San Diego makes its case for a $352 million near-term pension reprieve — with a steep

San Diego officials will make their case Friday for a $352 million reduction in pension payments over the next four years, contending the reprieve is warranted based on the city’s financial challenges.

Such a reprieve would shrink the $526.6 million annual payment San Diego is slated to send its pension system this summer by $100 million, helping the city close a $221 million budget deficit projected for the coming fiscal year.

The city’s pension board said in January it was open to supporting a substantial reduction in near-term payments, but only if city officials have a plan to solve their financial problems and can show they aren’t the result of mismanagement.

The city’s top two financial officials plan to tell the pension board Friday that San Diego simply doesn’t collect enough tax revenue to pay for all of its needs, including law enforcement, firefighting and infrastructure projects.

San Diego’s sales tax and hotel tax rates are lower than many other cities, and San Diego has relatively low stormwater and business license fees.

“There have been implications of mismanagement, but the reality is that we’ve made miracles with the money that we’ve had,” city comptroller Rolando Charvel told The San Diego Union-Tribune on Thursday.

And there are plans to solve the problems long term by sharply increasing revenue, said Matt Vespi, the city’s chief financial officer.

The city expects to get a roughly $75 million annual revenue boost when it starts charging single-family homes for trash pickup in 2026, a move made possible by a successful 2022 ballot measure.

Proposed November ballot measures that would increase the city’s sales tax and stormwater fees could generate $500 million more per year.

“We’ve made progress already on the revenue side, and we’re going to try to make more progress,” Vespi said.

Charvel and Vespi argue that projected increases in long-term revenue make it sensible, not irresponsible, to reduce near-term pension payments and increase pension payments many years into the future.

“For us, it makes a lot more sense to have our pension payment grow as our revenues grow and our payroll grows,” Charvel said.

That’s the proposal the pension board will consider Friday: reducing the city’s pension payment a total of $352 million over the next four years, but increasing the payment sharply after that.

For example, the city’s annual payment would be a record $593.7 million in 2036 under the proposal, compared with $490.4 million in 2036 under the current payoff plan.

In 2039, the payment would top out at $653.2 million — $141.3 million more than the $511.9 million slated for that year under the current payoff plan.

Pension board members expressed concern in January about the city’s ability to cover those high payments, but Vespi said Thursday those numbers won’t seem as high 15 years from now with inflation and tax revenue growth.

Vespi said the reprieve proposal would make the city’s payment more stable, which is one of the pension system’s primary goals. The plan would make the city’s annual payment close to 15 percent of revenues every year based on projected revenue growth.

That’s in stark contrast to the existing payoff plan, where the pension payment now amounts to about 19 percent of city revenue — a share that will drop sharply to about 11 percent in future years.

“This concept that the city is trying to skirt its responsibility in funding the pension is not accurate, and it’s really unfair,” Vespi said.

Some critics say it was irresponsible for San Diego to give most city workers raises last year totaling around 25 percent over three years. That simultaneously increased the pension payment and left the city with less revenue to cover it, they say.

The raises caused the annual payment to rise to $526.6 million, which would be by far the highest ever if the pension board doesn’t agree to the reprieve on Friday.

The raises also pushed the city’s projected pension debt to its highest ever, $3.36 billion.

Charvel said those raises were needed to counteract a pay freeze from 2012 through 2018 that had left the salaries of San Diego city workers much lower than their counterparts at other government agencies.

While the pay freeze helped San Diego balance its budget despite lower per-capita revenues than most other cities, the freeze also created big problems.

“We would hire someone, train them and six months later they would leave for the county or Chula Vista or some other city,” said Charvel, contending that customer service was damaged by inexperienced workers and vacant positions.

Vespi stressed that the large raises don’t come close to making up for nearly a decade of flat salaries. And he said the vacancies and inexperienced workers made the city more vulnerable to lawsuits and costly management mistakes.

“Low staffing levels lead to other liabilities, which drive up other costs,” he said.

Charvel said another way the city has masked its relative lack of revenue has been by underinvesting in infrastructure, a strategy that has left San Diego with a $4.8 billion backlog of infrastructure projects.

“Our capital infrastructure has not been well-maintained because of our lack of resources, and we held the salaries stagnant for years and years and years,” he said. “Those are the two ways we’ve been able to mask this underlying problem of revenues not matching up with the expenses we have to pay.”

Some critics have said the city’s effort to push pension debt into the future bears a troubling resemblance to a scheme two decades ago that helped earn San Diego the nickname “Enron-by-the-Sea.”

Vespi said that scheme was much different, noting that it involved the city increasing pension benefits for retirees and required a balloon payment only if certain targets weren’t met.

He said the city’s current proposal doesn’t veer from accepted actuarial principles and that San Diego has a strong track record with pension payments since the Enron-by-the-Sea days.

In recent years, the pension system has lowered expectations for investment returns, increased estimates of how long retirees will live and boosted expectations for worker salary increases.

“The aggressive nature of the assumptions put in place by the pension board have driven up our pension payments,” he said. “While the pension board has essentially been moving the goal posts back for us, we have continued to make our contributions.”

Vespi also said that the conversations about revamping the city’s pension payment schedule first came up because the pension system had some major decisions to make when the courts overturned Proposition B, a 2012 ballot measure that eliminate pensions for most new hires.

That forced the pension board to create retroactive pensions for thousands of workers and raised questions about how the pension system should move forward, he said.

The $221 million deficit projected for the new fiscal year, which begins July 1, is a new number first released this week and is more than $50 million higher than previous estimates.

Vespi said estimates for sales tax and hotel tax revenues during the new fiscal year have been scaled back based on those revenues being lower than expected during the ongoing fiscal year. Also, more vacant city jobs have been filled this year than expected, increasing estimated expenses during the new fiscal year.

Friday’s pension board meeting is scheduled to begin at 9 a.m. at the downtown headquarters of the pension system, the San Diego City Employees Retirement System. The address is 401 West A Street.