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


Write a comment
  1. Tough Love
    Tough Love 24 September, 2010, 06:42

    Quoting …”We need a second tier for new employees. ”

    No, you “need” to reduce the pensions & benefits of all CURRENT employees by 50+% ……. or just simply wait for insolvency to take care of it.

    Reply this comment
  2. Generoyb
    Generoyb 24 September, 2010, 07:38

    Years of elected officials selling their souls in exchange for a vote is a clear indication that the needs of the city are secondary to the needs of the politicians. Any private business in this financial shape would immediately be declared BANKRUPT!!

    Reply this comment
  3. Fake OCO
    Fake OCO 24 September, 2010, 07:45

    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%.

    LOL…the so called “heros” getting 10% compensation bumps for 10 years in a row……..this is why every muni in this state is BK.

    Reply this comment
  4. Robert Rizzo
    Robert Rizzo 24 September, 2010, 09:42

    It is too late to put new employees on a second tier system. You need to reduce current retirees pensions payouts by 50%. Let them sue and let the courts decide. If the courts decide with the retired employees, then let San Jose declare bankruptcy. It will make former contracts null and void.

    Reply this comment
  5. howard beale
    howard beale 25 September, 2010, 10:24

    Mr. Rizzo, I have started taking up a collection to erect a monumental statue (at least the heighth of the Statute of Liberty) to go on a pedestal at least 100 feet high. I am hoping that pedestal and statue will put up in the middle of the park behind California’s State Capitol Building.

    California is going to end up being saved because of all you did at and for the City of Bell. It was a game changer. Public employee unions and public employee administrators are now on the defensive and are on run and scrambling hard because of you. Thank you for awakening the press and the non-public employee general public to the fact that they have been sucker punched by the public sector. The name of Robert Rizzo will go down in the annals of California history as one of our most important and influential citizens. Thank you so much Mr. Rizzo. And by the way, how’s the food and the medical care you’ve been receiving this week?

    Reply this comment
  6. SeeSaw
    SeeSaw 26 September, 2010, 00:44

    It appears that San Jose officials gave away the store to their respective employee groups. Didn’t someone tell them that they are the ones who approve those contracts? They appear to have their own retirement plans that are not in CalPERS; why are they telling CalPERS member entities how to run their respective retirement plans? Many public entities have benefit constraints in place to maximize accumlations of sick leave and vacation, so that the employees are not able to cash out unlimited ammounts from these programs when they retire. And, free health care for life is no longer a reality.

    Robert Rizzo, if CalPERS tries to cut my pension payout by 50%, I will be sure to seek you out and include you in the class action lawsuit that will be filed. However, it is fortunate for us retirees, that we are in CA and not whatever redneck state you have emigrated from.

    Reply this comment
  7. Fake OCO
    Fake OCO 26 September, 2010, 15:04

    Robert Rizzo, if CalPERS tries to cut my pension payout by 50%, I will be sure to seek you out and include you in the class action lawsuit that will be filed. However, it is fortunate for us retirees, that we are in CA and not whatever redneck state you have emigrated from.
    That’s the seesaw I know-go get em girl!…………….GGrrrrr!!!!!!!!!!!

    Reply this comment
  8. Randy A
    Randy A 2 November, 2010, 21:43

    I think San Jose needs to double the size of the Police Department to keep in alignment with other big cities. Currently a higher salary and retirement benefit was reasonable based on the minimal staffing the city has. Most police officers here in San Jose are better educated and trained and this saves the city from having to double their staffing. San Jose historically has remained on top of criminal trends and was successful in keeping the city in the top 10 of safest cities in the United States with a population of 100,000 or more. Kicking your police and fire in the face could result in a backlash that will cost the city more than the retirement system savings will. The focus here has little to do with lowering the retirement costs, it is focused on giving the city the sole authority to invest the funds and possible transfer the system to the state PERS system which is a disaster. Now that the voters have authorized the change, the new adjustments and the change in the perceptions of your emergency service personnel will most assuredly change. Considering that no new hires are pending, the 1100 plus current employees will still be entitled to the old benefits which cannot be changed. For the new fire fighters and Police they will do the same work and be compensated less, the attraction to join the city work force may have been significantly damaged. But then again the City does have a history of lowering its standards

    Reply this comment
  9. Mamalita
    Mamalita 15 November, 2010, 03:19

    It is good that the Mayor wants to fix something broken. It is horrible that employees and retirees are blamed for the damage, along with a few politicos who may have begged to differ in opinion.

    I wonder how much it cost the City for Ron Gonzalez’s golden parachute? or Del Borgsdorff’s? Both of which were more than likely approved by mayor Reed himself.

    Now that the poop is hitting the fan and the sky is falling, Ceasar and his cohorts are running for cover. The plebs and serfs have to do the heavy lifting and the Emperor need not care if any of them get crushed by your failed decisions.

    You have been with the City Council since 2000, Mr. Reed. Where was this sentiment when the Budget Office was presenting dwindling general fund resources almost a decade ago?

    If I’m not mistaken, every non-appointed city employee had to pass rigorous Civil Service exams for gainful employment plus more exams for every promotion. Each retiree represents about 25+ years of his adult working life dedicated to serving the residents of the City of San Jose. Many of these people could have earned much more in the private sector during the dot com boom years.

    San Jose is not alone in its plight. The USA has an unfunded liability of non-pension benefits in the amount of $173 billion according to the Pew Trust Study and $48 billion of that rests on the shoulders of taxpayers in the State of California.

    To suggest that this can be corrected by decreasing the workforce or decreasing workforce benefits is morally irresponsible, not just to City employees but more so for its residents. Yet how can you suggest that taking away food, shelter, health care and education from families of your city employees and retirees be the sole panacea to the unfunded pension problem?

    These are hard and harsh times for EVERYONE including the residents of the City of San Jose. For so many years, I have seen the City staff forces dwindle even as we built our new beautiful City Hall and left the old one empty. And still, city staffing and general fund decrease. The new City was supposed to save money. You played your shell game and now programs that were housed in a paid for building pay rent for your sterile monument. The need to increase fees gets blamed on employees benefits, not your decisions.
    It seems to me you need to also consider increasing general fund revenues. You provoke the ire of government officials by chiding them for being weak when it comes to fiscal responsibility. How strong are you? Will you stand up to the taxpayers that you invoke? Will you ask for their help to increase the general fund and help stop the deficit? Will you ask them to pay a fair share of the cost for the services they want? The reserves have been used, capital funds transferred, workforces decreased to bare bones, paychecks frozen or cut, proposed 2-tier retirement packages alienating potential recruits and short of declaring bankruptcy and shutting down city hall, what else can you propose?
    It has already started, but it could go farther: consolidate departments and decrease their numbers to align with the same number of CSA’s. Fewer departments and department/assistant department heads. Aim for an organization that is streamlined and breezy light on top and reaches out to all resident sectors on the lowest hierarchy.
    What else can you propose? How about proposing fewer council members? Let’s go back to the general fund and the voters. Can you do it, Mr. Reed? If we residents want and need more services, then the simple painful truth is we the residents just need to PAY for those much needed services.

    Reply this comment
  10. jim
    jim 21 September, 2011, 17:40

    And why is it city council voted a 20% pay rase and now will not cut there pay 10% as they have asked all other employees to take.

    Reply this comment
  11. impeach Mayor Reed
    impeach Mayor Reed 23 September, 2011, 14:32

    First of all. Has anyone noticed that the city can’t go into bankruptcy. The city has a golden coffers (A Stadium Fund), your mayor has a golden parachute too or might I say the AAA bond rating from the Employees Pensions funds. The other thing is that most police and fire don’t retire until least 28 years of service or 60 years of age (NOT 50). When a fireman or officer die before 77 the city makes money from the employee contributions. The city pockets the retirement account and does not give it to the spouse? Who win there, CITY. I noticed, in my parents family and friends most of them are dyeing around 65. Winner again CITY…

    Mayor REED is a wild animal. He seems to be attacking public employees for his political agenda. Look at what he did to San Diego. During some of the greatest stock Market gains the U.S has ever seen. He put San Diego into Bancruptcy their too? Hmmm, Maybe the problem is Mayor Reed??? And not the hard working employees of San Jose or Santa Clara.

    Reply this comment

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