- Written by William Osborne and Steven Greenhut
23 Jul 2013
INSIGHT - (San Jose Mayor Chuck Reed, a Democrat, put his substantial political capital on the line last year in seeking voter approval of an initiative to curb the rapidly escalating pension costs that were crippling his city’s ability to provide municipal services.
The initiative, Measure B, was approved by nearly 70 percent of voters. He was interviewed in his San Jose office by U-T Editorial/Opinion Director William Osborne and Steven Greenhut, vice president for journalism for the Franklin Center for Government and Public Integrity, in connection with the U-T Editorial Board’s “Fixing California” project.)
Q: Bring us up to date on where pension reform stands now in San Jose.
A: Well, the voters approved our Measure B back in June  by nearly 70 percent margin. And we’re in the process of implementing changes based on the voters approved ballot measure. Some of those we’ve implemented. Almost all of them are being litigated. And some of them we’re waiting to implement on because of the litigation.
Q: The lawsuits filed by the public employee unions?
A: Yes, unions and the retirees.
Q: How about the state Public Employment Relations Board? Has PERB sued?
A: PERB is trying to get in the middle of it with actions that have been filed. The unions filed half a dozen lawsuits and half a dozen PERB claims. So PERB is processing through those claims. They’ve given us notice on three of them that they’re going to move to hearing.
Q: You’re familiar with what PERB is doing in San Diego in response to voter approval of its pension reform?
A: They’re trying to prevent the implementation of what the voters have approved. So we’ll go through that process, too. It’s not unexpected since PERB is very friendly to the union interests.
Q: Is your measure similar to San Diego’s pension reform?
A: No, it’s very different than San Diego’s.
Q: How so?
A: Our measure increases the amount that employees have to pay for their retirement benefits. They have to pay up to an additional 16 percent of pay on top of what they’re already paying toward unfunded liabilities. That’s the basic part of the measure.
Q: And that would bring their contribution up to what?
A: They’re between 8 and 11 percent now, in that ballpark, so add 16 percent on top of that. That’s for pension. They also have a contribution for health care, 8, moving to 10 percent and probably should be higher than that.
We’ve said, based on what we can do legally, we can make them pay more. We’ve always been told you can lay people off, you can cut their pay, and you make them pay more. So we did cut the pay — 10 percent pay cuts everybody took. We did layoffs. And now we’re down to making them pay more. But what we did that’s probably more interesting is we recognize an additional 16 percent is a heavy burden for employees, all of them, and very difficult for some of them. So we’re giving them an option to choose a lower cost set of benefits — still a defined-benefit plan, just at lower accrual rates, lower cost-of-living adjustments and later retirement ages. If they choose that then they don’t have to worry about paying the extra 16 percent.
Q: And is that being implemented?
A: We haven’t implemented that. We also need a ruling from the IRS that the tax treatment of our plans will be what we think it will be if we allow the employees to have a choice. Giving that choice raises some complicated tax issues. And so we requested a private letter ruling from the IRS. If we get it in hand today it’s probably a six-month time period to implement it because we’ve got to give our employees the information to make the decision.
Q: So you don’t have a good feel yet for employee interest in participating in the lower cost plan?
A: Not really because we haven’t been able to tell them what it means. But those who are close to retirement probably will just continue with the current system. Those that are a long way from retirement will probably opt in to the lower cost benefit because they save money for a very long period, of time.
Q: The key thing on the court case is whether you’re allowed to change benefits for existing employees going forward, right?
Q: Give us a summary if you would about why it was necessary for the city to implement this reform. What would happen if it hadn’t been approved by voters, and what would it have meant for the finances of San Jose?
A: If we had done nothing we would have continued on the path that we had been on for the last decade where our costs went from $73 million dollars to $245 million. And they would have continued to go up at high rates.
Q: And that’s right out of the general fund?
A: Not all of it comes out of the general fund, but the general fund’s share is big. And the percentage of general fund has gone from around the 5 percent range to in excess of 20 percent, up to close to a quarter of the general fund — just for retirement benefits. And that number was going to continue to grow.
So we were faced two years ago with what is described by the [International City and County Managers Association] as “service delivery insolvency,” which is we’re cutting the services so much we’re essentially ineffective as a city at delivering services to our people.
And so rather than just continue on that path we decided that we would take action. We adopted a fiscal reform plan. And we have been in the process of implementing it. One of the steps was to cut pay by 10 percent — everybody took a 10 percent pay cut — we shrank the workforce, including layoffs, and that allowed us to save about $100 million dollars a year in our general fund.
That’s given us a respite for the last couple of years while we work on the pension cost side of it. We did save money by cutting everybody’s pay and laying people off. But that’s not really a great way to save on pension costs, by laying people off. But that allowed us to continue providing services at the same level for the last couple of years. This year we’re going to be able to restore services a little bit because we’re getting about another $20 million of savings from Measure B, starting the 1st of July — of course, subject to litigation and all that.
Q: Are you optimistic about the court cases and ultimately being able to fully implement Measure B?
A: Well I’m a lawyer so I always realize there’s litigation risk. But if you just take the California Supreme Court’s decision on the Retired Employees Association of Orange County in 2011 as to what the standard is for how you determine vested rights, we fit very well within their standard because our charter prohibits the council from giving away certain things and reserves the right to roll back retirement benefits. Maybe we’re unique in that regard. So I’m pretty comfortable with the litigation, except I know it’s going to take a couple of years to do anything.
Q: You had negotiated with the employee unions prior to Measure B in order to get some of these things implemented, correct?
A: That was another difference between us and San Diego.
Q: And that makes your legal case maybe a little stronger than San Diego’s?
A: It does. It avoids the PERB question about whether or not you should have negotiated. We negotiated a lot — hundreds of hours of negotiations, dozens of sessions, including 20 sessions with the State Mediation Office. So we negotiated a lot. We modified our ballot measure five times I think in response to the negotiations.
Ultimately, we didn’t get any agreements with any unions. But we certainly negotiated. And so that puts us in a different position with regard to the PERB claim. Now our unions are claiming that we didn’t negotiate enough.
Q: Or in good faith.
A: Or in good faith. So it’s never enough in their view.
Q: How does the Orange County retiree case help your case?
A: In our case, with our charter that says we reserve the right to change retirement benefits, it’s clearly not something that you can give away because actions in violation of the charter are void.
Q: Has that charter provision been upheld? Has that ever been challenged?
A: No, we’re good. It’s been in place since 1961 and the statutory legislative history is pretty clear. We went back and found all the arguments. And the intention was to make sure the council had the right to make modifications.
Q: Everyone is looking to San Jose as a test case on whether you can change benefit levels for existing employees. Do you think because of the charter issue that it’s not really going to have that much statewide impact?
A: I don’t know that it’ll be legal precedent statewide. But it’s certainly legally helpful I think. Every city that with a ballot measure and every city that’s successful with a legal challenge helps other cities. There’s no doubt that we could use some more modern cases on pension rights and benefits. So the Orange County case I think is helpful to everybody even though it may not apply to everybody.
Part of the problem that everybody has had that I’ve seen is the unions say they won’t negotiate over a lot of these provisions because they say everything is a vested right and you can’t touch vested rights so we can’t negotiate over them. So to the extent the Supreme Court clarifies what is or isn’t, that leaves some room for negotiations. And so that could be helpful to other cities because when the union says we won’t talk to you about this because it’s a vested right, well, no, we can negotiate.
Q: What’s your sense on the Stockton bankruptcy?
A: I think the Stockton case is important in several regards. First, it demonstrates what happens if you slip into serve delivery insolvency. Your only choice then pretty much is bankruptcy because you’ve gone so far that you’ve just exhausted all of the alternatives.
It’s not really a legal concept, although the judge in the bankruptcy in Stockton did refer to it. I don’t think it’s a legal definition. It’s a definition that ICMA uses that it describes a condition that you’re which is one step out of bankruptcy. I think that demonstrates what happens if you wait too long. If you wait until you’re in trouble, you get in too deep, then there’s very few things you can do except bankruptcy, which is why I urged the council two years ago to try to get ahead of this, not wait.
Q: Statewide, how big is the pension problem? Is there a city that you’re aware of that does not need some sort of pension reform?
A: There are certainly cities that are not being stressed by it. It helps if you have a lot of money. And then you can absorb the increases. San Francisco’s done a pretty good job of absorbing increases.
But they’re a wealthy city. If you look at L.A. you can see that they haven’t really been able to do much about services because they’re spending a lot more money on retirement costs just like us. And so there are lots of cities in between. But if you look at the growth curve of pension and retirement costs generally, it’s up dramatically for practically every city in the state.
And if you look at what CalPERS has said they’re going to have to do over the next five or six years, it’s a 50 percent increase. And that’s going to hit practically, you know, a couple thousand jurisdictions around the state.
Q: How about Gov. Jerry Brown’s state pension reform?
A: Small. It was a 5 or a 10 percent solution. It’s helpful and useful and good. I’m glad to see that they did it and applaud the governor for taking it on and making something happen. But it’s still 5 or 10 percent of the problem.
Q: What do you think is the best way to get statewide reform?
A: I think the best way to get reform is going to be a statewide ballot initiative because having seen what the Legislature did, a 5 or 10 percent solution, it doesn’t solve the problem. It certainly hasn’t gone away, although plenty of people have declared victory and hope that everybody will go home.
The problem isn’t going away. I think we can only get it done with a statewide ballot initiative, to make sure we have clear authority to modify future accruals and give employees a choice with a lower cost plan.
The central problem in all of this is the benefits are too expensive, the government can’t afford them and the employees can’t afford them. So we have to be able to modify those future accruals to bring the cost of the benefits down. We don’t have to eliminate them, but we need to be able to modify them.
Q: What do you think are the chances of a statewide initiative?
A: I’d say they’re fair. Statewide initiatives are always difficult.
Q: Is there discussion between you and your big-city mayoral colleagues to launch such an effort?
A: With some of them. I’m in the middle of trying to figure out how to do that and whether to get personally engaged and to push the issue.
Q: There’s not yet a plan to push it for the 2014 ballot?
A: There’s not a plan for that but I and others are thinking about how do we get there because probably November of 2014 is the time that you would need to do it.
Q: It would be a monumental political battle against the unions.
A: Of course, but this is California. Everything is a monumental battle.
Fundamentally, the statewide ballot issue is about giving local governments the power to solve their problems through negotiations. We can’t negotiate these issues now. ...
We’re really all suffering from the excesses of the nineties. We thought we were going to be rich forever.
(This interview was conducted by William Osborne of the San Diego Union-Tribune and Steven Greenhut of the Franklin Center for Government and Public Integrity. It was posted first by the San Diego Union-Tribune. It was provided CityWatch by the subject of the interview, San Jose Mayor Chuck Reed.)
Vol 11 Issue 59
Pub: July 23, 2013