San Diego's pension crisis is about to get a whole lot worse, and it's not just a little bit worse. The city's annual pension payment is set to skyrocket to a record-breaking $563.2 million, a staggering four times the initial estimate. This sudden surge in pension costs is primarily due to substantial employee pay hikes, which have significantly increased the pension system's long-term liabilities.
The actuary, Gene Kalwarski, initially predicted a modest increase of less than $7 million, but this week he revised his estimate to a staggering $30 million. This dramatic jump comes despite a strong year for the stock market and the pension system's investments, which gained a substantial $89.2 million. Typically, stock gains would reduce the city's annual pension payment, but this time, they were overshadowed by the substantial employee raises.
The city's decision to grant large pay hikes, which have become a recurring theme, has put the pension system's long-term finances at risk. City officials argue that these hikes are necessary to counteract the effects of a wage freeze from 2013 to 2018, ensuring municipal salaries in San Diego are competitive with those in other cities. The average salary for city employees has now reached $113,800, a 7.4% increase from last year.
The pension payment hike is concerning, especially considering the city's unfunded pension debt, which has only slightly decreased from $3.49 billion to $3.46 billion. This slight reduction in debt doesn't align with Kalwarski's prediction of a much larger drop. Despite this, the funded rate of the city's pension system has climbed to 76.1%, the highest since 2008, according to Kalwarski's long-term liability projection.
However, the city's budget situation remains dire. The $110 million deficit projection is already an understatement, as a new $23 million deficit was recently announced due to lower-than-expected revenues and higher-than-expected expenses. This could lead to emergency cuts this winter. The pension payment hike will further strain the city's finances, and the impact on the general fund deficit is yet to be fully determined.
The pension payment hike is not evenly distributed across all city workers. Only 73% of the city's pension system is funded by the general fund, while the remaining 27% comes from enterprise funds. The city's latest projection for the general fund pension payment was $383 million, but with Kalwarski's revised estimate, it's expected to increase to around $410 million. This additional burden on the general fund will further exacerbate the city's budget challenges.
