San Jose pension fight could have nationwide implications

By John Woolfolk, San Jose Mercury News

jwoolfolk@mercurynews.commercurynews.com

The eyes of the nation are on San Jose as a landmark June 5 measure to trim soaring pension costs puts residents of the 10th largest U.S. city at the center of a $1 million-plus battle for their votes.

Should San Jose's Measure B pass, as Mayor Chuck Reed and the business and taxpayer groups behind it expect, it would be a key test of a city's authority to reduce future pension costs that exceed expectations and revenues, despite earlier promises to employees. Government employee unions maintain that the measure is illegal, unfair and unnecessary.

"It will have nationwide implications on pension obligations and what we can and can't do when we get underwater," said Marcia Fritz, a Sacramento-area accountant and president of the California Foundation for Fiscal Responsibility.

Reform advocates see the San Jose pension measure and another one in San Diego as a gauge of voters' willingness to trim costly retirement for cops, firefighters and librarians whose unions have stalled lawmakers' efforts to impose major changes.

Steve Maviglio, spokesman for Californians for Retirement Security, a group representing public employees and retirees, said "we're keeping a careful eye on it" out of concern it will unleash a wave of similar efforts.

"If these measures pass by wide margins, it opens the door for communities around the state to engage in these ballot-box negotiations, which are harmful to the workforce," Maviglio said.

Test of union clout

For the city's employee unions who have long enjoyed public and City Council sympathy in this Democratic Party stronghold, the vote will test their clout.

"I guess you'd call it a pivotal moment, certainly in terms of Chuck Reed's legacy, and also in the ability or inability of organized labor to beat back the effort to change the pension system," said Larry Gerston, political science professor emeritus at San Jose State.

Reed proposed Measure B a year ago after failing to gain much traction erasing budgetary red ink that has soaked the city ledger for a decade, even after he championed new tax measures and fought to impose 10 percent, top-to-bottom pay cuts on city employees. Though the city projects a modest $9 million surplus in the upcoming budget, thanks largely to the pay cuts and hundreds of job cuts, a $22.5 million shortfall is expected the year after.

"One line item has had the largest impact on our budget," Councilman Pete Constant, a retired city cop and Reed ally, told a community forum on Measure B last week, "and that is pension contributions."

The city's yearly pension bill has more than tripled from $73 million to $245 million in a decade, far outpacing the 20 percent revenue growth and gobbling nearly a quarter of the city's general fund. A city audit blamed the rise on a combination of benefit increases, flawed cost assumptions and investment losses.

Measure B would limit retirement benefits for future hires and require them to pay half the cost of a pension. Current employees would keep the pensions already earned but have to choose either a more modest and affordable plan for their remaining years on the job or pay up to 16 percent more of their salary to continue with the existing benefit. Retirees could see their 3 percent yearly pension raises suspended up to five years if the city declares a fiscal crisis.

The city measure also would require voter approval for future pension increases and change disability retirement with the aim of limiting it to those whose injuries prevent them from working.

Gov. Jerry Brown has proposed pension reforms statewide, including a more modest "hybrid" benefit for future hires that combines smaller pensions with a 401(k)-type plan, and ensuring that current workers shoulder more of the cost of their pensions. But his plan has stalled in the Legislature.

San Diego's Measure B would replace pensions with 401(k)-type plans for all new city hires except police recruits. It would freeze the pay for current employees on which pensions are based for five years.

San Jose's unionized workers said they want to work with the city on pension reform, but Reed and other leaders refused their offers.

"The workers of San Jose want a sustainable pension," Karen McDonough, an environmental services specialist for the city active with her union, told a recent Measure B forum. "We all agree changes need to be made. We don't agree Measure B will get us where we need to be."

No resolution

Employees argue Measure B would take too big a bite out of workers who already have taken 10 percent pay cuts, higher health care costs and agreed to pay more for their underfunded retirement health benefit.

But city leaders see the pay cuts as temporary fixes, and Measure B would provide lasting changes long after they leave office. City officials said months of talks could not resolve core differences.

For residents like Steve Landau, a 49-year-old marketer for a technology company, the complex debate and white-hot campaign rhetoric are head-spinning. But he's inclined to go along with the measure simply because he sees services being cut to cover city benefits better than those of most taxpayers.

"It's probably in the right direction," Landau said.

Contact John Woolfolk at 408-975-9346.