Monday, March 12, 2012

Update on San Jose and Its Public Employee Pension Funding Problems

San Jose Confronts Pension Burden provides an updated look at the city's underfunded public pension problem and its deliberations about what to do next. Here's what it says:

"The Bay Area's biggest city next week is expected to issue a five-year forecast that will likely become part of a rancorous debate over how to overhaul municipal pensions and ease their growing burden on San Jose. . . .

About 25% of San Jose's police and fire retirees receive pensions of $100,000 or greater, according to city records.

While Silicon Valley is currently experiencing job growth and declining unemployment, revenue from property and sales taxes has been stagnant. There have been shortfalls in San Jose's budget, which stands at about $900 million for the current fiscal year ending June 30, for 10 straight years. This year's gap is expected to be $25 million. Meanwhile, by the end of the year, the city will have to pay $244.4 million to fund employees' pensions, up 235% from 2001.

In the past three years San Jose has laid off or cut the positions of more than 1,500 city employees, or more than 20% of the city's work force, and cut dozens of services to help reduce costs.


"This forecast stands out because there's a heightened sense of awareness among employees and residents as a result of the cuts we've done," says San Jose Budget Director Jennifer Maguire. "There's no wiggle room now."

Union representatives for San Jose's police and fire employees—two of the city's largest unions—have objected to how pensions have been cast as a primary culprit for recurring budget deficits. . . .

"We aren't opposed to retirement reform but we're against reform based on made up, unsubstantiated numbers," says Thomas Saggau, a political consultant representing police, fire, architects and engineers unions.

"The numbers we use aren't made up," says San Jose Mayor Reed. "They're based upon projections of what we see now."

San Jose last year projected that the pension payout number would rise to $400 million by fiscal 2015, or about half the city's budget.

Ms. Maguire, the city's budget director, says San Jose could face another shortfall for fiscal year 2013. She estimates the gap in the $20 million range, though the number remains fluid, and adds that pension projections wouldn't be ready until a day or two before the forecast is issued.

Mr. Saggau, the political consultant for the unions, says the coming forecast is part of the mayor's campaign to overstate the severity of the pension problem in order to win greater concessions from workers.

He disputes the city's projection last year for pension costs reaching $400 million in three years. He says an independent actuary agency hired by the union projects the figure to be closer to $300 million.

Mr. Reed says the numbers the city uses to calculate pension costs are verified by an independent retiree board. "What we try to do is make it very clear to the public that the numbers we use are examined by independent sources," he says." You can't just make a number up." . . .

Joshua Rauh, a finance professor at Northwestern University, says San Jose is one of just a few cities nationwide that has opted to tackle rising pension costs.

"San Jose is the testing ground for what might happen around the country," he says. "Much of the rest of the country seems to want to shove the issue [of pensions] aside rather than confront it."'

Discussion and Analysis

Actually, my view is that they're arguing about the wrong thing. The right thing to discuss would be what the retirement benefit should be in relation to compensation during working years.

For example, if I earn $100 while working, perhaps I'll need a total annual income of $70 in retirement to sustain my standard of living. As part of the analysis, what other sources of funds will I have other than my San Jose pension benefit? Social Security? 401(k) plan? Savings?

And how much will I earn annually while employed by the city of San Jose? And how does that level of compensation compare to similar private sector compensation levels?

We really can't compare the pension benefit to the private sector, because there are more and more private sector companies terminating their pension plans and replacing them with 401(k) defined contribution plans. Why isn't this under consideration for current employees of San Jose?

And how will the city fund its portion of that $70 annual benefit? Will it assume contributions by the city and me will earn 8% annually over my working career? And will it assume that cost of living adjustments will be paid after I've retired? And what will it assume my salary increases will be over the working years? And will it update the results from time to time so everybody can see what's happening? In other words, are things working out as expected and if not, what remedial steps are being taken, if any? None of this is currently done with public sector pensions as far as I know. But it should be. Then the intramural fights could end between city and union officials.

I know the taxpayers would benefit from some sunshine. The unions and current city leaders may not enjoy seeing the truth being told, but they'd just have to get used to it.

Of course, taxpayers have every right to pay their public sector employees as much as they want, both while the city worker is actively employed as well as after he's retired?

And if taxpayers want to double their taxes to pay those salaries and benefits to city workers, that's very much their right.

But what if they want to pay competitive salaries, including retirement benefits?

The article says that 25% of San Jose's police and fire retirees receive $100,000 or more in annual retirement pay. That sounds awfully high to me. I wonder what objective reasons exist for the city employees' current salaries and benefits, including retirement pay?

And how powerful or reasonable is the union, and how strong or weak are the city negotiators charged with representing taxpayers?

A little sunshine on all this would work wonders for taxpayers. Let's hope the facts are revealed and that the sun comes out real soon in San Jose.

So rather than having a name calling, old style union pension negotiation based on negotiating prowess and taxpayer ability-to-pay, why shouldn't taxpayers receive an objective fact based analysis and then decide what's the right thing to do?

And if they are given the facts, they may just conclude that having 25% or 50% of a city's total budget dedicated to retirement pay is the absolute wrong approach.

Maybe the taxpayers will decide that they have better things to do with their hard earned money than fund out-of-line pensions for public employees. If that proves to be the case, taxpayers may elect to either keep the money for themselves or fund city services deemed essential.

To repeat, why not just convert from a pension to a 401(k) plan for city employees? That's the developing custom and practice in the private sector.

And why not just pay salaries and benefits which are similar to those paid for comparably skilled private sector work?

The times they are a changing. All over.

Taxpayer equity may soon be coming to San Jose. And to lots of other places, too.

Thanks. Bob.

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