By Khalida Sarwari
A new city audit report released this week shows San Jose’s $3.8 billion pension system is $2 billion short of covering employee and retiree pension benefits as a result of rising pension costs that Mayor Chuck Reed called “unsustainable.”
The “Pension Sustainability” report released Wednesday by the city auditor assessed the long-term sustainability of San Jose’s pension benefits and the potential impact of increases in pension costs on city services.
“The impact of rising pension costs has meant that San Jose can’t hire more firefighters, police officers, librarians, gang intervention workers,” Reed said in a statement Thursday. “As mayor, I think our growing city needs to be providing more services, especially in these difficult economic times.”
The city also has a $1.4 billion deficit in meeting medical and dental coverage for retirees.
To close a $118 million budget gap, the city asked all employees to take a 10 percent pay cut earlier this year. Growing pension and employee costs necessitated the concessions, cuts to services and layoffs, Reed said.
Retirement costs have tripled over the last decade, Reed said. While the city’s general fund has seen an increase of 21 percent, the average cost per employee has risen by 87 percent and 99 percent for firefighters and police officers, according to Reed.
The high costs are due to outside arbitrators that award public safety unions with pay and benefit increases, Reed said.
The city’s charter additionally stipulates that employees be provided with a defined benefit retirement plan, a minimum employer match of over 250 percent, a retirement age of 50 for police and firefighters and 55 for non-sworn employees, and city-guaranteed benefits for life based on final compensation.
“These out-of-control costs are why we can’t keep all of our libraries, community centers, and swimming pools open,” Reed said. “The current system is unsustainable.”
While acknowledging that San Jose has “limited legal maneuverability,” in changing its pension system, the audit recommended alternative ways for the city to control costs, such as additional cost-sharing by employees, a second tier pension for new hires, and joining the California Public Employees Retirement System.
“The city will continue to face considerable financial risks from rising pension costs for years to come,” the report concluded. “Understanding how we got to this place, identifying the major cost drivers of the city’s pension plans, and assessing alternatives for a sustainable future, are only first steps towards solving the problem.”
The audit report can be accessed online at http://www.sanjoseca.gov/auditor/AuditReports/1010/1010.pdf.