SAN DIEGOSAN DIEGO — San Diego’s pension debt will rise above $3 billion again thanks to a new analysis showing sharper-than-expected increases in future years to the salaries of city workers and to payouts for retirees.
The rise in debt is expected to increase the city’s annual pension payment by just over $20 million per year, leaving city officials with less money to spend on libraries, parks, police officers, firefighters, lifeguards and other services.
The city’s pension board unanimously approved Friday raising the pension system’s long-term expectations for annual salary increases from 3.05 percent to 3.25 percent.
The board also raised the system’s long-term expectation for annual retiree payout increases, which are based on inflation, from 1.9 percent to 2.0 percent.
Those changes, combined with some smaller adjustments, will increase the city’s pension debt by $194 million. The debt was calculated at $2.84 billion last winter, so the new increase will bring it to $3.03 billion.
The city’s pension debt sured $3 billion for the first time in January 2020 and climbed to $3.34 billion in January 2021. It has decreased two years in a row since then, but Friday’s vote by the pension board will push it back above $3 billion.
The debt is based on how much the actuary for the city’s pension system, Gene Kalwarski, thinks the gap is between what the city will need to pay out in benefits long term and the value of the pension system’s investments.
For example, Kalwarski said last winter that the city would need to pay out $11.84 billion in pension benefits and that the value of the pension system’s investments was $9 billion — leaving a $2.84 billion gap.
The changes approved Friday will increase the $11.84 billion in projected benefits because higher salaries mean larger benefit payments, and higher inflation adjustments to benefit payments also make them larger.
The changes were prompted by a once-every-three-years comprehensive analysis of the pension system’s economic and demographic assumptions. Kalwarski said the news from the analysis was not all bad.
Large increases to the life expectancy for city retirees that the pension system made five years ago are adequate and the life expectancies do not need to be increased again, he said. Such changes have increased the city’s pension debt more than $850 million since 2008.
The city’s projected rate of return on pension system investments, which the city lowered from 6.75 percent to 6.5 percent in 2019, also does not need to be lowered any further, Kalwarski said.
The rate of return on pension system investments affects the city’s pension debt because a crucial part of the city’s long-term payoff plan is significant growth in the value of those investments.
But Kalwarski said the pension system’s annual projection for pay raises must be increased.
Large pay raises given to most city workers this year — 23 percent, spread over the next three years — have already been calculated into the city’s pension debt and annual pension payment.
The change approved Friday by the board is more about future years. Kalwarski said the 3.05 percent the pension system has been using has been routinely sured in recent years, prompting the need for change.
Of 39 pension systems in California that Kalwarski surveyed, 11 use 3.25 percent and one uses 3.5 percent. The rest are all at 3 percent or lower.
The projected retiree benefit increases for inflation must also be increased, primarily because of steep inflation during and after the pandemic.
The city caps annual cost-of-living adjustments at 2 percent regardless of that year’s rate of inflation, which has been much higher the last two years. The city’s pension system says inflation was just over 7 percent in 2021 and about 6.5 percent last year.
But when employees get only 2 percent increases despite inflation being higher, the city “banks” the unawarded increases for future years when inflation falls below 2 percent.
During the last three decades, when inflation was mostly under control, employees often didn’t have enough in their inflation “banks” to get a full 2 percent benefit increase during years when inflation was below 2 percent.
But now that most employees have 5 percent in their inflation banks from 2021 and another 4.5 percent from 2022, Kalwarski said the projection of long-term benefit increases must rise from 1.9 percent to 2 percent.
He said that change alone is responsible for $119 million of the new $194 million in pension debt.
The increase in debt comes just after the city made its largest ever annual pension payment in July. The $448 million payment was $33 million higher than the then-record $415 million contribution San Diego had to make to its pension system two years ago.
Kalwarski also told the board Friday that city officials have formally requested that the board consider a proposed slowdown of his plan to pay off the city’s pension debt.
The slowdown would smooth out the city’s annual pension payments over the next two decades. It would lower payment in the next few years, which critics have called artificially high, by roughly $100 million a year.
Kalwarski said in July that a proposed slowdown is a premature idea that would come with huge interest costs and benefits that aren’t compelling enough.
But he said Friday that he plans to study eight potential slowdown scenarios and present them to the pension board in January.
