Advancing a Free Society

Does San Jose Know the Way to Pension Reform?

Wednesday, May 25, 2011

Under normal circumstances, the closest Wisconsin comes to California is a January trip to Pasadena and the Rose Bowl. So what, then, was a Wisconsin state senator doing in San Jose on Tuesday?

The answer: it has to do with the politics of public-employee pension reform, in which California may blossom as a key national player.

That Wisconsin senator, Democrat Spencer Coggs, traveled west to badger the city’s mayor, Chuck Reed, who’s called for a “fiscal emergency” declaration to help solve the budget woes plaguing San Jose, California’s third-largest and America’s tenth-largest city. That declaration will or won’t happen depending on a June 21 city council vote.

Last week, Reed unveiled this budget fix: amend the city’s charter to limit retirement benefits and require voter approval of future increases in retirement benefits. Naturally, that angered the South Bay chapter of the AFL-CIO. Thus the labor-rally cameo by Coggs, one of the renegade Democrats who fled his state earlier this year in an effort to stop Wisconsin Gov. Scott Walker from stripping that state’s government unions of collective-bargaining rights.

Here’s why Reed sees the need for urgency. He claims that, without reform, San Jose’s pension costs will double in five years, devouring more and more of the city’s budget each year and forcing San Jose to eventually reduce its workforce to just one-third its current size.

And he’s not joking.

San Jose has billions of dollars in unfunded liabilities for retirement benefits, hyper-inflating the city's annual retirement costs from $63 million in 2000 to $250 million in 2011. By 2016, these costs are projected to reach $400 million and could jump to $650 million if actuarial assumptions are adjusted to reflect modern conditions. Growing retirement costs make up about half of the budget deficit for the upcoming fiscal year.

Still, those gloomy numbers haven’t dissuaded Big Labor from going after Reed (in part for this, but also because Reed won the office by defeating labor’s pet candidate, and made this kind of fiscal reform a lead priority).

And, in doing so, California becomes a player in the national debate. Here’s why:

  1. A Democratic South Bay Assemblyman has asked California State Attorney General Kamala Harris to investigate whether Reed and San Jose’s city council have the authority to declare a fiscal emergency to limit retirement benefits. Harris has her eye on a high office; she may complicate matters for reform-minded mayors. And, if she presses ahead to curry favor with a vital Democratic constituency, other politically opportunistic Democratic a.g.’s may follow her lead.
  2. On the same day of the San Jose labor protest, San Francisco Mayor Ed Lee and six supervisors introduced a plan that caps pension benefits, raises retirement age and requires S.F. city workers to pay more into their system. We’ll see how San Francisco’s fabled quirkiness stacks up against the cold, hard fiscal reality of that city’s $300 million deficit.
  3. Pension reform will appear on the ballot the next time California holds a statewide election – the variable there being whether Gov. Jerry Brown can orchestrate a special election to solve the state’s budget impasse before 2012’s regularly scheduled votes. Does Big Labor, on the defensive this year, choose California as its showdown state? Does President Obama, who also stands to benefit from a rejuvenated labor movement, come out to a state where he’s still quite popular (more so than in swing states) and stand behind the union label?
  4. If pension reform succeeds in San Jose and San Jose, does it sweep its way across California? A Stanford University study released last November placed the unfunded liability for all of California’s local independent systems at $175 million. That tells you that the two Bay Area cities aren’t in this alone – and the showdown in San Jose may be just the first act in a prolonged drama.

(photo credit: The Loopweaver)