The City of San Jose is facing the city’s worst-case scenario: municipal ransoming by out-of-control pension costs. Part of the solution being proposed by Mayor Chuck Reed is a series of fiscal reforms that will serve as the defining moment in his political career.

In 2000, the city’s contribution to its pensions fund was $63 million. By 2016, that number could reach as high as $650 million, or a 1,031 percent increase.

“I think I have to deal with the problem,” said Mayor Reed during a phone interview with PublicCEO. “Last year, we shrunk the workforce by 800 jobs, including laying off some firefighters, this year we’re going to shrink the work force by another 600, including probably laying off some police officers. Next year, 2012, doesn’t look any better so we’ll have to shrink our workforce again. Whether it’s 500 or 600 or 700 jobs remains to be seen, but with that action we’ll be down to 3000 employees paid for out of the general fund.”

To understand the scope of the potential layoffs, one needs to look at the city’s general fund payroll over the last decade. In 2000, the city employed 6,753 people. Last year, the city had only 4,200 positions, including 2,400 police officers and firefighters. The city’s staff has already been cut 38 percent.

By 2016, staffing levels could be forced as low as 1,600 positions. In other words, in five years, the city could have 25 percent fewer total employees than it currently has working as public safety employees today.

Therefore, Mayor Reed brought forward a fiscal reform plan with lofty goals: reform retirement and compensation programs, increasing organizational efficiencies, thereby saving enough money to eliminate the city’s structural deficit while reopening and protecting core services.

“We’ve been trying to figure out what we could do to protect ourselves from the skyrocketing retirement costs,” said Mayor Reed. “So we’ve done a lot of analysis and discussion for months and months and months.”

On Tuesday, May 24, the city council vote to direct staff to prepare a dclaration of fiscal and public safety emergency and began moving forward with Mayor Reed’s proposal to amend the city charter.

“I think everyone recognizes there is a fiscal problem not only in San Jose, but in all of California,” said Steve Smith, Director of Communications for the California Labor Federation. However, he does not see the Mayor’s proposal as a viable solution.

“The unions in San Jose that represent city workers have been very clear that they are willing to come to the table and negotiate some concessions that would help bridge the fiscal crisis,” Smith continued. “What the mayor has chosen to do is not engage in a bargaining process and go straight for a nuclear option, which prevents workers from negotiating for wages and benefits.”

Admittedly, the Mayor’s proposal is bold.

“I realized we need[ed] to take some extraordinary action on February 14,” said Mayor Reed. “The staff told me that the annual cost of the retirement benefits could hit $650 million in 5 years from what we pay this year, $155 million.”

At first glance, the proposed changes would be extraordinary.

The plan addresses the cost of current employees’ retirement benefits without risking the same fate as Orange County’s attempt to reform its pension costs.

Most of California watched with bated breath as Orange County pursued its pension case in the courts. Ultimately, the courts ruled that the county did not have the legal authority or right to retroactively reduce earned retirement benefits.

Mayor Reed’s plan does not affect the amount of benefits already earned, however it does curtail the amount that an employee can accrue. For instance, if a police officer has already worked 10 years under the current 3 percent at 50 plan, they have earned the right to receive 30 percent of their salary as pension payments. However, if Mayor Reed’s plan is approved, they would only be entitled for accrue 1.5 percent for the rest of their time with the city.

All city employees would be subject to this new maximum accrual rate, and everyone’s retirement age would increase. Public safety employees would be eligible for retirement at 60 and for all others it would become 65 years of age.

Additionally, the Mayor’s plan takes into account the city’s economic climate. Should the funding ratio of the pension plan slip to or below 2010 levels, then more cost savings steps would be implemented.

Should the funding gap grow then all employees will become subject to a set of minimum benefits as described in the city’s charter. These include caps on pension, three-year averaging of wages, a prohibition against pension increases in retirement, and the elimination of early retirement.

Those cost saving measures would remain in effect until the fund gap is corrected and remains above the 2010 level for at least three fiscal years.

Should any of the city’s essential services – defined as police, fire, street maintenance, libraries, or community centers – cease operating at full capacity, then new limits would be placed on the authority of the pension fund administrators. While the list of all twelve limitations can be found in the text of the Mayor’s proposal, the list of prohibited actions includes:

  • creating or increasing an unfunded liability,
  • post-employment benefits,
  • increasing compensation for members of bargaining units after contracts expire,
  • and calculating pension on any compensation other than base salary.
It is essentially an attempt to block a municipal version of SB400.

The Mayor’s plan could be legal under powers granted by the city’s charter, specifically Section XV:

“…the Council may at any time, or from time to time, amend or otherwise change any retirement plan or plans or adopt or establish a new or different plan or plans for all or any officers or employees.”

“I don’t think you can manage a city of 1,000,000 with 1,600 employees,” said Mayor Reed. “One way or the other we have to take on this problem. I have one set of solutions, that I think will solve it.”