San Jose Votes to Curtail Pension Costs NOW ... San Diego Adopts 401(k) Plan

San Jose Voters Back Pension Overhaul has much to say about the public pension funding issues across America:

"A vote to overhaul city pensions in San Jose could bolster efforts by municipal officials across California and the U.S. to curb soaring retirement costs.

Voters in this city of about 950,000 approved a ballot measure Tuesday that requires city workers to either contribute significantly more to their pensions or to accept more modest benefits. The measure was backed by 69% of voters, according to the website of the Santa Clara County Registrar of Voters.

But unlike most efforts to rein in pension costs, the San Jose measure targets current workers and retirees rather than focusing only on workers that have yet to be hired.

San Jose is one of the few places in the U.S. where voters have had unilateral power to restructure pensions. But other cities, particularly those in California that manage their own retirement systems, are likely to follow suit, experts say.

"This is going to encourage other jurisdictions in California to follow San Jose's lead,'' said Joe Nation, a public policy professor at Stanford University before any vote results had been tallied. "Pensions are the biggest challenge facing the state and local governments."

The measure faces an almost certain legal challenge by San Jose's public workers unions, which say their pension benefits are contracts that can't be broken.

The city's police officers and firefighters say they have given up higher salaries and made other concessions over the years in return for their pension benefits. For cops and firefighters who have retired since 2007, the average pension is $95,336, among the highest in the state.

Public safety workers, who already pay about 11% of their salaries toward their pensions, could now be required to pay an additional 16%—or to instead retire later and accept more modest benefits.

"It's illegal,'' said Jim Unland, president of the San Jose police union, which didn't campaign much against the measure, considering it an uphill battle to convince voters. "I've been waiting for this day for them to go ahead and pass it. Now we will see [the city] in court."

Public safety workers have faced an outcry from taxpayers over the size of their pensions. San Jose Mayor Chuck Reed, a Democrat elected in 2006, blamed cuts in city services such as library hours and police staffing largely on rising pension costs.

With the early result showing the measure passing by a wide margin, Mr. Reed said in an interview that the pension overhaul is expected to save about $25 million in the first year it's implemented.

That would allow the city to open four libraries that were built in better times but have sat empty because there aren't enough funds to operate them. "Now that we are getting control of retirement costs, we can cautiously start to restore services,'' Mr. Reed said.

While state laws governing pensions vary widely, "California is particularly influential in the pension world," said Amy Monahan, an associate professor at the University of Minnesota Law School.

Decades ago, the California courts set the legal precedent that public pensions can be considered contracts. Other states went on to adopt the same reasoning, citing the California rulings. If the San Jose measure withstands a likely legal challenge, it could have a significant impact across the U.S.

Also on Tuesday, voters in San Diego approved a ballot measure that will place all newly hired city workers, except police officers, into a 401k retirement plan. The measure, which had the backing of 66% of city voters, would replace the traditional defined benefit plan for these new workers."

Summing Up

In cities like San Jose and San Diego, California voters on public emplyee retirement benefits may be leading the way in an unfolding American taxpayer revolution.

San Jose voters decisively moved to curtail taxpayer costs by voting to require public employees to increase contributions to 27% of their pay from 11% unless they are willing to retire later and accept more modest benefits.

And this applies to current workers and not just new hires.

Meanwhile, San Diego voters opted to place almost all new city employees in a 401(k) plan and not the current traditional pension plan.

The unions are protesting these moves by taxpayers, and the cases will undoubtedly be decided by the courts.

That said, there is definitely a movement afoot to tackle this enormous financial problem for cities and states in America.

My guess is that we'll be dealing with Social Security and Medicare at the federal level soon, too.

Stay tuned.

Thanks. Bob.