City Journal Spring 2014

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California

Steven Greenhut
San Jose and the Elephant in the Room
Unlike California’s state government, the city understands the need for pension reform.
24 February 2012

Jerry Brown paints a bleak picture of the future of “civilization” if Californians refuse to back his proposed tax increase, now vying for a place on the November ballot. If voters reject the initiative, warned the governor in December, it would reveal a deep “skepticism of public service” and send a message that “the common institution called government is not something we want to invest in.” The stark choice before voters, the governor says, is higher taxes or diminished public services. But in San Jose, the state’s third-largest city, a liberal Democratic mayor wants to give voters a third option: stretching taxpayers’ dollars by slashing the excessive costs of government services, especially pensions and other benefits for the people who administer those services.

In December, San Jose’s City Council voted six-to-five to place an initiative on this June’s municipal election ballot that would overhaul dramatically the city’s public-pension system. The brainchild of Mayor Chuck Reed, the measure would create a hybrid system for new hires—combining traditional defined-benefit pensions and 401(k)-style defined-contribution plans—while also significantly increasing contributions that current employees must make to their pensions. As the Reed administration’s fact sheet explains:: “New employees would pay for at least 50 percent of the total cost of the new plan and the city’s contribution would be capped at 9 percent of an employee’s salary (the city currently contributes more than 50 percent of an employee’s salary for retirement benefits).”

The council’s vote came during a raucous session filled with angry public employees unlikely to be pacified by the council’s willingness to pursue a negotiated settlement or modify ballot language in lieu of a June election fight. City Manager Debra Figone on Tuesday recommended that the council soften the measure’s language before sending it to the registrar of voters, despite the failure to reach an accord with the unions this month. The council is expected to vote on the new language on March 6, just three days before the registrar’s deadline. According to Ed Mendel of Calpensions, a website that covers the state pension crisis, Mayor Reed is relying on a city charter provision that sets down only minimum benefit levels as his authorization for cutting current-worker benefits. And the city is within its rights, Reed argues, because the charter allows changes to existing pension benefits. In fact, faced with the budget crisis, Reed initially wanted to declare a fiscal emergency, giving officials even greater cost-cutting powers, but the council rebuffed him.

The San Jose effort—and a similar one in San Diego, where officials are trying to put a far-reaching pension-reform measure on the ballot—may be a sign of things to come in California. The real story in San Jose isn’t the lower benefit level for new hires, which would only have a minimal effect on the city’s unfunded pension liability; it’s the plan’s changes for current employees, who are driving the unfunded pension crisis. Under the plan, current employees would have two options: pay far more to keep their current retirement plan or choose a lower-cost plan (though workers would keep all the benefits of the old plan that they had accrued to date). Simply put, workers would have to contribute more out of their paychecks or accept fewer benefits.

Under the first option, the city explains, employees “would contribute an additional 5 percent of their salary starting in [fiscal year] 2012-13 to help pay off the pension plan’s unfunded liabilities. These additional contributions would increase by another 5 percent each year until they cover half of the cost of paying off the unfunded liability (or reach 25 percent of pay).” The second option would increase the retirement age to 57 for public-safety employees and to 62 for all other public workers, reduce the city’s retirement obligation, and cap cost-of-living adjustments. It would also base pension payouts not on the final year of pay but the final three years. Finally, voters would have to sign off on all new pension increases. The softer language, if approved, would reduce the amount employees pay toward their pensions to cover accumulated debt, and it would boost benefits for new hires.

Mendel notes that Reed’s plan “takes on what the [official government watchdog group] Little Hoover Commission called ‘the elephant in the room,’ a way to reduce the cost of pensions promised current workers.” San Jose is now spending 20 percent of its general-fund budget on retirement benefits, the costs of which have tripled in the last decade, Mendel reports. What’s more, “the city’s pension contribution for police next year is expected to be about 60 percent of pay,” an imbalance that has forced the city to lay off 66 younger police officers over the last few years.

In the past, California courts have nixed such “going-forward” reforms, which might suggest Reed’s plan is stillborn. San Jose’s city attorney opposes Reed’s plan and sent a letter to the council claiming that the initiative is unconstitutional. Even if voters pass the measure in its revised form, the issue will doubtless end up in the courts. San Jose now stands on the cutting edge of pension reform, much to the fury of public-sector unions and their leadership.

San Jose’s case for renegotiating pension benefits is straightforward: “The city’s ability to provide its citizens with essential city services has been and continues to be threatened by budget cuts caused mainly by the climbing costs of employee benefit programs, and exacerbated by the economic crisis.” The city claims, with good reason, that cuts in service levels are unacceptable and would place residents “at an imminent risk.”

The city’s approach offers a stark contrast with Governor Brown’s assertion that only tax hikes can get California out of the current crisis. In fairness to the governor, he did introduce a pension-reform plan late last year that would stretch government dollars somewhat. But Brown doesn’t seem interested in using his political capital to advance the plan, which otherwise will be dead on arrival in the Democrat-dominated legislature.

In Brown’s view, resistance to tax hikes reflects an unnatural public skepticism. But are California voters so wrong to be skeptical of yet-higher taxes after the last decade of overly generous pension and health-care deals for government employees? Are voters wrong to resist giving the government more money when they see how that money is spent? Officials in San Jose understand that the greatest threat to the government programs they value is the excessive cost of administering them. Thus far, the governor and his fellow Democrats in Sacramento refuse even to consider that argument.

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