Sunday, December 1, 2013

The Epicenter of Silicon Valley is Booming, Except for....

the government.

Allysia Finley writes for WSJ:
San Jose, Calif., was the richest major city in the country last year, according to the U.S. Census Bureau's survey of median household incomes. More than 100 tech-related firms including Adobe Systems, Cisco, PayPal and eBay are based in the self-proclaimed capital of Silicon Valley.

Yet in Mayor Chuck Reed's view from the 18th floor of city hall, San Jose in recent years has been dead broke and slouching toward bankruptcy, propelled by ruinous public-pension obligations. Over the past decade, he says, the city has shed 25% of its workforce, including 20% of its police department, to cover soaring retirement costs.

Since his election in 2006, Mr. Reed has been that rare creature, a Democrat in a liberal bastion who is nonetheless focused on salvaging government finances while inviting the wrath of public unions and their political allies. The city's budget problems, he says, "have made it impossible to do many of the things that I would have liked to have done as mayor."

Mr. Reed points to a bar graph showing how the city's pension obligations soared to $245 million from $71 million in 2001. The average San Jose police officer last year earned $203,211 in total compensation—more than many software engineers in Silicon Valley. The city is spending $45,263 each year per worker on pensions. Mr. Reed notes that San Jose has boosted retirement benefits several times over the past decade. Police officers can retire at age 50 with up to 90% of their final pay.

Last year, Mr. Reed piloted an innovative approach to fixing pensions that involves curbing future benefits for current workers. He plans to take the approach statewide with a ballot referendum next year that may throw a lifeline to other struggling California cities, like Fresno, Oakland and Desert Hot Springs. But he faces a more immediate hurdle at home: The public unions are suing him. "Nothing important happens without litigation in California," he quips.

The referendum is a last hurrah for Mr. Reed, who is term-limited out of office next year and has spent most of his 65 years in public service.[...]

In 2000, Mr. Reed was elected to the San Jose City Council with "about 200 items on my to-do list. The highest priority were items like building parks in areas that didn't have parks," he says, noting that "pension costs never crossed my mind." He frequently knocked heads with then-Mayor Ron Gonzales. For instance, he opposed the mayor's idea to use eminent domain in 2003 to take over and redevelop the Tropicana Shopping Center. He also opposed a $343 million city hall building, which opened in 2005, as an unaffordable extravagance.

With Mr. Gonzales term-limited, Mr. Reed ran for and won the top job—along with a ticking bomb of pensions obligations. It took several years, and plenty of fruitless negotiations, before he finally confronted the city's unions. In June 2012, Mr. Reed quarterbacked a city ballot initiative to limit pensions for new hires and scale back future benefits for existing workers. He says merely reducing new workers' benefits, as many other cities and states have done, wouldn't have achieved meaningful enough savings.

Mr. Reed's initiative gave current workers a choice between paying up to 16% more of their salary for benefits—which would amount to about 27% of a police officer's pay—or accepting lower future benefits. Giving workers a choice, the mayor says, was intended to circumvent state court decisions that protect workers' "vested right" to their pensions under the state constitution's contracts clause—meaning that their benefits after being hired "can only go up and not down."

Mr. Reed's pension initiative enjoyed the support of a majority of the San Jose City Council, including six Democrats. It also got a big boost from the Bay Area Council, whose steering committee includes the chief executives of Virgin America, the San Francisco Giants and 49ers, Safeway, Webcor and the San Francisco Federal Reserve.

Businesses don't often publicly wade into such controversies because they don't want to alienate customers or risk retribution. But Bay Area companies saw how retirement costs were draining the San Jose budget, threatening public safety and forestalling important public works. Driving a Tesla over pot-holed roads is no fun. The initiative passed with nearly 70% support.

San Jose's public unions sued the city almost immediately for violating their pension rights, and a state court is expected to rule in the next few weeks. Mr. Reed says he's confident the reforms will be upheld since San Jose, as a charter city, has plenary authority under the state constitution to modify compensation. The city also has "an ordinance that says we can make them pay more" to their pensions and "we've negotiated past contracts with the unions in which they have paid more."

Yet it could take a few years before the state Supreme Court issues a final ruling, and other cities now going broke from retirement costs can't afford to wait. As Mr. Reed notes, asking employees to pay more for pensions "is only an interim solution that gives you a little bit of relief for a little while because the real problem is these benefits are too expensive."
Read the rest here. 

1 comment:

  1. "The highest priority were items like building parks in areas that didn't have parks," he says, noting that "pension costs never crossed my mind." Government calculation in a nutshell.