Skyrocketing compensation costs for public employees are forcing California municipalities to contemplate spending cuts and, in some cases, even bankruptcy. The question isnt whether to rein in these pension and medical liabilities—thats unavoidable—but precisely when and how to do so. Dominated by public-sector unions, the state legislature remains in deep denial, but some local leaders, acknowledging reality, are taking action on their own to control costs. Well do this city by city a few times and that will help to move the state, San Jose mayor Chuck Reed told me in a recent interview at City Hall. Eventually, Reed says, California will need a statewide pension-reform initiative to overcome the legislatures intransigence. Reed, a progressive Democrat who has dragged along a slim majority of a 10-member city council, is leading the most impressive effort statewide.
Reed numbers among a small but growing group of California Democrats making the progressive case for pension reform: if local governments spend so much money on retiree pensions, they wont have enough left to provide the government services that liberals care so much about. Governor Arnold Schwarzeneggers pension advisor, David Crane, also a Democrat, has told the legislature that one cannot be a progressive without embracing pension reform: ignoring it imperils government services. Its no surprise, then, that Crane views Reed as the most courageous leader in California.
In California and other blue states, serious pension reform cannot happen without Democratic leadership. Reed said he started paying attention to the issue in the early 2000s, when San Diegos fiscal meltdown made him wonder whether San Jose might suffer the same fate. Reed won a city council seat in 2000 and the mayors office in 2006. In the past decade, pension costs increased 350 percent. Today, retirement benefits consume 20 percent of the citys general-fund budget, crowding out other essential government services. Meantime, the city has 2,000 fewer employees today than ten years ago. In the current fiscal year, all city employees took a 10 percent pay cut. Despite those cuts and layoffs, each San Jose household owes about $11,000 to cover the citys pension debt alone.
As mayor, Reed started building coalitions and working on a broad set of cost-saving reforms, the centerpiece of which will appear on the June 5 city ballot—a pension-reform initiative that tackles benefits for existing workers, a necessity if the problem is ever to be solved. Most pension-reform proposals deal solely with new hires, but that alone will not address the current liabilities. Reed calls his reform efforts a long and difficult process filled with tough votes and tough decisions.
Not surprisingly, the unions have fought Reed at every turn. But its a testament to Reeds political acumen that he managed to persuade all but three members of a Democrat-dominated council to place the reform plan on the ballot. The unions have challenged the San Jose ballot measures wording in court and have pounced on past comments from the mayor and the citys retirement director, alleging that theyve exaggerated San Joses estimated $400 million unfunded liability and arguing the problem could be solved without forcing employees to contribute more. But that was just typical union antics. As Contra Costa Times columnist Dan Borenstein pointed out, all of the deficit projections are most likely understated, given that The retirement system forecasts hinge on investment assumptions of 7.5 percent annual returns, which they have less than a 50-50 chance of meeting.
Under Reeds plan, new employees would pay 50 percent of the plans total cost, compared with 25 percent today. The plan would boost the retirement age of new public-safety employees to 60 and mandate 65 for other government workers. It would cap cost-of-living adjustments and require that the citys pension contribution not top 9 percent of an employees base pay.
But the real news concerns current employees. They would have a choice: they could keep their current pension plan but contribute an additional 4 percent of their salary each year until they cover half of its costs. Or they could opt into a new plan that delays retirement ages (57 for public safety, 62 for everyone else), lowers benefit levels, and computes the annual pension amount based on a three-year average, rather than on the final years (or highest years) pay.
So far, California courts have forbidden local governments from changing current public employees compensation, but Reed explains that charter cities have plenty of authority for employee compensation and that San Joses charter and city ordinances specifically allow officials to make changes. Reed predicts his initiative will win with 70 percent of the vote. This is not about denying people a pension, he said. These are very good benefits. . . . They are far better than most of my taxpayers will receive. In fact, Reed says city employees receive benefits two to three times what typical San Jose residents get. In his view, its a simple matter of providing services to the public; the citys pension obligations are destroying its ability to do so.
Theres a difference between being a liberal and progressive and being a union Democrat, Reed explained. If you drain money out of services and pour them into retirements, people suffer. He said that San Jose has shut down community centers and libraries and doesnt have enough police and fire services. He showed me an op-ed by Councilman Sam Liccardo, a liberal Democrat who represents downtown San Jose. Wrote Liccardo: Although conservatives have long called for pension and arbitration reform, I supported these measures not in spite of my progressive values, but because of them. Progressive advocacy for affordable housing, environmental stewardship, marriage equality and immigrant rights doesnt preclude the pragmatic pursuit of fiscal reform.
Reed also is dismayed by how unionization has corrupted public service: My experience with unions, its always about money, not about the public. . . . Its all about money, about enhancing an already generous retirement. . . . The focus on money is different than a focus on public service. He argues that the reform issue doesnt break down across ideological lines, but between unions and everybody else—and hes right.
A courageous, reform-minded politician in California is too rare. If voters back Reeds reforms on June 5, though, he could go from rarity to trendsetter.