Statement from Mayor Chuck Reed regarding Local Legislators’ Request for a State Audit of San Jose Pension Funds

San Jose is a leader in dealing with skyrocketing retirement costs that threaten local government across the state.   We are trying to bring down the costs of retirement benefits so we can afford to provide services to our residents and taxpayers.  In that process we have been guided by the recommendations of the Legislature’s Little Hoover Commission, the Governor’s pension reform proposal, and the 2010 pension audit performed by the San Jose City Auditor (full report is online here, a powerpoint overview is also available).

We would not object to an audit of the city’s pension obligations that is fair and objective and follows nationally recognized government auditing standards.  However, we would object to a politically motivated audit that might interfere with our constitutional right to amend our charter by a vote of the people.  Of course, the mere fact that an audit is being done will be used as an attack on our pension reform ballot measure.  For that reason, the committee’s decision should be delayed until after June 5, 2012, so the audit will not have to be done in politically charged environment.

Skyrocketing cost for pension obligations and retiree medical benefits (OPEB) have had a dramatic impact on the people of San Jose.  Any audit should look at both factors that have generated billions of dollars of unfunded liabilities and hundreds of millions of dollars increased costs.  To pay those increased costs, we’ve been forced to eliminate jobs, close libraries and community centers, lay off police officers and fire fighters, and watch our streets and infrastructure deteriorate. As pension and healthcare costs escalated, we were forced to drain money out of services and pour it into retirement benefits.

Ten years ago, San Jose spent $73 million on retirement benefits. This year, we spent $245 million on retirement benefits. These are not projections or assumptions. They are actual dollars spent. Retirement benefits now cost the city more than 50 percent of base payroll and consume over 20 percent of our general fund budget. Every dollar the City pays for retirement costs is a dollar we can’t spend on services for our residents.

Writing ever-larger checks for retirement benefits has had a dramatic impact on our work force. We’ve cut more than 2000 positions over the last 10 years in order to balance our budgets. Every city job eliminated reduces the services we can deliver to our residents.

Here’s what happened in the police department. Despite increasing the budget by nearly a hundred million dollars over the past ten years, we now have fewer officers than we had a decade ago. And retirement cost increases were the single largest cause of those cuts.

While the numbers are staggering, our Fiscal Reform Plan has provided a road map for reversing these devastating trends. All city employees, including the City Council and our senior management, have taken at least a 10 percent cut in total compensation. While painful, those reductions were crucial to saving jobs and services, and they helped slow the rate of growth in our retirement costs by reducing our payroll by 24%, something we do not want to repeat.

Our Fiscal Reform Plan includes a ballot measure in June to reduce pension costs.

The pension reform ballot measure will reduce city costs and allow us to restore services by requiring our current employees to pay a larger share of the cost of their retirement benefits, which is an element of Governor Brown’s pension reform proposal and a step that has already been taken by over 200 California cities. (See the 2012 Pension Sustainability Surveyby the League of California Cities, posted athttp://www.cacities.org/resource_files/30460.2012%20City%20Manager%20Pension%20Survey.pdf)

New employees would pay half of the cost of their retirement benefits in a new lower-cost plan.  Over 100 California cities have already adopted lower cost plans for new employees, and the Governor is proposing a similar approach.

Current employees would also have the option to choose a lower cost plan and avoid paying higher costs.

The ballot measure also would reform disability retirement rules to prevent abuses, eliminate bonus payments to retirees, and require voter approval for any future retirement benefit increases.

All together, the ballot measure will save the taxpayers hundreds of millions of dollars over the next 10 years, and much more after that as the percentage of employees in the new plan grows.

Please note that the City’s pension and OPEB payments are determined by two independent retirement boards that retain their own actuaries, make their own actuarial assumptions, and determine our required contribution, which we pay on an annual basis.

Changing actuarial assumptions does not reduce the cost of the benefits we are obligated to pay.  Our Fiscal Reform Plan will reduce the cost of the benefits, which will allow us to restore services to our residents and taxpayers.
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