San Jose Looks to Deal With Unions on Pension Reform

Over at Calpensions, Ed Mendel has an interesting post on the negotiations taking place between the city of San Jose and its public employee unions over retirement benefits. Regular readers of Golden State Liberty will recognize how important these negotiations are, as San Jose is truly the front line in California's struggle to avoid financial Armageddon at the hands of unfunded pensions. The city has had 11 straight years of sizable budget deficits, and is already facing a deficit of at least $78 million for the coming year; the fastest-growing component of those deficits, of course, is retirement benefits. As we wrote back in June, California's third-largest city is rapidly approaching a crisis in which it can either risk a lengthy court battle by clawing back the benefits of current employees, or cut public services down to nothing. Which is what makes this story so interesting: could San Jose cut a deal with its unions to make its pension nightmare go away?

At issue are the unearned pension benefits of current city employees; no one is talking about touching the benefits of current retirees or the benefits current workers have already earned, and no one has disputed San Jose's authority to reduce benefits for future workers. Back in the spring, mayor Chuck Reed floated the possibility of declaring a state of economic emergency and putting a measure to reduce current workers' pensions on the November ballot. This would have likely triggered a court challenge, as earlier rulings have found that benefits promised on the date of hire are vested, and ultimately the City Council chose to table the plan until next year. But now, Mendel reports that the unions are close to agreeing to a plan that allows current workers to switch to lower pensions.

There are, of course, complications that need to be worked out. The unions assume that all "non-sworn" city employees would opt for the lower pension, but it's unclear whether the incentive to do so would be a carrot or a stick. The unions prefer carrots, like lower employee contributions or higher salaries, while San Jose would prefer the stick of higher personal contributions for those who opt for higher pensions. Representatives of the police and firefighters' unions assume that two-thirds of their members will choose lower pensions. Whether these assumptions are realistic is certainly debatable. It's also uncertain whether the IRS would continue to allow pre-tax pension contributions under the revised system. The feds have refused to authorize pre-tax contributions for Orange County's "hybrid" pension option, first approved in 2009; a similar delay could prevent the city from realizing any savings in their plan. Complications aside, though, the possibility of a deal is very welcome news for San Jose and its taxpayers.