Key Takeaways

• In the aftermath of the Great Financial Crisis, San José faced financial pressures that were exacerbated by rising pension costs, inspiring the mayor, Chuck Reed, to embark on a series of pension reforms.
• The mayor’s first attempt at reform was successfully challenged by city employees, but the second reform, albeit less ambitious, helped to address rising pension costs.
• At the time of the second reform, it was estimated that the city could save up to $1.7 billion in pension costs between 2016 and 2026.

Background

San José is the cultural, financial, and political center of Silicon Valley and the largest city in Northern California in both population and land area. San José’s economy relies heavily on a variety of major global tech companies including Cisco Systems, eBay, Adobe, PayPal, and Zoom, among others. The city is one of the wealthiest in the world and has one of the most expensive housing markets in the US.

Financial Problem

In the aftermath of the Great Financial Crisis, San José confronted financial pressures that were exacerbated by rising pension costs, facing an estimated budget deficit of $61.2 million in FY 2010. Pension and retiree health care costs consumed approximately 20 percent of the city’s budget and seriously hampered the city’s ability to provide services.

Pension costs had risen steadily since 2001, from $73 million in FY 2002 to $244 million in FY 2012. According to the Reason Foundation, the primary cause was a massive increase in salaries and benefits: Between 1991 and 2009, after adjusting for inflation, the average annual benefit for police and firefighter retirees increased 75 percent, and 54 percent for other retired city workers. In 2011, average total annual compensation for working police officers was $178,821, for firefighters, $203,098, and for other city employees, $120,092.

In the face of these rising costs, San José tried to save money by cutting employee salaries and government services. Employees voluntarily accepted wage cuts of between 10 to 18 percent. Other budget cuts were wide-ranging, affecting public safety, libraries, sidewalk and park maintenance, and code enforcement. The city even decided to cancel the opening of four new libraries and a police substation that had been built with bond funds. But these cuts were not enough.

Policy

In 2012, San José mayor Chuck Reed embarked on a series of pension reforms, placing local-ballot Measure B before voters. Measure B reduced retirement benefits for new employees, while current employees had to choose between switching to a plan with reduced benefits or contributing more from their salaries to maintain their existing benefits.

In addition, Measure B eliminated the “13th checks” that were issued in the past when the pension investment fund earned a return higher than a certain threshold. The measure also reduced the automatic annual cost-of-living adjustment from 3 percent to 1.5 percent and required voters to approve any future benefit increases. Measure B passed with 69 percent of the vote.

Mayor Reed had framed the measure as an attempt to restore services, arguing that “every dollar the city pays for retirement costs is a dollar we can’t spend on services for our residents.” In addition, resentment towards the generous pension plans for public sector employees had grown, as, for example, employees of the city’s police department could retire after 30 years of service with 90 percent of their salary.

Public sector unions challenged the legality of Measure B in court, arguing that adjusting the pensions of current employees violated their vested rights. In a victory for the unions, a court struck down most of Measure B’s provisions in 2013. The city, again, began negotiations with its eleven unions, and, in 2016, put ballot measure F before voters, representing a compromise. Measure F was less ambitious than Measure B but still made significant adjustments that would lower pension expenditures in San José. Approximately 60 percent of voters then voted in favor of Measure F.

Financial Impact

At the time, the city was expected to save $1.7 billion between 2016 and 2026 as a result of the new rules. Under Measure F, new hires are considered “Tier II” employees and contribute 50 percent of their pension costs, face a higher retirement age, restrictions on the final salary upon which pension payments are based, capped cost-of-living adjustments, and caps on the total pension benefit (which cannot exceed 80 percent of eligible salary). Measure F also eliminated “13th Check” defined-benefit retiree health care for new employees that fell into the “Tier II” qualification. Under Measure F, all future increases in pension benefits are subject to voter approval and reforms cannot be retroactive.

Long-term Effects

Since Measure F passed, the city has stabilized the pension plan’s funded status and reduced expected changes in unfunded actuarial liabilities. In 2015, for example, the unfunded actuarial liability increased by over $200 million, while in 2019 it increased by only about $100 million. In FY2019, net pension liability decreased by $63.3 million (or two percent) to $3.129 billion. At the same time, Other Post-Employment Benefits (OPEB) net liability decreased by $148 million (or 14 percent) due to changes in benefits and assumptions.

Sources

San José (Ca.). (2019). Comprehensive annual financial report: For the fiscal year ended June 30. San José, Ca: City of San José. https://www.sanjoseca.gov/Home/ShowDocument?id=45618

San José (Ca.). (2019). Actuarial valuation report: For the fiscal year ended June 30. San José, Ca: City of San José. https://www.sanjoseca.gov/home/showdocument?id=49172

Wikipedia contributors. (2020, October 16). San José, California. In Wikipedia, The Free Encyclopedia. Retrieved 00:01, October 20, 2020, from https://en.wikipedia.org/w/index.php?title=San_Jose,_California&oldid=983904568

Woolfolk, J. (2009, March 5). San José’s 2009-10 budget deficit grows to $61.2 million. San José Mercury News. Retrieved 00:01, October 20, 2020, from https://www.mercurynews.com/2009/03/05/san-joses-2009-10-budget-deficit-grows-to-61-2-million/

Silicon Valley Community Foundation. (2012). The City of San José’s Budget Crisis. Silicon Valley Community Foundation. Retrieved 00:01, October 20, 2020, from https://www.siliconvalleycf.org/sites/default/files/SanJoseBudget%20FactSheet%20FINAL.pdf

Ballotpedia. (2012). San José Pension Reform, Measure B (June 2012). Ballotpedia. Retrieved 00:01, October 20, 2020, from https://ballotpedia.org/San_Jose_Pension_Reform,_Measure_B_(June_2012)

Ring, E. (2017, September). Pension Reform – The San José Model. California Policy Center. Retrieved 00:01, October 20, 2020, from https://californiapolicycenter.org/pension-reform-san-jose-model/

Giwargis, R. (2016, October 2). San José: Measure F promises to end pension battle — but will it?. San José Mercury News. Retrieved 00:01, October 20, 2020, from https://www.mercurynews.com/2016/10/02/san-jose-measure-f-promises-to-end-pension-battle-but-will-it/

Cooper, M. (2012, June 6). San Diego and San José Lead Way in Pension Cuts. New York Times. Retrieved 00:01, October 20, 2020, from https://www.nytimes.com/2012/06/07/us/politics/san-diego-and-san-jose-pass-pension-cuts.html?pagewanted=all

Cooper, M. (2012, February 18). Budget Woes Prompt Erosion of Public Jobs, With a Heavy Toll in Silicon Valley. New York Times. Retrieved 00:01, October 20, 2020, from https://www.nytimes.com/2012/02/19/us/in-san-jose-budget-woes-take-a-toll.html