension payment during future years when it is projected to be relatively low, allowing the payment to be artificially reduced during future years when it is projected to be relatively high.

Supporters say smoothing helps stabilize the city budget by making the annual payment more consistent.


Critics say smoothing is irresponsible, invoking underfunding schemes more than a decade ago that earned San Diego the nickname “Enron by the Sea.”

The board’s actuary, Gene Kalwarski, said last week that the city’s annual payment would be $345 million instead of $322.9 million this year without the smoothing of the lower projected investment returns.

In 2016, the board decided against smoothing the impact of a study that found city employees are living significantly longer than expected, sharply increasing the city’s pension liability. That change spiked the city’s annual payment from $261 million in the budget year that ended in June 2017 up to $324.5 million in the budget year that ends this June.

Lowering investment return projections and increasing longevity assumptions for workers have jointly increased the city’s pension debt from $2 billion to $2.76 billion during the past two years.


The pension board will face a similar decision next summer when debating whether to use smoothing to soften the impact of the police pay raises.

The raises, which the City Council approved Dec. 5, would provide all officers hikes of at least 25.6 percent between next July and January 2020, and veterans with more than 20 years on the job would get 30.6 percent raises.

An actuarial analysis estimates the increase in the city’s pension payment from the hikes will start at $12.1 million in the 2020 budget year and then steadily climb up to $33.1 million in 2034.

Board member George Kenney said he’d like the board to be given several possible smoothing schedules of varying lengths, but that he prefers shorter periods of smoothing.


“The pension fund should not be viewed by the city as a bank account,” Kenney said.

The police raises have a big impact on the pension system because San Diego replaced pensions with 401(k)-like plans for all new hires except police officers when voters approved Proposition B in 2012.

So while police officers account for only 1,800 of the city’s 11,000 workers, they make up a larger percentage of the employees receiving city pensions.


david.garrick@sduniontribune.com (619) 269-8906 Twitter:@UTDavidGarrick