Peter Constant is a tough guy. He spent 14 years on the San Jose Police Force until he suffered a career-ending injury during an undercover operation. In 2006, Constant was elected to the city council and decided to take on reforming the city’s pension system. It soon became a mission that has been as tough as any work he did as a cop on the beat.
Like Social Security, changing public pensions can be a third rail. Touch it and your political career could be over. But Constant knew reform was needed, otherwise the city’s chronic fiscal problems would only get worse. San Jose, the third largest city in California and tenth largest in the country, has had its share of political troubles, from bribery to corruption, but nothing compared to the ticking pension time bomb.
For years, the city struggled with deficits, sometimes as big as $100 million in a $900 million budget. As Constant explains, the city tried to deal with the problem through efficiencies and consolidation, but that wasn’t enough to stop the bleeding. Eventually, they had to cut services. From a workforce of more than 7000 at its peak, the city is now down to less than 5,000 employees. San Jose’s libraries are closed for half the week and 4 newly-built libraries haven’t opened yet. The same goes for a brand new police substation that stands empty; meanwhile hundreds of police officers have been laid off and residents have seen costs for permits and licenses skyrocket while service response has deteriorated badly.
“When we started looking at the root causes for the deficits, the largest single line item that increased every year was the growing pension fund contribution,” says Constant. In 2000, the city contributed $72 million from its general fund into the city’s two pension systems. By 2014-15, costs are expected to hit $319 million, about 24 percent of the general fund. Like so many cities throughout the country, San Jose had over-promised and under-funded its pension system. Having slashed services to the bone, the city was left with the stark choice of bankruptcy or not being able to pay retirees at some point in the future.
Or, the city could figure out how to repair its broken pension system.
Constant dove into the problem head first. He took classes to educate himself, eventually taking courses at the Wharton School of Business at the University of Pennsylvania, University of Chicago and even Stanford Law School. Today, he’s an expert on the subject, and talks to elected officials around the country about the right and wrong ways to reform a public pension system.
Constant worked with Mayor Chuck Reed and other reform-minded council members to craft a solution that dealt with the main stakeholders in the city’s pension system. “Reform had to be done in a way that looked not only at new hires but also current employees, where obligations related to their pensions and health care keep increasing,” says Constant. The changes they decided to make started at the top, were broad-based and include a revamped pension governing board to improve decision making, and a change to the city’s charter that revised “minimum” pension guarantees to a “maximum” that set tight parameters on what could be negotiated, as well as requiring voter approval for all future pension increases.
As for specific changes to the system, the new plan calls for all future non-safety workers to pay half the cost of their pension, which has a payout set at a maximum of 65 percent of their salary and a retirement age of 65 rather than 62. For current employees, the new pension plan will allow them to keep their pension credits, but they must contribute more to continue that benefit or choose a more modest plan for the remaining years on the job. Even retirees face changes. The city council now has the power to reduce cost of living increases during a declared fiscal emergency, and so-called “bonus” pension checks have been discontinued.
Constant says the city put its plan together after careful deliberation and by seeking advice from people “who are not part of the system. That’s crucial because all city employees are part of the pension system. You need to get perspective from outside experts: actuaries, lawyers and economists.”
Not surprisingly, the proposed changes did not sit well with the unions. “We had a series of protracted negotiations, but most of the unions were only willing to talk about [changes for] new employees, and none were interested in speaking about current pension benefits and the unfunded liabilities,” says Constant.
To keep matters as transparent as possible, the city posted all documentation related to the proposals and negotiations on its website. Finally, after negotiating with the unions for two years, the city put the matter before the voters and the plan, known as “Measure B,” passed with 70 percent of the vote on June 5, 2012. (Besides San Jose, voters in San Diego also approved major pension reform, setting a new precedent that has gained national attention.)
The city unions promptly filed suit, and in anticipation, the city set a grace period of nearly a year to allow time for a court decision before the changes take effect. The unions have taken the view that “pensions promised government employees…are a ‘vested right,’ protected by contract law, that can be cut only if a benefit of equal value is provided,” according to Ed Mendel, a former reporter who writes the blog, Calpensions.
For Constant, the price of victory at the ballot box was not cheap. Some friends no longer talk to him, but he believes the cost was worth it. “My goal was to make sure the city of San Jose remains solvent,” he says. “While some workers didn’t think they should be part of the equation, my goal was to make sure that someone who commits 40 years of their career to public service would have a pension when they needed it the most.”
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