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.

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