A debate under way in California could determine the future of pension plans across the country.
The City of San Jose – aka Silicon Valley – has been in court trying to find ways to cut its public-sector pension plan costs.
One of the ways proposed was to cut retirement benefits for current workers.
According to the Calpensions blog, Measure B, which was approved by 70 percent of San Jose voters last year, challenges the concept that pensions promised to state and local government workers are sacrosanct and can’t be changed, that they are a vested right.
Most attempts to reduce pension costs involve cutting the benefits of new hires while saving the pensions of current workers.
San Jose has had budget deficits of $670 million over the last decade and saw its retirement costs balloon from $73 million to $245 million. Retirement costs now make up 20 percent of the city general fund, which is diverting dollars from much-needed services like police and fire. That cost is expected to reach 25 percent by 2017.
According to the blog, the city contributes 57.7 percent of pay for police and fire pensions and retiree health care, while employees contribute 11.16 percent of pay. Next year the city is projected to contribute 70.55 percent and employees 11.67 percent.
The San Jose pension reform could save the city $20 million this year by eliminating a bonus 13th check to retirees when investment earnings exceed projections and switching to a lower-cost retiree health plan. In essence, it would cut future pension earnings but wouldn’t cut earnings already accrued.
The city could save even more if current workers were given an option: to earn a lower pension for future service or to contribute up to an additional 16 percent of pay to continue earning the previous pension amount.
A provision in the city’s charter gives the council the ability to amend or change its retirement plan provisions at any time. If the court disagrees with the option, the rule authorizes the city to cut pay by 16 percent.
Any decision is likely to be appealed.