San Jose is facing a $115 million budget gap, unprecedented cuts to core city services and the loss of 600 jobs in the fiscal year that starts July 1, 2011. That’s on top of closing a $118.5 million shortfall and eliminating 800 jobs last July. The city’s proposed budget would layoff hundreds of workers, including more than 100 police officers.

San Jose has billions of dollars in unfunded liabilities for retirement benefits, driving up the City’s annual retirement costs from $63 million in 2000 to $250 million in 2011. By 2016, these costs are projected to reach $400 million and could jump to $650 million if actuarial assumptions are adjusted to reflect modern conditions.

Growing retirement costs make up about half of the budget deficit for the upcoming fiscal year, during which San Jose will likely be forced to eliminate 195 sworn police positions, cut 64 firefighter positions and reduce branch library services to three days per week.

Mayor Chuck Reed has proposed a set of fiscal reforms that sets limits on retirement benefits for new employees, current employees and retirees.

These reforms include:

  • Capping the city’s contribution to retirement benefits for new employees at 9% of base salary and 50% of the total cost.
  • Raising the age at which employees can receive full retirement benefits to: 60 for sworn public safety employees and 65 for all other employees (phased-in over 20 years for current employees)
  • Raising the eligibility for retiree healthcare benefits to 20 years of service (phased-in for current employees).
  • Limiting current employees’ pension accrual rate to 1.5% per year for any future years of service (benefits earned and accrued to-date will not be reduced).
  • Limiting the cost of living adjustment to a maximum of 1% per year and restricting bonus pension payments to retirees.

The proposal does not reduce retirement benefits that current employees and retirees have already earned and accrued.

The plan also institutes additional temporary limits on employee benefits until essential city services are restored to January 1, 2011 levels or if the retirement plans’ experience new unfunded liabilities.

The proposal builds on recommendations from the City Manager’s Fiscal Reform Plan, which identified approximately $270 million in potential savings, including approximately $216 million that could be achieved through retirement reform alone. The Mayor’s proposal also directs City staff to meet and consult with the city’s employee bargaining units prior to developing specific ballot measure language.

Fiscal Emergency: The proposal recommends that the Council, “Declare a fiscal and public safety emergency and direct staff to return to the Council on June 21 with a formal declaration that describes the necessity of making fiscal reforms to avert a fiscal disaster, prevent substantial degradation of public safety and other vital city services, and maintain the integrity of our retirement system so that earned and accrued benefits can be paid to current and future retirees.”

Declaring an emergency doesn’t give the City extraordinary powers, but it does recognize the City’s inherent power and responsibility to protect its people in the event of an emergency.

Alternatives: The proposal clearly states, “This proposal is not the only solution. It is one combination of ideas that we believe will solve the problem. We are open to other solutions, and our proposal directs staff to engage with employee groups – many of whom have said they are eager to work in partnership to solve this crisis – and to discuss alternatives that also solve the problem.”

Some have accused the proposal of attacking collective bargaining. In fact, it directs staff to bargain with employees to develop solutions to the crisis the City faces.

Today’s meeting is the first step in the process. Should the Council vote to move forward, the Council will again discuss fiscal reform on:

  • Tuesday, June 21: Staff will return to the City Council with the proposed changes to the City Charter.
  • Tuesday, August 2: Staff will return to the City Council ballot measure language for a possible election in November.

Since many of the recommendations in the proposal require changes to the City Charter, they must be approved by the voters even if a negotiated agreement with bargaining units is reached.