All Eyes on San Jose Pension Reform Fight

The projections for the city of Davis’ budget are headed in the wrong direction over the next five years and, while some of these blows are self-inflicted in the sense that the city is finally addressing their unmet needs and dealing with rising water costs, some of it is coming from the state and changes to CalPERS (California Public Employees’ Retirement System) accounting rates.

Last year, facing similar problems in San Jose, the voters overwhelmingly approved a pension reform plan and now that plan is going to be tested in court in a trial that started a few weeks ago, but has yet to receive a verdict.

As the Mercury News reported on July 21, “The judge’s ruling will affect similar debates over government pensions throughout the state and across the country.”

The unions are, of course, suing to block the measure.

Judge Patricia Lucas “is expected to take months to decide the Measure B case, after lawyers submit written closing arguments, and appeals are likely. But much is riding on the outcome.”

“Unless it’s implemented,” said San Jose’s lawyer, Arthur Hartinger, in opening statements to the judge, “the city’s pension and post-employment benefit programs are unsustainable and out of control and threaten the city’s ability to provide essential city services.”

“The city has made an express promise,” said John McBride, a lawyer representing several city employees, in opening statements. “Here is a benefit you will have an entitlement to earn.”

After the hearings, Robert Sapien, the San Jose Firefighters’ union president and a plaintiff in the case, “said he felt employees had presented a solid case, and noting that Reed is seeking a state ballot measure to soften pension protections,” added that “it doesn’t seem like they have a lot of confidence.”

“City employee unions say that under a ‘vested rights’ doctrine, established through a series of court decisions dating back more than half a century, government employers cannot cut employees’ pension benefits. They insist pension rates are protected both for work already rendered and for the rest of their careers,” the paper reports.

The city is challenging this.  Some of this will not impact Davis – at least not directly and not immediately.  “City lawyers point to San Jose’s charter language and argue it reserves the right of voters and their elected officials to make future changes to retirement plans.”

The Mercury News writes, “San Jose’s pension troubles are rooted in benefit increases, flawed assumptions and market losses for the city’s pension fund. As a result, the annual cost to the city more than tripled in a decade, consuming more than a fifth of its general operating fund. City officials cut everything from police and fire department staffing to library and community center hours to cover growing costs. And with the retirement funds still $2.9 billion short of promised benefit costs, the bill continues to rise.”

The numbers may be different, but the city of Davis is facing similar challenges.

For the city of Davis the impact is expected to be high.  Changes to the CalPERS methodology will result in a 54 percent increase for safety pensions over the next six years, and 59 percent increase for the rest of employees.

Davis is facing huge cost increases, despite being in better shape than many in the state and despite reforms that have been accepted by five of seven bargaining units.

“The sobering news is the fact that PERS [has] reduced their rate of return,” Davis City Manager Steve Pinkerton said during a June budget workshop, noting that their actuarial believes, in addition to the quarter percent reduction, there will be an additional quarter percent reduction.  “They’re likely finally going to acknowledge that people live longer and that certainly impacts the PERS liability as well.”

Based on these projections, they are anticipating that rates will go, in the miscellaneous category, from just under 23% of payroll up to over 31% of payroll in the next five years.

“You’re going to start to see an 8 to 10 percent increase on an annual basis,” he said.  Previously, when PERS said everything would be okay after the recessions, the projected rate was about 23 percent.

“Compared to other cities this isn’t bad, but on a percentage basis you’re looking at far more than the three percent we were projecting for revenues,” he said.  In total it will be a 60% increase from this year to 2018-19 on miscellaneous employees; it’s slightly less of an increase, 54%, for public safety.

For public safety it goes from 29% of payroll up to 39% by 2018-19.

What these numbers mean is that, combined with the costs for OPEB (Other Post-Employment Benefits – retiree medical), more than half of the payroll will be going to pensions and retiree health care by the end of this period.

On retiree medical, they are projecting a 4% increase from year to year.  It goes from $3.79 million this year to $4.43 million in 2017-18.

“Though PERS did give us an unpleasant surprise this year, where it’s probably going to exceed… it looks like double-digit rates on CalPERS next year,” Mr. Pinkerton said.

The Mercury News notes, “San Jose was one of two major California cities where voters overwhelmingly approved pension reforms in June 2012. San Diego’s Proposition B called for replacing pensions for all new hires except police with 401(k)-type retirement savings accounts, and a five-year freeze on current employees’ pay that would count toward their pensions. San Diego has since negotiated the five-year pay freeze and put new hires on 401(k)-type plans after defeating unfair labor-practice challenges.”

San Jose’s case is taking direct aim at the “vested rights” doctrine.

Jack Dean, vice president of California Pension Reform, noted, “All of the state’s pension reform activists are watching this case with great interest.”

—David M. Greenwald reporting