San Diego's $119 Million Budget Deficit Is Only the Tip of a $4.5 Billion Pension Iceberg

City backs away from making San Diegans pay to drive to Mission Bay Park as budget fix – San Diego Union-Tribune

City abandons beach parking fees while pension costs devour 27% of budget—and grow by $1.2 billion annually. True cost of workforce delay: $5 million per month.

TL;DR

San Diego faces a $119 million budget deficit for fiscal 2025-26, but this masks a far larger crisis: the city's $4.5 billion unfunded pension liability grows by approximately $1.2 billion annually as employees age and salaries rise. City leaders have backed away from controversial beach parking fees, instead proposing audits, management cuts, and lease renegotiations—but avoid addressing the core problem. Every city employee adds roughly $238,000 in annual costs when lifetime pension obligations are included, yet pension formulas based on "final compensation" mean delaying workforce reductions costs the city approximately $5 million monthly in lost savings. Expert analysis suggests only immediate workforce reductions of 400-500 positions combined with strategic outsourcing can break the "doom loop" where pension costs grow 6-9% annually while revenues grow just 3-5%. The current approach—modest cuts and efficiency claims—will likely result in a $215 million deficit by 2028-29.

SAN DIEGO—City leaders are backing away from paid parking at Mission Bay Park and beaches as a solution to San Diego's budget crisis, opting instead for internal audits, management reductions, and lease renegotiations. But these measures may not address the structural problem driving the deficit: a pension system that consumes an ever-growing share of the city's budget while creating more than $1 billion in new obligations every year.

Support among City Council members for beach parking fees has collapsed from four to one since last fall, with officials citing the troubled rollout of paid parking at Balboa Park as a cautionary tale. The retreat comes after Mayor Todd Gloria's staff had already invested months in discussions with the California Coastal Commission.

The pivot reflects a broader reluctance to confront San Diego's fundamental fiscal challenge: pension obligations that have grown from $80 million (9.4% of the General Fund) in 2000 to $480 million (26.7%) today—and are projected to reach $580 million (29%) by 2028-29 without structural reforms.

The Real Numbers Behind the Crisis

San Diego's projected $119 million deficit for fiscal year 2025-26 represents just the immediate budget gap. The deeper problem involves the mathematics of California's defined benefit pension system, where every year of continued employment dramatically increases the city's long-term obligations.

Under CalPERS formulas, pensions are calculated using employees' highest-earning period—typically their final 1-3 years—rather than career average salary. For a mid-career police officer currently earning $130,000, continued employment until retirement would increase the city's pension liability from approximately $1.35 million today to $3.15 million at retirement—an additional $1.8 million in obligations created over the next decade.

Across San Diego's 11,500-employee workforce, this dynamic creates approximately $1.2 billion in new pension liability annually, separate from investment return shortfalls. The city's total unfunded pension liability stands at $4.5 billion and has grown continuously since 2000 despite strong stock market returns.

"Every year the city delays workforce restructuring, the problem compounds exponentially," said municipal finance analysts familiar with CalPERS obligations. "Revenue grows at 3-5% annually while pension costs grow at 6-9%. The gap widens by 1-6 percentage points every year."

Council's Alternative Approach

In budget priority memos released this week, council members emphasized audit-driven savings over revenue generation or major workforce changes. City Auditor Andy Hanau's office has documented substantial savings from recent reviews, including a police overtime audit expected to save $9 million annually and a lease audit identifying $2.2 million in lost revenue from under-market city property rentals.

Councilmember Raul Campillo proposed increasing funding for the auditor's office by more than 50%—from just under $6 million to $9 million annually—noting that San Diego currently spends less than comparable cities on this function.

"The city auditor provides critical oversight and operational recommendations that have resulted in additional revenues, cost avoidance and process efficiencies," Councilmember Marni von Wilpert stated in her memo.

Several council members called for targeting management positions rather than frontline workers. "Staffing changes should be proportional across frontline, supervisory and management levels," Councilmember Henry Foster said. Councilmember Vivian Moreno specifically identified the city's 40-person public relations staff—costing $7.6 million annually—as a potential reduction target.

Council members were adamant that cuts should not be distributed equally across all neighborhoods, instead prioritizing protection of services in lower-income areas. Matt Yagyagan, the mayor's policy director, indicated Gloria would incorporate multiple data factors beyond income levels, including literacy rates and crime statistics.

The Pension Time Bomb: How San Diego Got Here

San Diego's pension crisis has specific historical roots. Between 1996 and 2004, the city enhanced pension benefits retroactively—including "3% at 50" for police and fire, and "2.5% at 55" for general employees—while simultaneously underfunding the system. The decisions were based on assumptions of 8% annual investment returns during the dot-com boom.

A 2006 SEC investigation found securities fraud related to pension underfunding, with city officials having withheld information from bond investors. Multiple officials resigned or were indicted.

The unfunded liability has grown from approximately $500 million in 2000 to $4.5 billion today, even after the city issued $1.9 billion in pension obligation bonds in 2002—a gamble on stock market returns that failed spectacularly during the 2008 financial crisis.

California's "California Rule" legal doctrine means the city cannot reduce pension benefits for current employees or retirees, even prospectively for future years of service. This creates what fiscal experts call a "doom loop": rising pension costs force budget cuts, remaining employees receive raises to maintain morale, those raises increase future pension obligations even more.

True Cost of Employment: The Hidden Math

Traditional city budget documents report the cost of a general employee at approximately $144,000 annually (salary plus benefits and current pension contributions). However, when lifetime obligations are calculated, the true cost is substantially higher.

A general employee earning $85,000 annually creates approximately $1.1-1.25 million in present-value pension liability over a 25-year career, plus $200,000-250,000 in retiree healthcare costs. When amortized, this represents an effective annual cost of approximately $238,000—65% more than reported in budget documents.

For police and fire employees under the "3% at 50" formula, lifetime pension obligations reach $1.7-1.9 million in present value, with effective annual costs of $300,000-350,000 per employee.

The "final compensation" formula creates particularly perverse incentives. Employees often maximize overtime in their final years to inflate pensionable salary—a practice known as "spiking." A police sergeant who normally would retire on $135,000 salary can increase final compensation to $175,000 through aggressive overtime scheduling, adding $30,000 annually to pension payments and approximately $520,000 in present-value costs to the city.

City data suggests 15-25% of retiring employees engage in some form of spiking, at an estimated annual cost of $8-12 million and lifetime cost for current retirees of $150-200 million.

The Exponential Cost of Delay

Because pension obligations grow throughout an employee's career, the timing of workforce reductions dramatically affects savings. A 400-position reduction in force (RIF) implemented today would generate approximately $139.4 million in annual savings when lifetime pension obligations are included:

• Immediate salary and benefits: $57.6 million
• Elimination of existing accrued pension liability: $13.2 million (amortized)
• Prevention of future pension growth: $41.2 million (amortized)
• Prevention of spiking: $3.0 million (amortized)
• Enhanced overtime savings: $9.0 million
• Administrative efficiencies: $15.4 million

Delaying this RIF by one year would reduce total savings by approximately $60 million in present value as employees age, receive raises, and accrue additional pension credits. Each month of delay costs approximately $5 million in lost savings.

Outsourcing: The Long-Term Solution

Competitive outsourcing of city services eliminates pension obligations entirely for affected positions, as private contractors pay legally required benefits but not CalPERS pensions. Analysis of five service areas suitable for outsourcing reveals substantial potential savings:

Service Area	Employees	Annual Budget	Contract Cost	Direct Savings	Pension Liability Eliminated	Total Annual Savings
Landscaping/Grounds	180	$16.4M	$12.5M	$3.9M	$162M	$19.2M
Facilities Maintenance	145	$14.6M	$10.8M	$3.8M	$138M	$16.8M
Fleet Maintenance	85	$9.3M	$7.2M	$2.1M	$83M	$10.0M
Custodial Services	95	$6.9M	$4.8M	$2.1M	$74M	$9.1M
IT Help Desk/Support	60	$8.0M	$6.2M	$1.8M	$66M	$8.0M
TOTAL	565	$55.2M	$41.5M	$13.7M	$523M	$63.1M

First-year implementation would require $15-20 million in transition costs but would generate $43-48 million in net savings, growing to $63.1 million annually thereafter.

However, competitive outsourcing faces fierce opposition from municipal employee unions, which view it as an existential threat. The Municipal Employees Association (MEA), representing approximately 5,500 city workers, has historically mobilized legal challenges, political campaigns, and work actions to prevent outsourcing initiatives.

Historical precedent from other California cities suggests implementation requires 18-24 months and sustained political will. San Diego County's outsourcing efforts in the 1990s faced years of litigation, while Costa Mesa largely abandoned its 2011 outsourcing plan after political backlash.

Notably, no City Council member mentioned competitive outsourcing in their budget memos.

Three Scenarios: What Could Happen

Scenario 1: Conservative Approach (Most Likely)

• Modest workforce reduction through attrition (150 positions): $33-48 million
• Limited outsourcing (1-2 areas): $15-25 million
• Administrative consolidation: $15-20 million
• Audit-driven efficiencies: $15-20 million
• Capital project deferrals: $35-40 million
• One-time fund balance draws: $20-25 million
• Total: $133-178 million

This approach closes the immediate deficit but does not address exponential pension growth. Projected FY 2028-29 deficit: $215 million.

Scenario 2: Moderate Reform

• Targeted RIF of 300 positions (management-heavy): $71-85 million
• Outsourcing of 3-4 service areas: $40-50 million
• Administrative consolidation: $25-30 million
• Audit-driven efficiencies: $15-20 million
• Limited capital deferrals: $20-25 million
• Revenue enhancements: $10-15 million
• Total: $181-225 million

This approach exceeds required cuts by $62-106 million, providing substantial budget cushion and beginning to address structural problems.

Scenario 3: Comprehensive Structural Reform (Fiscally Optimal)

• Strategic RIF of 500 positions: $119-140 million
• Aggressive outsourcing (5-7 service areas): $60-70 million
• Major administrative consolidation: $30-35 million
• Service level rationalization: $20-25 million
• Capital deferrals: $15-20 million
• Revenue measures: $15-20 million
• Total: $259-310 million

This approach creates a sustainable long-term fiscal structure and provides buffer against future recessions. However, it faces massive political resistance and union opposition.

Based on council discussions, Scenario 1 appears most probable despite being fiscally insufficient for long-term sustainability.

Why the Problem Will Likely Get Worse

Without substantial workforce reductions or structural reforms, San Diego faces exponentially growing deficits driven primarily by pension costs:

Fiscal Year	Projected Pension Cost	% of General Fund	Projected Deficit
2025-26	$480M	26.7%	$119M
2026-27	$515M	28.1%	$145M
2027-28	$545M	29.3%	$178M
2028-29	$580M	30.8%	$215M
2029-30	$615M	32.1%	$260M

The trajectory means that by 2035, pension costs could consume 35-40% of the General Fund if current trends continue, leaving progressively less money for actual city services.

Chief Financial Officer Rolando Charvel acknowledged that last year's budget process generated complaints about insufficient transparency. "There were a lot of lessons learned from last year," Charvel said. "We are definitely committed to transparency and making it a more open discussion."

Mayor Gloria is scheduled to release his proposed budget on April 15, after which the City Council will conduct hearings before adopting a final budget by June 30.

The Broader Pattern: Not Just San Diego

San Diego's pension crisis reflects a pattern affecting municipalities throughout California and nationwide. Several cities have filed bankruptcy partly due to pension obligations:

• Stockton (2012): Pension costs reached 30% of general fund; bankruptcy court allowed reduction of retiree healthcare but not pension benefits
• San Bernardino (2012): Stopped making CalPERS payments during bankruptcy; CalPERS sued and won
• Vallejo (2008): Cut police and fire forces by 20-25% but still could not reduce pension obligations

Cities that implemented reforms earlier fared better. Orange County shifted new hires to lower pension tiers after its 1994 bankruptcy, stabilizing pension costs at 18-22% of budget. San Jose's 2012 voter-approved pension reform (later partially overturned) slowed but did not solve the problem.

The common lesson: cities that acted in the 1990s-early 2000s avoided the worst outcomes. San Diego waited.

Union Response and Political Reality

San Diego's major public employee unions—including the Municipal Employees Association, San Diego Police Officers Association, and San Diego Firefighters Association—have not yet issued public statements responding to this week's budget discussions.

However, these organizations wield significant political influence through campaign contributions, member mobilization, and collective bargaining processes. Any substantial workforce reductions or outsourcing initiatives would likely trigger intensive labor negotiations and potential legal challenges.

The incentive structure for politicians creates what economists call a "tragedy of the commons": immediate electoral benefits from enhancing benefits and avoiding cuts, while costs come due 10-20 years later when different politicians are in office.

For unions, the calculus is straightforward: benefits are legally protected once granted and nearly impossible to reduce. Every outsourced position permanently removes a member from the pension system, reducing union membership, dues, and political power.

This dynamic explains why San Diego's 2002 Proposition F—which enhanced pensions retroactively—was sold to voters as costing "only $45 million annually" when actual costs would exceed $200-300 million. The information asymmetry was deliberate: politicians and unions had every incentive to minimize apparent costs, while complex actuarial calculations remained inaccessible to average voters.

What Should Happen vs. What Will Happen

Financially Optimal Path:

• 500-position RIF implemented by June 2025: $119-140 million
• Aggressive outsourcing of 5-7 service areas: $60-70 million
• Pension liability reduced by $800+ million
• Creates sustainable fiscal foundation for 20+ years

Politically Likely Path:

• 100-150 position reduction through attrition: $22-33 million
• Token outsourcing of 1-2 minor services: $8-15 million
• Heavy reliance on efficiency claims and deferrals: $50-70 million
• Closes immediate deficit but ignores structural problem
• Larger crisis emerges within 3-5 years

The critical difference: the optimal path stops the $1.2 billion annual growth in pension liability, while the likely path allows it to continue compounding.

Recommendations for Fiscal Sustainability

Municipal finance experts and actuarial analysts suggest San Diego should:

1. Implement comprehensive hiring freeze with pension impact analysis - Require City Council supermajority approval for any new hire, with full disclosure of lifetime pension costs

2. Establish pension liability reduction as explicit goal - Target $300-400 million reduction in unfunded liability over three years through workforce management

3. Launch strategic outsourcing pilot program - Select two service areas (landscaping and custodial services recommended) for competitive bidding with implementation by January 2026

4. Authorize management-heavy RIF - Target 150-200 positions with 2:1 emphasis on middle management versus frontline staff, implemented by July 1, 2025

5. Increase employee pension contributions - Negotiate 2-5% shift of pension costs to employees in exchange for job security guarantees

6. Implement regular zero-based budgeting reviews - Require every program to justify its existence every 3-5 years to prevent accumulation of obsolete programs

7. Establish budget stabilization reserve - Build reserve fund to 10-15% of General Fund to protect against revenue volatility

The window for relatively painless reforms is closing. Every month of delay allows pension liabilities to compound and reduces available options.

Questions Residents Should Ask

When Mayor Gloria releases his budget proposal on April 15, residents should demand answers to several critical questions:

1. What is the total present-value pension liability created by the proposed budget?
2. How many positions will be eliminated, and what is the pension liability reduction?
3. Which services have been evaluated for competitive outsourcing, and what were the findings?
4. What is the 5-year projection for pension costs as a percentage of General Fund?
5. How does this budget address structural pension liability, not just annual deficits?
6. What is the plan if CalPERS investment returns fall short and contribution rates increase further?

The answer to these questions will reveal whether San Diego's leadership is willing to confront the fundamental fiscal challenge or whether the city will continue down the path of incremental adjustments while the structural problem compounds.

The Uncomfortable Truth

San Diego's $119 million budget deficit is not the result of a sudden revenue shortage or temporary economic downturn. It is the inevitable consequence of pension promises made two decades ago that were either knowingly unsustainable or based on wildly optimistic assumptions about investment returns, life expectancy, and salary growth.

Every assumption underlying the 2002 pension enhancements has proven wrong:

• Investment returns: Assumed 8%, actual 6.5-7.0%
• Life expectancy: Retirees living 7-10 years longer than projected
• Healthcare costs: Growing at 6-8% annually versus 3-4% assumed
• Salary growth: 4-5% actual versus 3% assumed

The mathematical inevitability of the crisis was knowable in 2002. Actuaries warned about it. The warnings were ignored because the immediate political benefits of enhanced pensions outweighed concerns about long-term fiscal sustainability.

The chickens are now home to roost.

The question is whether current leadership will face reality and make the difficult structural reforms necessary, or whether they will opt for the politically expedient path and leave an even larger crisis for the next council—and the next generation of San Diego residents.

Based on the budget discussions so far, the answer appears clear. And troubling.

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Sources

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Note: Pension liability calculations are based on standard actuarial methods using CalPERS published rates, average salary data from City of San Diego budget documents, and present value calculations using 7% discount rate (CalPERS assumed rate of return). Workforce cost projections incorporate historical salary growth patterns, actuarial life expectancy tables, and documented patterns of final-year compensation inflation. Outsourcing cost estimates are based on competitive bidding data from comparable California municipalities and industry benchmarks for municipal service contracts.