San Jose Wrestles With Cost of 90% Pensions

A 2007 arbitration ruling letting San Jose, California, firefighters retire as early as age 48 with 90 percent of their pay may result in the firing of 370 municipal workers as the 10th-largest U.S. city tries to close a budget deficit fueled by higher pension costs.

Firefighters’ pensions were sweetened for the third time since 1996 after San Jose came under pressure from unions to keep up with what other municipalities were offering, according to Alex Gurza, the city’s chief negotiator.

“A lot of the discussions around the bargaining table were around that issue,” Gurza, who is also the city’s employee relations director, said in a telephone interview. “The main argument was that we needed to do it for recruitment and retention.”

Mayors in San Jose and San Francisco are developing ballot measures to put before the voters in November to scale back benefits for city workers to stem growing budget deficits, maintain services and prevent layoffs. In New York City, Mayor Michael Bloomberg has said higher pension costs are a factor in shrinking the city’s workforce.

Sixty-five percent of San Jose residents support lowering the maximum pension for all new police officers and firefighters, and 68 percent think the retirement age should increase above 50, according to a city-sponsored telephone survey of 903 people in January.

Recruitment and Retention

San Jose firefighters, who can be hired as young as 18, can retire at any age with 30 years’ service and receive 90 percent of their highest annual salary. Such a firefighter retiring today would get a base pension of about $95,000, with 3 percent annual increases, Gurza said.

The increase from 85 percent took effect in 2008 following after contract talks went to arbitration. The city didn’t have trouble with recruitment or retention, Gurza said. The year the new benefit took effect, the city got 2,645 firefighter applications three days after posting a job notice, he said.

Berkeley, Long Beach, Newport Beach and Oakland are among other California cities that offer similar benefits to their firefighters, according to the California Public Employees’ Retirement System, the biggest U.S. public pension.

Cities across the U.S. are scrambling to come up with ways to roll back benefits and require employees to contribute more. San Jose’s unfunded liability for its two pension plans is expected to grow to $2.03 billion in the next five years as gains and losses are spread over time, according to the city’s Retirement Services Department.

Overly Optimistic Assumptions

The shortfall arose because of overly optimistic earnings assumptions, losses from the 2008 financial crisis and retroactive benefit increases, Gurza said.

“We are so acutely aware now of the importance of using realistic assumptions when determining the long-term costs of retirement benefits,” Gurza said.

San Jose voters in November already approved two ballot measures aimed at containing the costs. One limits binding arbitration. The second allows new employees to be excluded from existing retirement plans or benefits.

San Jose is asking workers to agree to a 10 percent cut in pay and benefits. So far, five unions, including the firefighters, have agreed, said Tom Manheim, a spokesman for the San Jose city manager. Five firefighters and 122 police officers were told they may be among those out of their jobs.

“We’ve seen people who have served our community for decades escorted to the door,” Sam Liccardo, a Democrat on the City Council, said in an April 28 telephone interview. “As they struggle to find jobs, firefighters will be retiring in their early 50s with six-figure annual pensions. The irony is not lost on our taxpayers.”

Silicon Valley Giants

San Jose, the third most-populous city in California and home to Silicon Valley giants including EBay Inc. (EBAY) and Cisco Systems Inc. (CSCO), and San Francisco, the home of Wells Fargo & Co. (WFC) and Twitter Inc., are among cities nationwide that say escalating pension costs are the primary cause of their budget deficits.

Ballot measures to overhaul pensions are likely to be well- received by voters, said Joe Nation, a public-policy professor at Stanford University near Palo Alto and a former California assemblyman.

“Whether it’s right or wrong, there’s not a lot of sympathy for public employees right now,” Nation said in a May 2 telephone interview. “People have come to the conclusion that public-employee pensions are probably too high. With that going into an election that restricts those benefits, the outcome is almost certain.”

New-Hire Changes

In San Francisco, Mayor Edwin Lee and Supervisor Sean Elsbernd, a Democrat, are drafting legislation that would reduce pension benefits for new employees, increase cost-sharing for pension contributions and give the city more say in the oversight of the board that sets health benefits for current workers and retirees, said Micki Callahan, the human resources director, in a May 2 telephone interview.

Lee and Elsbernd are negotiating the provisions with the city’s unions. Lee must submit the initiative by May 24 for consideration by the Board of Supervisors, Callahan said.

Elsbernd said the 2008 financial crisis is responsible for the city’s escalating pension costs.

“An actuarial loss of 30 percent that the system had never seen before, it was never brought up,” Elsbernd said. “If anything is to blame, it’s the inherent nature of a defined- benefits system.”

Unfunded Health Liability

The city has an unfunded liability of about $4.4 billion for its retiree health benefits because improvements were approved without being funded, Callahan said.

“So we have benefits that are both very rich and almost entirely unfunded on the health side,” Callahan said.

Nathan Ballard, a Democratic strategist for San Francisco’s public-employee unions, said labor is negotiating with the city on a compromise on the ballot measure. He said he expects current and future employees to pay more into their pensions.

“We’re inching closer to each other’s position,” Ballard said in a May 2 telephone interview. “We want to do it in a way that’s fair to city workers, but also accomplishes significant savings for the city.”

U.S. states expanded the deficits in their employee retirement systems to $1.26 trillion by the end of the 2009 budget year, a 26 percent increase from a year earlier, according to a report released last month by the Washington- based Pew Center on the States.

Guaranteed Annual Increase

San Jose should eliminate guaranteed annual increases in pension benefits, bonus payments to retirees and manipulation of compensation to avoid so-called spiking to save the city from “fiscal disaster” and “stop the cancer’s growth,” Mayor Chuck Reed said in a state-of-the-city speech in February.

Sharon Erickson, San Jose’s auditor, said consensus is growing for reducing benefits for current employees.

“It really is the employer’s responsibility to make sure this is something we can afford,” Erickson said in an April 27 telephone interview. “It’s very difficult in a down economy to ask taxpayers to foot the bill for pension benefits that your average resident isn’t going to see.”

Liccardo, the council member who also has served on San Jose’s pension board, said he doesn’t blame the unions for advocating for better benefits.

“I blame public officials who failed to have the long-term best interest of the city at the forefront of their decision- making,” Liccardo said. “Every time a decision was made it was made without the benefit of anyone pointing out that the emperor isn’t wearing any clothes, that is that we could not possibly sustain this level of benefits.”

New York Mayor Michael Bloomberg is founder and majority owner of Bloomberg News parent Bloomberg LP.

To contact the reporter on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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