San Jose is the 10th largest city in America and the largest city in Silicon Valley. It has two independent pension plans, both achieving better than a 7.5% return on investments since their inception. The City has always paid the Actuarial Required Contribution (ARC). Even so, annual costs skyrocketed and unfunded liabilities for pensions and retiree healthcare exceeded $3 billion.
The City’s two plans cover 5,200 active and retired police, firefighters, and government employee members. From 2002 to 2012, the City saw its annual pension contributions increase from $70 million to $245 million. Spending for retirement costs grew to more than 20% of the General Fund.
Skyrocketing retirement costs helped cause city budget deficits for 10 years in a row. Each year the city closed those deficits by raiding budget reserves, eliminating open positions, and by cutting services. Eventually, the increasing costs forced layoffs of police officers and firefighters, closing of libraries and community centers and caused streets to deteriorate year after year.
Setting the Stage for Reform:
After a decade of cutting services to balance the budget and a loss of over 2000 city jobs, San Jose officials– under the leadership of Mayor Chuck Reed – realized they had to adopt significant fiscal reforms or risk falling into service delivery insolvency and be unable to provide even the most basic of services to city residents and taxpayers. So they set out on an effort to advance reforms that would ensure both public employees were fairly compensated for their service and taxpayers received needed services.
Despite the dire situation, they faced significant resistance from public employee union officials and special interest groups. As a result, Mayor Reed and San Jose leaders spent several years building public support for fiscal reforms by:
- Implementing open government and sunshine reforms to make it easier for the public to know what was going on and to participate in the decision making process.
- Engaging the public through a community based budgeting process and using full-disclosure budgets to educate the public on the scope of the problem and the tradeoffs the city was making due to the skyrocketing costs of pension benefits.
- Approving policies that removed structural barriers to reform. This included ballot measures approved by the voters modifying the mandatory arbitration process in place for police/fire employees to ensure arbitrators consider the City’s fiscal condition when ruling on disputes; and updating the City Charter to clarify that retirement benefits could be modified for new employees.
- Engaging with the City’s eleven public employee unions in discussions and negotiations around the need to take action and potential strategies for reigning in out-of-control costs. Proposals and counter proposals by the city and by the unions were posted and made public at the time they were made in the negotiations.
- Adopting a Fiscal Reform Plan in 2011 that identified a series of fiscal reforms to control runaway costs and begin to restore basic services.
These efforts were critical first steps in tackling substantive reforms.
By the end of Mayor Reed’s term, San Jose had adopted a number of significant retirement benefit reforms, including three ballot measures approved by the voters by large margins. These reforms included:
- Restructuring the Retirement System Boards so that a majority of board members would be independent members with financial and investment experience.
- Requiring that retirement plans be actuarially sound, minimize any risk to the City and its residents, and be prudent and reasonable in light of the economic climate.
- Placing newly-hire employees into a more stable, lower-cost pension plan where the City and employee split all costs (including unfunded liabilities) 50/50.
- Requiring current employees to either contribute more into their pension benefits or choose a lower-cost plan going forward.
- Eliminating “bonus” pension payments when the fund was underfunded.
- Requiring that disability retirements be approved by an independent panel of medical experts.
- Modifying the retiree healthcare plan.
- Requiring voter approval for all future retirement benefit increases.
There continue to be legal challenges to some of the reforms, and the City has agreed to modify some of the reforms as part of a settlement to litigation. However, the majority of reforms remain in place and are saving the City of San Jose more than $30 million per year (and growing, with projected savings in excess of $1 billion) – contributing to the end of a decade of cutting services to balance the budget and to the restoration of services for current and future residents and taxpayers.