Innovators in Action (October 2013 edition): Advancing Pension Reform in San José

The latest interview in Reason Foundation’s Innovators in Action 2013 series focuses on recent pension reforms enacted in San José, California. Like many cities, San José has been reckoning with a looming crisis related to unfunded government employee pension liabilities. The city is facing a $2.3 billion unfunded liability in its pension system, and the city’s annual pension contributions have risen from $73 million in 2001 to $245 million in 2012. That annual payment now accounts for over 25 percent of the city’s general fund expenditures, putting a strain on its ability to fund essential services.

This situation came to a head in June 2012, when 70 percent of San José voters passed a ballot measure (Measure B) to reform the city’s pension systems and put them back on a path toward financial sustainability. One of the leaders of the pension reform movement in San José was City Councilman Pete Constant, a retired police officer and former board member of the San José Police Officers’ Association, the union representing the city’s law enforcement officers. Constant worked with Mayor Chuck Reed to design the language in Measure B and was a leading advocate of the measure prior to voter approval. Constant was also the sponsor of a separate policy initiative that ultimately ended the provision of lifelong pension benefits for San José elected officials.

I recently interviewed Constant on what prompted him to take on pension reform in San José, how he made the case to policymakers and citizens, the specifics of the reforms enacted, and more. Here’s an excerpt:

Gilroy: San José had experienced a dramatic ratcheting up of retirement benefits in the years, and really decades, before Measure B passed. Can you speak to that? What impact did this have on current city services?

Constant: The City of San José had a number of factors that collided to significantly contribute to this financial crisis and the pension crisis. First, there was a series of escalation of pension benefits provided to not only our current, working employees but also to people who had already been retired. Mayors and councils made promises that really didn’t take into consideration the future cost implications.

For example, people who had been hired on by the city with pensions that were a maximum of 75% of final salary saw some of those pensions escalate to 90% of salary. People who had retired in a pension plan where their annual cost of living increases were tied to the consumer price index found that the city had increased that benefit to the point where it was a 3% guaranteed annual increase. We also saw an increase in our retiree health benefits when our city council provided 100% paid healthcare—not only for the member, but for their entire family—upon retirement.

All of these individually might have seemed like minor adjustments—like taking a pension from 75% to 80%, or subsequently from 80% to 85%, and ultimately from 85% to 90%. But what we found was that these increased benefits were given at a time when salaries increased a very significant amount at the same time. For example, if you were a police officer working in this city in the year 2000—without supervisory rank, just an officer on the street patrol—the money you would make would have been $72,000 per year. And in 2000, that came with an 80% retirement. So someone who had served for 30 years would retire and get approximately a $58,000 per year pension for the rest of their life.

Fast-forward just a decade later to the year 2010, at a time when the pension benefit was only increased from 80% to 90%. At the same time, wages were increased by over 50%. So that same officer who had worked for the city for 30 years was making a salary of approximately $118,000 per year at a 90% pension. As you can see the simple math shows that that’s now a $106,000 pension a year for the rest of your life, plus the 3% guaranteed cost of living adjustments compounded every single year.

So for that period of 10 years the actual cash retirement benefit nearly doubled from $58,000 per year to $106,000 per year. It’s that exponential factor that we found—that by increasing salaries and benefits along the same track—that resulted in these huge unfunded liabilities that we now see top $3 billion in San José.

Check out the full interview here. Other articles featured in the Innovators in Action 2013 series are available here.

Leonard Gilroy is Senior Managing Director of the Pension Integrity Project at Reason Foundation, a nonprofit think tank advancing free minds and free markets. The Pension Integrity Project assists policymakers and other stakeholders in designing, analyzing and implementing public sector pension reforms.

The project aims to promote solvent, sustainable retirement systems that provide retirement security for government workers while reducing taxpayer and pension system exposure to financial risk and reducing long-term costs for employers/taxpayers and employees. The project team provides education, reform policy options, and actuarial analysis for policymakers and stakeholders to help them design reform proposals that are practical and viable.

In 2016 and 2017, Reason's Pension Integrity Project helped design, negotiate and draft pension reforms for the state of Arizona's Public Safety Personnel Retirement System and Corrections Officer Retirement Plan, which both passed with overwhelming bipartisan support in the state legislature and were signed into law by Gov. Doug Ducey.

Gilroy is also the Director of Government Reform at Reason Foundation, researching privatization, public-private partnerships, infrastructure and urban policy issues.

Gilroy has a diversified background in policy research and implementation, with particular emphases on competition, government efficiency, transparency, accountability, and government performance. Gilroy has worked closely with legislators and elected officials in Texas, Arizona, Louisiana, New Jersey, Utah, Virginia, California and several other states and local governments in efforts to design and implement market-based policy approaches, improve government performance, enhance accountability in government programs, and reduce government spending.

In 2010 and 2011, Gilroy served as a gubernatorial appointee to the Arizona Commission on Privatization and Efficiency, and in 2010 he served as an advisor to the New Jersey Privatization Task Force, created by Gov. Chris Christie.

Gilroy is the editor of the widely-read Annual Privatization Report, which examines trends and chronicles the experiences of local, state, and federal governments in bringing competition to public services. Gilroy also edits Reason's Innovators in Action interview series, which profiles public sector innovators in their own words, including former U.S. Transportation Secretary Mary Peters, former Florida Gov. Jeb Bush, former Indiana Gov. Mitch Daniels, former New York City Mayor Rudy Guiliani and more.

Gilroy's articles have been featured in such leading publications as The Wall Street Journal, Los Angeles Times, New York Post, The Weekly Standard, Washington Times, Houston Chronicle, Atlanta Journal-Constitution, Arizona Republic, San Francisco Examiner, San Diego Union-Tribune, Philadelphia Inquirer, Sacramento Bee and The Salt Lake Tribune. He has also appeared on CNN, Fox News Channel, Fox Business, CNBC, National Public Radio and other media outlets.

Prior to joining Reason, Gilroy was a senior planner at a Louisiana-based urban planning consulting firm. He also worked as a research assistant at the Virginia Center for Coal and Energy Research at Virginia Tech. Gilroy earned a B.A. and M.A. in Urban and Regional Planning from Virginia Tech.