As pension costs rise, San Diego must choose between raising taxes, cutting services, or more debt

San Diego faces fiscal instability, with public pension costs worsening the city’s already challenging financial outlook. After years of steady financial recovery, the city expects a $170 million deficit in 2025, with deficits for years to come. The Department of Finance estimates from 2026 to 2030 that city budget deficits could total $1.03 billion. This dire situation has compelled San Diego to implement hiring freezes and significant departmental cuts, including to public safety budgets, which are typically protected.

Frustratingly, San Diego’s fiscal conundrum was largely addressed by a voter-approved pension reform that was later undone by public worker unions through the courts. In 2012, San Diego voters passed Proposition B to tackle rising pension costs by replacing traditional taxpayer-guaranteed pensions with 401(k)-style-defined contribution plans for most newly hired city employees — like most private sector workers receive.

The reform reduced city debt by eliminating the long-term risks associated with underfunded pensions and giving new public employees flexibility and control over their retirement benefits. However, labor unions opposed the reform and in 2021, courts mandated that San Diego reinstate traditional pensions and convert the retirement benefits of employees hired under the defined contribution system into pension promises taxpayers must pay for.

This reversal carries significant financial consequences for taxpayers and the city’s budget. Incorporating affected employees into the legacy pension system is expected to cost San Diego $142 million, most of which became debt, and raised the city’s required yearly pension contributions for 2025 by $48 million. This year, San Diegans are paying $490 million for city pensions. Any salary or pension benefit increases for city workers would further drive up short- and long-term costs.

San Diego’s pension system improved during the reform, increasing from only 66% funded in 2012 to 82% funded in 2021. Today, however, the San Diego City Employees’ Retirement System is back down to 75% funded, sticking taxpayers with $3.3 billion in pension debt.

San Diego’s rising public pension costs are more than abstract balance sheet numbers; they pose real constraints that force difficult budget choices. Three-quarters of San Diego’s expenses are inflexible and committed to pension and bond payments, which must be made, and public safety, where politicians and taxpayers usually don’t want significant cuts.

As pension costs rise, city leaders looking to balance the budget must cut spending in more flexible categories, such as services and infrastructure. City leaders are also increasing parking meter rates, extending trash collection fees, and making other moves to raise revenues. To pay for rising pension costs and to mitigate deficits, San Diego also announced hiring freezes and department cuts that could result in as many as 1,500 layoffs from the city’s workforce of around 12,000.

As public pension costs continue to rise, the city confronts an unavoidable reality: either increase taxes, reduce services or pile more debt onto future taxpayers. City Council President pro Tempore Joe LaCava noted last month, “The Five-Year Financial Outlook makes it clear that projected revenue is insufficient to meet the needs of our city. The takeaway is unmistakable: We must cut expenses, and some cuts will be deep—very deep.”

The union leaders who advocated reopening the pension argue that the rising costs will help recruit and retain public employees, citing higher turnover rates during the Proposition B era. However, this narrative overlooks broader labor market trends. Public employee turnover has risen nationwide, including in cities and states that provide traditional pensions. A workforce report from the city of San Diego found its turnover rate is just slightly above the national average and recommended wage increases, telework expansion and parental benefits — not pensions — as the best solutions to attract and keep workers.

The city’s budget is increasingly dedicated to paying for past commitments, forcing today’s taxpayers to finance the retirements of yesterday’s workforce at the expense of current and future investments. As it reinstates traditional employee pensions, San Diego must choose between raising taxes, cutting services, or pushing more debt onto future taxpayers. Without reforming its pension system, San Diego will only get further trapped in this cycle of rising pension costs for taxpayers and challenging budget trade-offs.

A version of this column appeared in the San Diego Union-Tribune.

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