San Jose’s deficit estimate slashed dramatically as pension costs fall

SAN JOSE, CA &#8211 New pension cost projections unveiled Thursday were expected to slash San Jose’s $80 million deficit next year by more than half, easing fears of libraries and community centers closing and prompting Mayor Chuck Reed to call off Tuesday’s scheduled vote on whether to declare a fiscal emergency.

Reed was set to ask the City Council to proclaim the emergency to justify putting a pension measure on the March ballot aimed at trimming retirement benefits for city workers. The mayor said he now wants to push the election to June.

While ostensibly good news, the relief for next year’s budget gap was fraught with politics as it arrived just days before what was to be a key council vote on Reed’s proposed pension reforms. Union leaders crowed that it bolstered their assertion that city leaders were overstating the city’s pension woes to justify the rejection of recent employee concessions as insufficient.

“OK, Mr. Fiscal Emergency Chuck, you were saying the house is burning?” said San Jose Police Officers’ Association President Jim Unland, adding that the mayor would “politically not be happy with this news.”

Reed and City Manager Debra Figone greeted the news with skepticism and some dismay, arguing that the reduction in pension costs appeared to stem from staff cuts, including the layoff of 66 officers last summer. But Reed acknowledged that the reduced deficit could spare the city from having to shutter libraries and community centers next year. He argued, however, that his reform proposal is still needed to close the gap because employee pension offers remain insufficient.

“If the cost goes down, that’s good,” Reed said. “Politically, I don’t think it matters all that much because we haven’t solved the problem. We get a little bit of a reprieve, perhaps. But the problem is retirement costs have jumped dramatically, and this doesn’t fix that.”

Cheiron, the actuarial firm that examines the city’s pension plans, said Thursday it was lowering its projections for police and firefighter pension costs, largely after factoring recent 10 percent pay cuts and staff reductions into the complex formulas that determine the city’s yearly retirement bill.

Similar reductions are expected for other workers’ pension costs. Police and fire pension trustees on Thursday also chose a less-conservative investment-return assumption on pension funds than had been recommended, which will further lower what the city had expected to pay.

Figone said it would be weeks before the city has a better sense how the revisions will affect next year’s projected deficit. But in a memorandum issued late Thursday, she said that Cheiron, which in July had projected police and fire pension costs would rise from $127 million to $160 million next year, now projected they would actually drop to $105 million. That’s a $55 million difference in the city’s expected cost, which Figone said would shrink next year’s budget gap to a more manageable $25 million.

But, Figone added, “Unfortunately, current retirement costs are still unsustainable.”

The new numbers, Unland said, do “not for one second mean that we’re not on board with pension reform.”

Police and firefighters late Thursday offered a revised pension concession that would offer new hires the same retirement benefit in effect in the mid-1990s before a series of enhancements. Current employees could also choose the lower-cost plan as an option.

Reed and his fragile majority on the fractious City Council have been battling the city’s employee unions over personnel costs that have outstripped revenues and driven more than a decade of deficits and staffing reductions. The fiscal problems have worsened since the economic crash in 2008 as pension costs have skyrocketed and tax revenue has sagged. Overall, city staffing is down thousands of positions to levels not seen since the 1980s.

Noting that city pension costs have more than tripled in a decade from $73 million to $245 million because of benefit increases, market losses and flawed assumptions, Reed and his council allies in May called for declaring a fiscal emergency and putting the pension reform measure on the ballot. Reed said even with revised figures he still expects pension costs to approach $400 million in coming years.

The proposed measure, modified over months of talks with employees, would reduce retirement benefits for new hires, require current employees to pay more for their pensions unless they switch into a lower-cost plan, and temporarily suspend cost-of-living raises for retired city workers.

Employee unions and retirees say the mayor’s proposal violates laws protecting public employees from cutbacks to contractually promised pensions. They have offered pension concessions they say would save the city millions of dollars and avoid more city layoffs next year without a costly ballot measure and court fight.

From The San Jose Mercury News.

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