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City workers oppose San Jose’s pension reform plans

By David Ruiz | 22 Feb 2012

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The San Jose City Hall is the site of much of the city's debate about pension reform for municipal employees. (Photo: David Ruiz / Peninsula Press)

Tom Saggau doesn’t want to see the number of San Jose public servants decrease as a side effect of poor negotiating.

Pension reform is a large concern in San Jose, as it is in many cities across America. A report released by Joe Nation and the Stanford Institute for Economic Policy Research this December reveals a dangerous risk for the city. It says San Jose may not be able to fulfill its public employees’ pension benefits when they retire. The institute wants to inform economic policy in the United States and other countries via research and analysis. The report states that San Jose, over the next 16 years, has only an 18 percent chance of covering the deficit that underfunded public pensions created.

Saggau doubts the report’s validity.

Saggau, half of Saggau-DeRollo LLC, says he prides himself that, as a lobbyist, his firm relies more on facts and analysis than personal relationships with influential policymakers. Saggau is representing the San Jose Firefighters Local 230 and the International Federation of Professional and Technical Engineers, a group representing public sector engineers in the Bay Area. Saggau offers consultation to these and other organizations.

“If a lobbyist says ‘trust me,’ that’s a red flag,” he said. Saggau himself is registered as a lobbyist in San Jose. He described how his firm “will never send a letter, email, or position paper that is not sourced and footnoted. We just don’t do it.” Saggau said that accurate  data can open debate.

Nation’s report lacks this proper data, Saggau said. “Joe is saying that rate of returns should be something they aren’t; that doesn’t help anybody. We have a real rate of return, let’s use that instead; let’s work with the facts.” Nation’s report assumes a 6.2 percent rate of return on the largest pension funds in California.

Saggau said Nation’s report exaggerates the crisis of pension reform. “We look at numbers like that, and we can take it one step further—let’s assume a rate of only 2 percent,” he said, “and suddenly it looks as though the sky is falling.”

Nation argues that there are no errors in the report and that he is “confident we got it right,” referring to himself and two current graduate students who are enrolled in master’s programs for mathematics and physics at Stanford University.

Saggau and Nation are both arguing in favor of pension reform; it’s the way they’re arguing that differs.

The problem with pension reform is that, in a way, it can’t happen. California’s Constitution prohibits any change to a public employee’s pension plan after initial hiring. The United States Constitution contains one clause, now referred to as the “Contracts Clause,” stating “no state shall pass any law impairing the obligation of contracts.” In a report released last July, the California Public Employees Retirement System interpreted the clause to mean “promised benefits may be increased during employment, but not decreased, absent the employees’ consent.”

If someone is hired with a pension plan, he keeps it until he retires. Increasingly, public employees’ accounts earn  a rate of return that doesn’t fully fund the expected pension, forcing the city to cover the deficit. With a larger deficit, the city loses funding for its public services — from an efficient planning commission to ambulances needed in the middle of the night. San Jose is currently facing this problem, and Saggau is trying to find a way to fix it.

In December, the San Jose City Council voted to place a pension-reform ballot measure before the voters during June’s presidential primary. The current options provided on the measure violate the Contracts Clause, also referred to as the Vested Rights Doctrine, said Robert Sapien, president of the San Jose Firefighters Local 230. “The problem with San Jose is that, rather than negotiate, the debate is highly politicized,” Sapien said. “There are a number of unlawful reforms, asking for contract abandonment and removal of collective bargaining.” The ballot initiative details the Volunteer Election Program, an option for San Jose’s current employees. An employee who chooses to sign up for the program “irrevocably relinquishes his or her existing level of retirement benefits and has voluntarily chosen reduced benefits,” the proposal says.

The other option involves pay reductions to fund pension deficits. If the ballot measure passes, after June 24 public employees can expect to pay 5 percent of their pensionable pay to cover unfunded liabilities in the pension fund, with a 5 percent increase every fiscal year until they reach a  25 percent cap.

The ballot offers no other options. Voters must choose one or the other.

Instead of creating new plans and altering current ones, Saggau has a different approach. The solution is simple, he said, explaining a focus on three areas of interest— lowered accrual rates and cost of living combined with a raised age of retirement and an increase in the amount of time one must work before becoming eligible for pension benefits. A cost-of-living index details the average price for living in different areas and can be used to determine pension benefits. A lowered cost of living doesn’t directly alter the pension plan, allowing for change without violation of the Vested Rights Doctrine.

Saggau worries about the “uninformed and uneducated” members of the public who hear the “extraordinary story of the department director making $250,000 that goes and lands another job and pads it to $310,000 and the next thing you know, he’s out on a $200,000 pension—that becomes the poster child and that’s what you see in the news,” he said. “Those cases are more exciting than Joe and Joanne Six-Pack that are trudging into work every morning making $65,000, retiring with 60 percent of that. It’s not a king’s ransom,” he said. He likened negative press on public unions to former President Ronald Reagan’s oft-spoken “welfare queen,” a term Reagan used to describe individuals committing welfare fraud. Reagan popularized the term in his 1976 presidential campaign which involved a hypothetical woman with “eighty names, thirty addresses, twelve Social Security Cards” and a “tax-free cash income over $150,000.”

According to a Field Poll conducted with UC Berkeley in March 2011, 42 percent of registered California voters found public employee pension benefits to be “too generous.” Moving past current public opinion is the most difficult part, Saggau said. “We know this will have repercussions on a regional, state-wide and potentially national basis.”

The city has until March 6 to finalize a ballot. Negotiations between the city and labor unions can change the ballot proposal, but the two sides must finalize plans by March 6 to meet the deadline for the June ballot.

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