The city of San Diego’s budget deficit dropped by almost $20 million in an instant Friday after its annual pension payment came in lower than expected.
The city will pay $231.3 million to the retirement system next year. It’s a small increase over this year’s payment, but much less than what had been projected. That’s primarily because the pension fund earned 24 percent last year — the best since 1987 — far exceeding assumptions. The fund’s deficit also grew slightly to almost $2.2 billion.
Mayor Jerry Sanders estimates the new bill will reduce next year’s budget deficit to $12.2 million, putting the mayor in striking distance of ending San Diego’s decade-long series of gaps without major cuts.
“My administration will work diligently over the next few months to develop a budget that is balanced, that eliminates the structural budget deficit, and best preserves services to the public,” Sanders said in a release.
One point deserves highlighting. It’s amazing how much the pension and by extension the city budget ties to the whims of Wall Street. Two years ago, the maximum projected annual pension payment was $524 million in 2025. That followed a year when the retirement system took a massive hit on its investments. Now, following two years of good returns, the maximum projected payment stands at $338 million in 2025.
Even those numbers don’t tell the whole story. The retirement system makes projections by assuming it will earn 7.5 percent every year on its investments. This never happens. Sometimes, like this year, investments do better. Other times, like two years ago, investments do worse.
The volatility these swings create is enormous.
Make sure to check out a chart on page 11 of the report. It shows what can happen if investment returns vary over the next three decades, but still average a 7.5 percent gain ever year. You’ll see that pension payments can drop by big amounts and boom back up with little warning.
This presents a huge problem for city leaders as they try to make long-term budget projections. The economy inevitably will go south at some point over the next 30 years. When it does, the city not only will have to deal with lower tax revenues, but also a growing pension burden.
Liam Dillon is a news reporter for voiceofsandiego.org. He covers San Diego City Hall, the 2012 mayor’s race and big building projects. What should he write about next?
Please contact him directly at firstname.lastname@example.org or 619.550.5663.
Like VOSD on Facebook.