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San Diego and San Jose Lead Way in Pension Cuts

While the eyes of the nation focused on Wisconsin, where Gov. Scott Walker brushed back a recall attempt by critics of his move to strip most public-sector unions of their collective bargaining rights, a pair of less noticed local elections Tuesday in California could have more immediate ramifications for struggling state and local governments and for organized labor.

Protestors carry signs as they demonstrate inside the Wisconsin State Capitol on March 4, 2011 in Madison,Wisconsin.
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Protestors carry signs as they demonstrate inside the Wisconsin State Capitol on March 4, 2011 in Madison,Wisconsin.

Residents of San Diego and San Jose voted overwhelmingly to cut the pension benefits they give city workers. And they did so in a way governments traditionally avoid: moving to cut not just the benefits of future hires, but also those of current city workers, whose pensions generally have much stronger legal protections than those of private-sector workers.

Unions in both cities vowed to block the cuts in court, but the ease with which the measures passed is expected to embolden other financially strained cities and states to follow their lead.

It is not just Republicans seeking savings. Mayor Rahm Emanuel of Chicago, a Democrat, has been seeking to suspend the annual automatic cost-of-living adjustments for retirees.

In Illinois, which has the nation’s largest unfunded pension liability, Gov. Pat Quinn, a Democrat, has been struggling to reach a deal with lawmakers that would cut the pensions of current workers without running afoul of the pension protections in the state’s Constitution. And in Providence, R.I., unions are being asked to ratify a tentative deal their leaders made last month with Mayor Angel Taveras that would suspend the cost-of-living adjustments for retired city workers.

“I would say that the San Jose vote is a harbinger of things to come,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College, who was on President Bill Clinton’s Council of Economic Advisers. She said governments need more flexibility to solve their pension funding problems.

The wide margins of passage for the pension-cutting measures — San Diego’s with two-thirds of the vote, and San Jose’s with 70 percent — underscored the extent to which both cities have struggled to pay for basic services. At one point San Diego — burdened with high pension costs for years after its pension disclosures ran afoul of the Securities and Exchange Commission and the city lost access to the public bond markets — kept a rotating group of firehouses closed each day to save money.

Per capita GDP: $68,141San Jose is California’s third-largest city, but it has the state’s highest per-capita GDP. Located in the southern portion of the San Francisco Bay, the city was at the epicenter of the technology boom in the 1990s, and today "The Capital of Silicon Valley" is still its The city is close to bursting with technology companies. Adobe and Cisco Systems are headquartered there, and Hewlett-Packard, IBM and TiVo have major offices in the city. Kaiser Permanente and eBay are am
Bernd Geh | Photographer's Choice | Getty Images
Per capita GDP: $68,141San Jose is California’s third-largest city, but it has the state’s highest per-capita GDP. Located in the southern portion of the San Francisco Bay, the city was at the epicenter of the technology boom in the 1990s, and today "The Capital of Silicon Valley" is still its The city is close to bursting with technology companies. Adobe and Cisco Systems are headquartered there, and Hewlett-Packard, IBM and TiVo have major offices in the city. Kaiser Permanente and eBay are am

San Jose could not afford to open four new libraries it had built, and laid off police officers. And some voters grew resentful of the benefits given government workers — police officers and firefighters in San Jose could retire after 30 years with pensions worth 90 percent of their salaries — while private-sector pensions were growing rarer.

Many states and municipalities are struggling with rising pension costs. In many cases benefits were set when the stock market was booming and investments seemed to deliver nothing but gains. It was widely assumed at the time that investment returns would cover most of the cost of people’s pensions.

Now, though, the expected investment gains have fallen far short, and municipalities everywhere must make up the missing money, sometimes by raising taxes, sometimes by cutting government services. Laws and court precedents in many states have long been interpreted as saying that public workers’ pensions cannot be reduced. The new pension cuts passed in San Jose and San Diego may test that.

The union representing San Jose police officers filed a lawsuit in Superior Court on Wednesday seeking to block the cuts, arguing that they are illegal under California law and that they violated the vested rights their members have to their pensions. “I think there’s a clear sense by the taxpayers that they want costs down, but it’s a question of how you do that,” Jim Unland, the president of the union, the San Jose Police Officers’ Association, said in an interview, adding that he would have preferred a negotiated agreement to cut costs.

But city officials said they expected to prevail in court, and filed their own motion in federal court seeking a declaration that the measure is constitutional. The measure gives city workers an option: They can keep their current pension, as long as they agree to contribute more of their salaries — up to 16 percent — to the pension fund, or they can enter a less generous pension plan with a higher retirement age, benefits that accrue more slowly and smaller cost-of-living adjustments. Future hires would be put into a plan that costs even less, and would be required to contribute up to half of its cost.

Mayor Chuck Reed of San Jose, a Democrat, said the pension cuts were needed to restore police positions that were eliminated and to reopen firehouses that were closed on certain days, and so the city could afford to open the four closed libraries. He added that the changes were needed to make sure there would be enough money to pay retirees their benefits, so they did not end up like the retirees of Central Falls, R.I., whose benefits were cut when the city went bankrupt.

He said he expected other cities to follow San Jose’s lead. “I think it’s clear that if you present the facts to the voters, they’re going to be there in support of pension reform,” Mr. Reed said.

Gov. Jerry Brown of California, a Democrat who has been pushing his own measures to reduce pension costs, said the vote in San Jose sent “a very powerful signal that pension reform is imperative,” The San Francisco Chronicle reported.

Some public sector union officials, reeling from their losses in the Wisconsin vote and the pension measures in San Diego and San Jose, said they needed to do more to educate the public about pensions and the nature of deferred compensation. They worried that some public workers would retire without enough money to support themselves.

Some saw a pattern. “It isn’t lost on us that the one commonality in Wisconsin, San Diego and San Jose is that we were considerably outspent,” said Steven Kreisberg, the director of collective bargaining at the American Federation of State, County and Municipal Employees in Washington. “You have politicians conspiring with corporations to take away pensions from workers.”

San Diego’s plan would require future hires to enroll in a defined-contribution plan, similar to a 401(k) plan. In the future, public employees will be responsible for investing their own retirement money, and if their investments fail, the city’s taxpayers will not have to step in. The city’s current workers will see a freeze in the amount of their pay that will be used to calculate pension benefits, which the city estimates will save it $1 billion over the next 30 years — savings that unions say are overstated but that some critics say will not go far enough.

Ian Lovett contributed reporting.

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