Q&A: San Jose Mayor Chuck Reed on Pension Reform

Q&A: San Jose Mayor Chuck Reed on Pension Reform

By Carl M. Cannon - October 23, 2013

Chuck Reed, the innovative mayor of San Jose, Calif., has been spearheading efforts by municipalities to come to grips with soaring public employee retirement costs. A Democrat, Reed was elected in 2006, and re-elected overwhelmingly in 2010. Last year, he shepherded passage of a citywide referendum curbing future costs. Although the measure still faces legal challenges from the city’s public employee unions, San Jose’s reforms were hailed nationally as a path forward for the hundreds of cities and counties that are facing severe cutbacks in current services—or even bankruptcy—unless they tackle this issue.

Mayor Reed is keynoting a conference on pensions in New York City on Thursday that is sponsored jointly by the Manhattan Institute and RealClearPolitics. In advance of that event, he consented to an online interview with RCP Washington Bureau Chief Carl M. Cannon.

You’ve been mayor of San Jose, Calif., since 2007. When did it dawn on you that the city had a crisis involving its public employee pension obligations?

I was a city council member when huge problems in San Diego’s retirement plans first came to light, and it made me wonder if something similar could happen here. As I started digging into the details of San Jose’s two retirement plans, I started to realize that the costs of our employee retirement benefits were on an unsustainable path and threatened both our city’s ability to provide services and the long-term solvency of the retirement plans themselves. That’s why I’ve spent a good portion of my time as mayor trying to solve this immensely complex problem.

How does a municipality—or county or state—get to a place where 20 percent of its operating budget goes to supporting people who no longer work, as was the case in San Jose?

The fuse was lit in 1999 when the State of California approved a huge retroactive increase in employee retirement benefits, which was soon adopted by local governments across the state. (For example, many public safety employees can now retire as early as age 50 and collect a pension equaling up to 90 percent of their salary.) At the time, supporters justified these benefits enhancements by stating that the stock market was roaring and investment returns would more than cover the extra costs.

Well, as we all know now, those predictions were dead wrong and the true cost of these really generous benefits continues to stretch the budgets of cities, counties and other government agencies. In addition, as our retirement plans have failed to meet their overly optimistic assumptions, we’ve found ourselves having to pour even more money into the retirement systems to pay off our unfunded liabilities. These fundamental structural problems have been made even more severe due to the market losses that we suffered during of the Great Recession.

Spending this much of your General Fund on retirement benefits causes services to suffer. You’re forced to lay off police officers and firefighters, close libraries and community centers, and watch as our streets and critical infrastructure deteriorate. You’re forced to lay off hard-working employees, implement furloughs, and impose pay freezes (or pay cuts). And you’re left struggling to figure out how to keep providing even the most basic of public services.

Are other cities in the state worse off?

While each city’s situation is unique, almost every city has seen a dramatic increase in retirement costs over the past decade. According to annual reports published by the State Controller, the collective annual pension contribution for California cities grew from $411 million in FY 2000-01 to $1.6 billion in FY 2010-11.

As I mentioned earlier, these escalating costs are impairing most cities’ ability to provide essential services and subjecting many government employees to layoffs, furloughs and even pay cuts. Even worse, rising employee retirement obligations have also played a role in the bankruptcies of Vallejo, Stockton and San Bernardino.

While some cities have been able to absorb these cost increases so far, more bad news is ahead. According to new actuarial rules adopted by CalPERS [the California Public Employees’ Retirement System], to achieve full funding within 30 years, most local governments are projected to see their annual contributions rise by up to 50 percent over the next seven years.

Is this an issue for California, especially? I know of Detroit and Chicago, and other cities with obligations far greater than San Jose’s, but much of the action on pension reform seems to be in California.

There certainly has been a lot of attention on California and that’s what I’m most familiar with. But this is a topic that continually comes up when I talk to other mayors across the country. It seems that almost every mayor is dealing with the impacts of rising pension costs in one form or another.

Conservatives blame this problem on Democrats, saying Democratic city councils, Democratic county supervisors, Democratic mayors, and Democratic legislators are far more willing to curry favor with public employee unions by granting labor contracts that aren’t really sustainable. As a Democrat, do you think that criticism is legitimate?

I think all of our elected leaders – Democrats and Republicans alike – need to accept the blame for the mess we find ourselves in. All too often, it was members of both parties who approved generous retirement benefits without thinking about how it would impact the budget or whether they could be sustained in the long run.

I know that there are certainly some votes that I wish I could take back and I’ll accept my share of the blame. But it does not change the fact that we need to adopt reforms that will allow us to: (1) provide essential services to the public; and (2) ensure our employees and retirees are paid the benefits they have earned.

Conversely, some progressives assert that the corrective being applied to the pension crunch is worse than the problem. Liberal writer Matt Taibbi, for one, has identified the Manhattan Institute—the organization hosting the seminar you are addressing this week —as a stalking horse for hedge fund managers who want to get their fingers in the pension pie. Writing in Rolling Stone magazine, Taibbi says, “This war isn't just about money. Crucially, in ways invisible to most Americans, it's also about blame. In state after state, politicians are … using scare tactics and lavishly funded PR campaigns to cast teachers, firefighters and cops—not bankers—as the budget-devouring boogeymen responsible for the mounting fiscal problems of America's states and cities.”

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Carl M. Cannon is the Washington Bureau Chief for RealClearPolitics. Reach him on Twitter @CarlCannon.

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