Whitewash In San Jose

Few California officials have tried harder than San Jose Mayors Chuck Reed and Sam Liccardo to rein in pension costs. Sadly, a recent report by a San Jose task force undermines those efforts and promises more problems for city residents.

In the first decade of the 2000s, San Jose increased maximum pension benefits for Police and Fire employees, sometimes retroactively, and changed what had been an inflation-linked cost-of-living increase to a fixed 3 percent annual increase. When combined with deliberate underfunding of pension funds through the use of unrealistic investment return assumptions, those increases forced pension costs to rise sharply and increasingly crowd out public services. In search of solutions, a task force (the “Retirement Stakeholder Solutions Working Group”) consisting of retirees, city officials and others issued a report in April. Not surprisingly given the makeup of the task force, the report ruled out the most obvious solution — reversal of the increases described above. In doing so, the task force rejected the only changes that could significantly reduce pension costs. At our request, Rockefeller College ran numbers illustrating potential reductions:

After the changes, retirees would still have extraordinarily rich benefits:

Government employees want the public to think that it’s legal to raise pension benefits retroactively but illegal to reduce pension benefits prospectively. That’s why nowhere in the report is a reference to recent California Supreme Court decisions that make clear that the Court has not ruled specifically on the ability of governments to do that or to suspend fixed annual increases until pension funds are better funded.

A California city, county, school district or special district should enact such reforms in order to protect citizen services. That’s the only way cities like San Jose can dig themselves out of the holes they dug by boosting benefits retroactively and chronically underfunding pension contributions.* Government employees would sue and courts would be called on to rule. Only then would residents learn if California governments really can’t protect them from the ravages of retroactive pension increases and deliberate under-funding of pension funds.

*Not surprisingly, the only step proposed by the task force was to borrow money from Wall Street to speculate on stocks and other investments, a bad idea in any event but also ironic since the same task force blamed stock markets for rising pension costs.