San Diego is staring down a financial cliff, with its annual pension payment skyrocketing to a staggering $563.2 million—far higher than anyone anticipated. But here's where it gets controversial: this massive increase comes despite a booming stock market and strong investment returns for the pension system. So, what’s driving this crisis? The answer lies in larger-than-expected employee pay raises, which have ballooned the pension system’s long-term liabilities by over $140 million. And this is the part most people miss: the city’s budget was already in dire straits, with a projected $110 million deficit for the upcoming fiscal year. Now, this new pension payment will add at least $20 million to that gap, making the situation even more dire.
Gene Kalwarski, the actuary for the city’s pension system, had initially predicted a modest $7 million increase in pension payments this winter. But in a shocking twist, he revised that estimate upward by more than four times, to $30 million. This sharp hike comes even as the pension system’s investments gained $89.2 million in value—a testament to the strong market performance. Normally, such gains would reduce the city’s pension obligations, but they were overshadowed by the hefty employee raises that took effect last July and this month.
City officials argue that these pay hikes are necessary to offset the effects of a wage freeze that lasted from 2013 to 2018, claiming that San Diego’s municipal salaries lagged far behind those in other cities. But is this justification enough to risk further straining the city’s finances? The average salary for city employees has jumped 7.4% to $113,800, with general employees receiving 5% raises, police officers and lifeguards getting 4%, and firefighters seeing a 3% increase last July followed by an additional 1% in January. These raises are on top of automatic pay hikes tied to years of service, creating a compounding effect on the pension system’s liabilities.
Interestingly, the city’s unfunded pension debt has actually shrunk slightly, from $3.49 billion to $3.46 billion. However, Kalwarski had expected a much larger reduction of $131 million, not the mere $27.9 million that materialized. On a brighter note, the funded rate of the city’s pension system climbed to 76.1% this year—its highest level since 2008. Yet, even this silver lining comes with a caveat: the city has scaled back its investment and employee longevity projections, which critics had previously deemed overly optimistic.
Looking ahead, Kalwarski projects that the annual pension payment will rise again next year to $573.2 million before dropping sharply to around $500 million from 2029 to 2033. Last year marked the first time the payment surpassed $500 million, and this year’s record-breaking figure will further strain the city’s general fund, which covers 73% of the pension system’s workers. The general fund’s pension payment is now expected to jump to about $410 million, up from the previously projected $383 million.
Here’s the real question: Can San Diego afford to keep this up? With a $23 million deficit already announced for the current fiscal year—due to lower-than-expected revenues and higher expenses—the city may be forced to consider emergency cuts this winter. Kalwarski presented these grim numbers to the San Diego City Employees Retirement System (SDCERS) board on Friday, but the board won’t formally adopt the payment until its March meeting. By then, the city will need to confront some tough choices—and the public will be watching closely. What do you think? Are these pay raises a necessary correction, or a risky gamble with the city’s financial future? Let us know in the comments.
