The Vote that Could Change Public Pensions
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By Peter Henderson,
Reuters
June 4, 2012

A radical plan to slash public employee pension benefits gets voted on by the residents of Silicon Valley's San Jose on Tuesday - a decision that could set an important precedent for many other cities, not only in California but across the nation.

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The nation's 10th-largest city is also one of the wealthiest, but over the past several years it has cut its municipal workforce by a quarter, laying off cops and firefighters, shuttering libraries and letting street repairs fall by the wayside.

The problem? Mayor Chuck Reed says it's simple: Retiree benefit costs eat up more than a quarter of the city budget - and are growing at a double-digit rate. The solution he is pushing at the ballot box, after city council approval, would slash benefits for workers, increase employee contributions - and almost certainly prompt a precedent-setting legal challenge from the public employee unions.

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"The best metaphor is cancer," said Reed, a Democrat known as more of a technocrat than a firebrand, who is now cast as public enemy No. 1 by public employee unions. "It started a long time ago, it goes for a long time, and then it becomes life-threatening." It's a challenge other cities in California will soon face. "Our problem is nearly universal in the state," he added. "It's just a question of timing."

Public finance woes are nothing new in California. The state budget deficit stands at an estimated $15.7 billion for next year, requiring further cuts in state services and, if Governor Jerry Brown has his way, higher income and sales taxes. Local governments and school districts have struggled for years to make ends meet.

The pension problem, though, may be the mother of all budget issues - for California, for its cities and counties, and for other states and municipalities across the nation. The main California state retirement systems have a total shortfall in pension-plan funding of close to half a trillion dollars, a Stanford University study estimated. The bill is not due at once, but payments on it grow steadily and can eventually squeeze out even basic services. Public officials like Reed, and academics who have studied the issue, say the day of reckoning is nigh.

San Jose is not the only city making tough choices. In San Diego, voters will also be asked to approve a pension-cutting ballot initiative on Tuesday. In Stockton, city officials, unions and creditors are engaged in a mediation process aimed at avoiding a municipal bankruptcy - and public employee pensions are an achingly large part of the problem.