San Jose report details pension plan breakdowns

San Jose report details pension plan breakdowns

Michele Ellson

A 2010 report on the sustainability of the City of San Jose’s pension system offers a detailed look at how the costs of that city’s pensions outpaced its ability to pay for them, to the tune of $2 billion in unfunded pension liabilities that year.

The list of factors that contributed to San Jose’s pension woes included benefit costs that outpaced contributions as early as 2001 and nearly $1 billion in investment losses, San Jose City Auditor Sharon Erickson’s report showed, along with incorrect assumptions about the city’s investment returns as well as what kind of salary increases its employees would earn, when they would retire and how long they would live.

At the time, Erickson recommended that San Jose city leaders consider asking employees to pay more toward their retirement or accept fewer benefits, set a “second tier” of reduced benefits for new employees and consider joining the state’s CalPERS retirement system, a move that she said would cut the city’s pension administration costs by close to two-thirds. But she cautioned that even those moves might not be enough to fix the city’s broken pension system.

“The City will continue to face considerable financial risks from rising pension costs for years to come,” wrote Erickson, who said rising pension costs threatened the city’s ability to provide services. “There is a risk that even if the City implements the recommendations in this audit, pension costs may still be unsustainable.”

San Jose has since earned voter approval of a pair of measures aimed at trimming pensions, including one of the June 5 ballot that will allow the city to take 16 percent of employees’ pay to cover pension costs unless city workers accept less generous benefits, and sets up slimmer benefit packages for future employees – if it survives court challenges. (San Jose is one of a few dozen California cities and counties that manages its own pension plan.)

Alameda’s city leaders are in the midst of a fresh effort to address this city’s pension costs, which are expected to be $9.92 million this year, down from the $10.1 million to $11.5 million the city has paid into CalPERS each year since 2004 but triple what the city paid PERS for its employees’ retirement benefits in 2001. Top city staffers have said they expect the city’s pension costs to continue to rise, even as employees have offered to pay more toward their retirement. City Manager John Russo has assembled a task force to study the city’s pension and retiree health care cost issues. A report is due out sometime this fall.

Meanwhile, Alameda has also faced chronic budget deficits, including an estimated $5.1 million funding gap in the 2012-2013 budget to be considered by the City Council on Tuesday. City staffers have recommended closing the budget deficit by cutting positions and shuttering the city jail, among other things.

Erickson projected that pension and retiree health care costs would equal 75 percent of San Jose’s public safety payroll and 45 percent of its non-safety payroll by 2014 (pensions alone would cost the city 64 percent of its safety payroll and 36 percent of its non-safety payroll).

Here in Alameda, the city is projected to pay the equivalent of 40 percent of Alameda’s public safety payroll and 17 percent of its non-safety payroll toward pensions by 2014; the amounts are 37 percent and 15 percent this year (public safety pensions account for $7.5 million of the city’s costs this year, while other employees’ pension costs account for $2.42 million).

Annual financial reports released by the city show that Alameda’s unfunded pension liabilities more than doubled between 2002 and 2008, from $36.3 million to a little over $74 million. The city’s most recent consolidated annual financial report shows the city with nearly $95 million in unfunded pension liabilities in 2010.

Back in 2002 the city’s pension plan for public safety was 78 percent funded by existing assets, while its non-safety plan was overfunded by $2.5 million; in 2010, the city’s safety plan was 75.4 percent funded and its non-safety plan, 89.1 percent funded.

While Alameda’s city leaders here said they can’t ask current employees or retirees to accept slimmer benefit packages, over the last year all of the city’s employee unions have agreed to allow their members to pay more toward their pensions. Contracts with the city’s non-safety unions, for example, are expected to produce $873,000 in pension and benefit savings over the lives of those contracts, while increased pension contributions from police and firefighters are expected to save the city $578,400 over three years.

All of the city’s non-safety unions have agreed in recent months to discuss adding a “second tier” of retirement benefits for new hires that would increase their retirement age and lower the compensation amount their pensions are based on. And Russo has said he plans to sit down with the city’s public safety unions this summer to ask for additional help in managing the city’s pension costs.

San Jose’s voters signed off on minimum pension benefits for city workers in 1965, the September 2010 auditor’s report said, granting police and firefighters half their final pay at age 55 or upon completion of 20 years’ service and non-safety workers 2 percent of their pay for each of their first 25 years of service and an additional 1 percent for every year they worked after that. But over the years both plans were enhanced dramatically.

San Jose’s public safety workers, like those in Alameda, can retire at 50 with 3 percent of their top year’s pay for every year they worked; allowing safety employees to retire at 50 instead of 55 adds 13 percent to the cost of the city’s safety pensions, while offering 3 percent for each year worked instead of 2.5 percent adds another 17 percent, the report said. (Non-safety employees in both cities get a smaller retirement benefit and a later retirement age.)

Between 1991 and 2010, San Jose’s pension payouts increased sevenfold, the report said, a result of increasing benefits and a growing number of retirees. Between 1998 and 2009, the city’s pension costs nearly doubled, growing from $54 million to $107 million. Annual contributions per safety employee grew from $11,600 to $24,800, and for non-safety employees, from $7,200 to about $12,000, it said.

More generous benefits accounted for much of the cost, the report said: Average annual pension benefits increased 175 percent for safety workers and 150 percent for non-safety workers between 1991 and 2010. Pensions for a half dozen police and fire department retirees who started with the city after 1970 and retired before 2005 were between $32 and $24,249 a year more than they would have been had the benefits in place when they were hired remained in effect. (Average annual payouts as of June 30, 2009 were $68,028 for retired police and firefighters and $34,500 for other retired city workers.)

And the city was paying those costs for a growing number of workers. By June 30, 2009, the city had an estimated $5.4 billion in pension liability – up from $2.1 billion a decade earlier – but only $3.4 billion in assets, the report said. At that point the city had 1.4 active employees paying into the system for every retiree taking benefits; the city’s employee to beneficiary ratio had been 3 to 1 in 1990.

Alameda has 558 current employees enrolled in its two retirement plans and 763 receiving retirement benefits, Assistant City Manager Lisa Goldman said, or 0.73 active employees paying into the system for every retiree taking benefits. (San Jose had 5,400 positions in its budget this year.)

The city’s overly optimistic expectations regarding investment returns caused some of the underfunding of San Jose’s pension system, the report said; the city’s pension system suffered $978.8 million in investment losses between 2007 and 2009, and its investments would need to achieve much higher than average returns in order to correct them.

Even 2009-2010 returns of 15.3 percent for the city’s non-safety pension plan and 13.7 percent for the safety plan – higher than the city’s assumed 8 percent returns – weren’t enough to cure the losses, the report said: That would have required returns of 25 percent.

CalPERS, the state pension fund that manages most cities’ investments, including Alameda’s, saw its investments dive by 30 percent in 2008 when the stock market crashed.

The San Jose report said that city had to cut services, lay off employees and seek pay and other concessions from workers in order to close a projected $118.5 million budget gap for the 2010-2011 fiscal year – $52 million of which the report attributed to higher than anticipated pension costs. (San Jose’s general fund budget for next year is set at about $822 million; Alameda’s proposed budget is just shy of $72 million.)

“San José’s plans are currently underfunded, and if contribution rates were frozen indefinitely at today’s rates, even if investments yielded expected returns, Retirement Services staff estimate that the amount owed in pension obligations would continue to grow at a much faster rate than available plan assets, leading to ever increasing unfunded liabilities over the foreseeable future,” the report said.

Related: City limited in effort to trim pensions

You can link to the city's 2011 consolidated annual financial report here and prior year reports here.


Submitted by frank on Sat, Jun 23, 2012

I just wanted to say that this is a very well done article. There are just too many 'soundbites' coming from both sides. In the end Pension and Health Care Reform must come via the State itself. Cities like Alameda can presently only take a 'bandaid' approach. The reality is though that the representives in Sacramento would rather just kick the can than sponsor reform. This isn't in anyones best interest. PBS News Hour did a piece on what different States are doing to solve their problems last Wednesday.