A recent $380 million spike in San Diego’s pension debt is forcing city officials to debate whether to begin paying that bill now or take the controversial step of pushing the financial pain several years down the road.

It’s common for government agencies to spread the impact of new pension debt over time to avoid sharp spikes in annual payments that wreak havoc on budgets, but critics warn that such an approach helped create San Diego’s notorious pension crisis a decade ago.

Those benefits and those risks will be weighed Friday when the board that oversees the city’s pension system decides which route to take.

“There’s a handful of options that will be discussed that I believe make sense, it’s just a matter of what the board is comfortable with as a group,” said Alan Arrollado, president of the board and leader of the city’s firefighters labor union. “The board is committed to making sure this bill is paid one way or another.”


The spike, which is the result of a new actuarial study showing that city employees and retirees are living significantly longer, would increase the city’s annual pension payment -- $261 million this year -- by $35 million, or more than 13 percent.

That increase would help the city continue to cover annual pension benefits for retired employees and continue steadily paying down its unfunded, long-term pension liability, which the new study increased from $2 billion to nearly $2.4 billion.

Mayor Kevin Faulconer and the City Council created the city’s first pension stabilization fund last spring with a $16 million initial contribution, but they didn’t expect the money to get wiped out in one year.

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The spike in pension debt also threatens millions of dollars in future pension savings that would be dedicated to infrastructure projects under Proposition H, a ballot measure spearheaded by Councilman Mark Kersey that city voters approved in June.

The actuary who conducted the study, Gene Kalwarski, notes that the city’s annual pension payment is scheduled to plummet in 2029 from $235 million to $63 million when inflated payments to cover investment losses during the Great Recession finally come to an end.

That sharp decline, which many call the city’s pension “cliff,” creates the potential for smaller annual increases than $35 million between now and 2029 in exchange for a much less steep drop in payments in 2029 than has been estimated.

Under that approach, the city would have softer swings upward in its annual pension payment over the next 12 years and then a less severe swing downward in 2029.


Critics say that might make sense for the city and its managers, but not necessarily for the employees, who could lose their pensions, or San Diego taxpayers.

“This piles risk on the employee,” said Herb Morgan, former chief executive of the city’s pension system, formally known as the San Diego City Employees Retirement System.

Morgan said delaying the pain is a slippery slope that could lead the city toward bankruptcy if there is a sudden sharp downturn in the economy, noting that scenarios like that played out in Vallejo and San Bernardino.

Bankruptcy would jeopardize the pensions of the employees, but Morgan said ultimately the courts would likely rule that taxpayers are still on the hook.


“There is only one logical choice -- you have to pay for it,” Morgan said. “But instead of making the payment the actuary is recommending, they may drag it out over more years. It’s always better to pay. When you have the money, it’s better to put the max in your 401 (k), right?”

Arrollado, the board president, said the mayor and City Council would have the discretion to pay more each year than the annual pension payment chosen by the board if they think that’s prudent.

But he was adamant that the board won’t be putting the city in jeopardy of repeating the pension fiasco that made national headlines and got San Diego the nickname “Enron by the Sea” for a short time.

“All parties involved are putting in a lot of effort to make sure we never go down that path again,” he said.


The staff of the retirement system and the actuary aren’t recommending a particular path forward, leaving the decision to the board.

A spokeswoman for the system said in an email that the board is being asked to accept the findings of the new actuarial study, which the city conducts every five years, and then to vote on a funding plan to cope with the new data.

“Potential funding options include phasing in the cost increase or adjusting the unfunded actuarial liability amortization schedule,” said the spokeswoman, Christine Packard.

Other factors in the increased pension debt include recent investment losses and a lower rate of inflation than expected, but the actuary’s report says lower mortality rates are responsible for nearly the entire increase.


Between 2010 and 2015, the years covered by the study, 34 members of the city’s pension system died, less than 50 percent of the 72 the actuaries had previously predicted.

The report says the number might be a slight aberration, but that clearly longevity rates are increasing across the nation and should be expected to continue increasing in coming years.

Councilman Kersey said the pension cost spike, while disappointing, was something he anticipated when drawing up Proposition H.

“The city’s retirement system makes changes to its formulas on a regular basis, so we were aware that this was a possibility,” Kersey said. “It’s one reason that Prop H did not promise a defined amount of money but rather created a funding mechanism to capture any savings realized as the unfunded pension liability is paid down.”


Haney Hong, chief executive of The San Diego County Taxpayers Association, said the spike in pension costs should serve as a reminder that 401 (k) plans, sometimes called “defined contribution” plans, are much safer financially for cities than pensions, which are sometimes called “defined benefit” plans.

With a 401(k), the employee faces a problem if he or she lives longer than expected, not the city.

San Diego replaced pensions with 401(k)-like plans for all new hires except police officers after voters approved Proposition B in 2012.