San Jose responds to grand jury report on $3.4B in unfunded pension liabilities

Growing retirement benefits and poor investment returns are at the heart of San Jose’s ballooning pension obligations — which are projected to drain an average of $340 million a year from the general fund over the next decade — according to a Santa Clara County Civil Grand Jury investigation the City Council discussed Tuesday.

The council unanimously approved a report that accepted some of the jurors’ findings and recommendations, but disputed others. District 10 Councilmember Johnny Khamis raised the question of merging the city’s two retirement boards — a cost-savings measure recommended by the grand jury. Khamis said running two boards is “expensive” and merging them would “eliminate duplication.” The city agreed to look into merging the two boards.

The city’s Director of Employee Relations and Human Resources and the chairmen of its two pension boards pushed back against some of the grand jury’s recommendations even as they acknowledged the scope of the problem.

“The growth in the city’s unfunded liabilities has many causes, including the financial downturn after 2008,” according to the grand jury report. “But the primary cause is a massive increase in retirement benefits.”

Specifically, the report calls out the cost-of-living adjustments (COLA) many retirees receive as being especially “generous” and recommends the city “examine ways in which the 3% COLA liability can be reduced fairly as many other public entities have done by considering options such as reducing COLAs in exchange for lump sum buyouts.”

Mayor Sam Liccardo on Tuesday expressed surprise at that recommendation, saying it was “odd” for jurors to suggest the city look at re-negotiating cost-of-living increases with employee unions “since the court said that’s illegal.”

The grand jury wanted the city to complete the examination and make it public by June 2020. But staff is recommending the City Council not attempt to reduce cost-of-living adjustments.

“The city disagrees with this recommendation,” according to the staff memo prepared by Director of Employee Relations Jennifer Schembri. “The city is currently in a closed retirement Memorandum of Agreement (MOA) with its bargaining units through June 30, 2025… Tier 1 retirement benefits are subject to the terms of the MOA until it expires. This includes the 3% COLA.”

The findings of the grand jury were also disputed by Matt Loesch, chairman of San Jose’s Federated City Employees Retirement board and Vincent Sunzeri, chairman of the city’s Police and Fire Department Retirement board — including its recommendations that the city consider merging the boards and diversifying its membership to include professions outside of finance and investing. But Loesh and Sunzeri took particular exception to the notion that their investments were not performing up to snuff.

“Moving the city of San Jose mature pension plan to a more risk-averse investment portfolio has contributed, in part, to poor investment returns,” the grand jury found.

“The Boards respectfully disagree with this finding,” according to the memo from the chairmen, adding they “have considered the risk/return balance of their portfolios in the context of their benefit payment obligations and cash flow needs, the risk tolerances of the Boards and the city plan sponsor, and all other factors affecting the diversification of their respective portfolios. The systems have not experienced ‘poor investment returns’ relative to their risk/return expectations.”

As originally conceived, the city’s pension funds were meant to be self-funding. Nevertheless, jurors estimate taxpayers will pay almost 80% of more than $4 billion over the next decade because the investment funds won’t raise enough to cover the obligations.

“Based on estimated pension payouts and the mandated annual COLA increases,” according to the grand jury report, “San Jose retirement plans in the next 10 years will need to payout approximately $4.3 billion.”

But according to the grand jury’s calculations, the pension funds will generate less than a billion dollars between 2020 and 2029 — leaving the city to pay for the rest, approximately $3.4 billion from the general fund.

“A basic shortfall results as the city continues to contribute additional funds to cover costs and amortization of the unfunded liabilities,” the grand jury wrote. “These sums are large and… take funding away from other essential and desired services the city otherwise could provide its citizens.”

Schembri acknowledged the truth in the grand jury’s finding that the city’s pension obligations were “an ever increasing burden on the city’s general fund,” saying the city has taken steps to reign in the rising cost of retirement benefits.

San Jose became a poster child for its landmark pension reform efforts after former Mayor Chuck Reed in 2012 authored a controversial measure to trim pensions for new and existing employees. Voters overwhelmingly approved the measure with nearly 70% of the vote. A war with city employees and labor unions ensued, many suing the city in a long drawn-out legal battle.

Though he supported Reed’s pension reform plan as a councilman, Mayor Sam Liccardo quickly settled the litigation with labor unions after taking office by reaching a compromise that curbed future benefits, but did not touch existing retirement plans.

“San Jose is committed to providing its residents and customers with essential services, and has taken several steps to address the high cost of retirement benefits for city employees,” Schembri wrote in a memo. “This includes the Alternative Pension Reform Framework Agreements with the city’s eleven bargaining units, which contained several cost saving measures and protections against further benefit enhancements…”

Schembri also agreed with the grand jury’s recommendation that the city work with the eleven unions representing its employees on other ways to reduce the cost of benefits to the taxpayer. Schembri added that San Jose has also established a working group of stakeholders, set to convene for the first time in October, to examine ways to reduce the cost to the city on an ongoing basis.

“This Working Group has a goal of convening key stakeholders to address the current challenges of the city’s retirement systems in a collaborative and transparent manner, and making recommendations for City Council consideration,” she wrote.

Contact Adam F. Hutton at [email protected] or follow @adamfhutton on Twitter.