Pensions Crushing San Jose; City Voters Eye Reform

Steven Greenhut: Here’s some great testimony from San Jose Mayor Chuck Reed at today’s Little Hoover Commission meeting regarding pension reform.

Here are some key passages:

Mayor Chuck Reed

The reality that we all must face is that employee costs – as the Santa Clara County Grand Jury reported in June of this year – are unsustainable. Cities are in the service business; as a result, for the majority of cities, employee costs are the largest part of our budget.

Over the last decade, San Jose’s general fund dollars have grown by 21%, while the average cost per employee has gone up by 87%. For public safety employees – firefighters and police officers – the increase is even more dramatic at 99%.

San Jose Police and Firefighters can retire at age 50 and the non-sworn employees can retire at 55. In some instances, pension payments are greater than the salary employees received when they were working, with an annual 3% increase, lifetime health and dental insurance provided without annual payments, and a lump sum payment of hundreds of thousands of dollars for unused sick leave. Our Charter requires us to provide city employees with a defined benefit retirement plan, a minimum employer match of over 250%, a retirement age of 55, and city guaranteed benefits for life based on final compensation.

We can no longer afford such generous and costly benefits and the Charter must be changed so we can gain control over skyrocketing retirement costs.

City payments for retirement benefits have tripled over the last 10 years even though our workforce has declined dramatically, and we have billions of dollars in unfunded liabilities that the taxpayers must pay. The average cost to the City of San Jose for a police officer or firefighter is over $180,000 per year. Benefits, primarily retirement costs, are nearly 50% of salary.

Due to these cost increases, we have whittled away at services and jobs. We now have over 1,000 fewer employees delivering services to our residents and businesses. We have had to cut services to our residents and businesses year after year. These out-of-control costs are why we can’t keep all of our libraries, community centers, and swimming pools open.

Many of these costs are the result of big pay and benefit increases awarded to our public safety unions by outside arbitrators. Sky-rocketing costs are also fueled by generous retirement benefits that are guaranteed in the City Charter.

On November 2, San Jose voters will decide on two ballot measures, V and W, on reforming the city’s pension and binding arbitration systems. These two measures are critical first steps that will work to address these issues.

Measure V is a charter change to reform the arbitration process that currently governs negotiations with the police and fire unions. It would place some common-sense limits on outside arbitrators to keep them from spending money the City doesn’t have.

In 1999, the California legislature dramatically increased pension benefits for state employees. They thought the stock market would keep going up forever. It’s the greatest financial blunder in the history of California – ten times worse than Enron.

In addition to the legislature’s actions, over the past 15 years, other actions taken by City Councils or dictated by outside arbitrators have caused employee compensation to grow much faster than revenues, resulting in cuts in service annually for the past nine years, including:

• Giving employees pay raises faster than revenues were growing.

• Giving raises and increasing benefits when revenues were falling.

• Giving raises and benefits retroactively at costs of tens of millions of dollars.

• Allowing police and fire employees to cash out unlimited amounts of sick leave when they retire.

• Providing healthcare for life to city retirees.

• Allowing pension payments to exceed 100% of the salary earned in the final year of employment.

Historically, arbitrators come into town, spend our money, and leave:

• In 1997, an outside arbitrator increased San Jose public safety pensions from 75% to 80% of highest salary.

• In 2007, an outside arbitrator increased San Jose firefighters’ pension maximum from 85% to 90%.

The most important thing the State of California can do is implement meaningful reform with its own employees and with PERS agencies. This will have a ripple effect throughout the state.

We need a second tier for new employees. This year as we were negotiating with our employee unions to close a $118.5 million shortfall, we consistently heard: Second tier doesn’t really help us this year. It’s all out in the future. Let’s focus on what we need to do this year to balance the budget.

The current system is unsustainable and is a major factor in San Jose’s structural budget deficit. In my first State of the City address in 2007, I said: “We cannot become a great city unless we eliminate our structural budget deficit. That is our greatest challenge. The budget deficit is public enemy number one, an enemy that will steal our hopes and kill our dreams of becoming a great city if we ignore it.”

Progress has been painfully slow because budget decisions and fiscal reforms require approval by a majority of the City Council. Unfortunately, when public employee unions pack the Council chambers with hundreds of advocates, the voices of the taxpayers who pay for the services and the residents who need the services get drowned out. But the taxpayers and residents do get to vote, and I believe we are seeing a clear shift in public sentiment: Elected officials and candidates who are weak on fiscal responsibility will be severely penalized.

San Jose’s two retirement systems manage over $4 billion in assets, serving more than 10,000 employees, retirees and survivors. The City has $1.1 billion in unfunded liability for its pension system and $1.2 billion in unfunded liability for retiree healthcare benefits.

The retirement boards have exclusive control over how the retirement funds are invested and administered. The Boards’ specific duties include: consideration of requests for retirement, administration and investment of the retirement funds, determining eligibility for membership in the pension plans, and determining employees’ eligibility for retirement benefits.

When I joined the City Council, I discovered that there were clear conflicts of interest inherent in the make-up of the Boards responsible for overseeing the assets of these two systems. Two Councilmembers sit on each board. Seats are designated for employee and retiree representatives, and it has been possible for these special interests to control a majority of the board. There was a lack of will to manage the systems to the best interests of the people of San Jose, and as a result, the City/taxpayers were on the hook for any unfunded liabilities.

In August 2008, the City Auditor concluded an investigation that found that retirement board members had traveled extensively on the Retirement Board’s dime and had been wined and dined by investment professionals and pension fund managers. The City Council directed the City Manager to incorporate into the boards and commissions analysis, recommendations on restructuring the Federated City Employees’ Retirement System and the Police and Fire Department Retirement Board to add independent Board Members with financial and investment expertise. The process was to include outreach to affected stakeholders. A consultant was hired, and they issued a report with recommendations on changing the composition of the retirement boards. These included adding independent Board Members with financial and investment expertise.

In the recent recession, San Jose’s retirement funds lost over $1 billion. In addition, retirement costs continue to increase due to higher salaries that result in higher pension payments; earlier retirements; and increased longevity of our retirees. As a result, San
Jose needed to dramatically increase pension contributions in 2010-2011, from $137 million to $177 million, with increased contributions in the years ahead.

In February 2010, the City Council approved a model for restructuring the retirement boards to serve the long-term interests of the City, taxpayers, employees and retirees, and be well-managed utilizing best practice and the highest standards of good governance. The amendments adopted expand the expertise of board members and ensure a majority of the board are independent members.
The Council also required that the Retirement Board hold its meetings at City Hall, in a publicly accessible location, and comply with state and local ordinances for open meetings, sunshine and transparency.

The second initiative, Measure W, would allow the City to provide lower retirement benefits for new city employees. Currently, public safety employees can retire with up to 90% of their highest annual salary, while civilian employees can retire with up to 75%.

We can no longer afford such generous and costly benefits, but the people must decide to change the Charter so we can gain control over skyrocketing retirement costs.

Posted Sept. 23, 2010