Local Measures – June 2012

Santa Clara County & San Jose

Measure A – Amends County Charter to Allow Flexibility in Jail Staffing

Recommendation: Strong Yes

This seems like a common sense measure aimed at allowing the County Supervisors to both comply with changing legal regulations relating to jail staffing and promote efficiency.  Santa Clara previously staffed jails using less expensive non-law enforcement officers.  However, the law changed prohibiting that practice, so currently law enforcement staff supervise the non-law enforcement staff.  This amendment allows the Supervisors flexibility in how the jails are staffed.  There is no opposition to this measure.

Measure B – Amends San Jose City Charter to Reduce Public Employee Benefits

Recommendation:  Strong Yes

The present system:  Unlike most private employers, the majority of whom long ago moved to 401K systems that do not create a future expense burden on the employer (by shifting the risk of future benefits to the employee), San Jose provides its employees with a “pension” retirement system.  While a 401K provides a pool of money dependent upon the individual investor’s returns, a pension guarantees a continued stream of future payouts usually a percentage of the employee’s working salary (a liability that the employer must at some point fund).  The City Charter requires the city and its employees to contribute to the employee’s defined benefit program (a type of retirement benefit) at a ratio of 8 (by the city) to 3 (by the employee).  The city also makes contribution to fund “unfunded liabilities” that result from future benefits that are not covered by the contributions.

In 2010 a Civil Grand Jury was assembled to investigate the cost of employee benefits for all 15 cities in Santa Clara County.  The Grand Jury determined that immediate action was needed to forestall serious financial problems.  For a detailed discussion of the benefits system as well as the numerous recommendations made by the Grand Jury, see its report here:

The Problem:  The City of San Jose, like many other governments that still offer pensions, has for several years promised its employees future payments (which are increased over time) without really putting in place a plan to pay for those benefits.  Since at least the 1990s, San Jose has set aside less money for its pension funds than will be needed to cover employee retirement costs.  A 2010 audit found total pension benefit payments had grown 700% over the last 20 years and that benefits owed exceed contributions.  (For a comprehensive discussion see this Mercury News article).  The same 2010 audit found that the city’s pension fund was $2 billion short and that the deficit would continue to increase absent action by the City.  While San Jose has actually reduced its total employees by 2000 over the last 10 years, and 1200 over the last two years, it is still looking at a pension cost of about $300 million this year (up from $73 million 10 years ago [note we said there were more active city employees on payroll 10 years ago]).  These increases are inherent in the system since the Pension program requires the City to essentially continue to pay salaries (at a slightly reduced rate) in the form of pension benefits whenever an employee retires.  So, as each employee retires and is replaced, the cost to the City increases because it then effectively pays two salaries.  This year, this phenomenon will result in a pension benefit expenditure of about $250 million dollars of the City’s total general revenues of about $700 million.   Similarly, San Jose currently has more former employees collecting pension benefits than are actively employed by the city.  Put another way, the City will pay about 35% of its total income this year to former city employees who no longer provide any services to taxpayers.

The Proposal:  This measure addresses the growing San Jose pension problem differently for new employees verses existing employees.

New employees hired in the future would have a less costly retirement plan, which could combine a 401(k)-type plan and Social Security with a smaller pension that would have higher retirement ages and lower cost-of-living increases.

Existing employees – and this is where the controversy exists – would see reductions in their benefit packages.  The city would increase current workers’ contributions toward their pensions (from 4% up to a maximum of 16% but no more than ½ of the yearly unfunded liability of the pension plan) unless they switch to a cheaper plan for their remaining years on the job. It also would make changes to the city’s disability retirement program by mandating that the disability benefit only by allowed where the employee could not perform work for the city – shockingly a requirement that does not currently exist and which understandably leads to much abuse.  The proposal also would allow the city to suspend cost-of-living raises for current retirees (the automatic raises that increase the employee’s pension benefit over time) if the city declares a fiscal emergency.  The proposal also requires any future change in post-employment benefits to be approved by voters rather than the City Counsel.

The Fight & Our Take:  A fight between Mayor Chuck Reed and the City Employee unions (and broader unions) over this issues has been percolating for 2 years now.  While there were talks between the two camps, and even some changes to this ballot measure as a result of those talks no consensus was reached and the sides remain far apart.  Even before the issue reached voters, two separate lawsuits were filed and ultimately resolved. It is not surprising that unions are fighting this measure with vigor; after all, this is an effort to effectively retroactively re-negotiate their member’s retirement benefits.  That should give voters some pause purely from a “fairness” standpoint.  Generally, if one doesn’t like the deal that has been struck, one doesn’t have the right to back-out after the other side has performed (by providing the work).  Understandably, both sides expect lawsuits on this issue.

The fight has definitely gotten ugly at times, with legitimate criticisms (like an initial reluctance to try to resolve the issue with unions rather than going directly to voters, and repeated overstatement of various figures, and some other not-so-nice tactics).  None of that, in our view, addresses the very real problem we outline above, however.  We find it telling, that despite the slick flyers and pithy soundbites, the “No” campaign has plastered across the city, it has not been able to effectively respond to the most important issue that underlies this measure:  250 million of the cities’ 700 million dollar budget is being consumed by the costs of retired labor and that cost is going to go up dramatically in the coming years.

No reliable calculation or forecast that we have found indicates that is a sustainable scenario for the City – they all plainly state it is not sustainable.

The “No” folks do point out that the City Manager, Deputy City Manager and the Assistant city Manager have combined compensation packages of around $300,000.00 each.  If that isn’t sufficiently offensive, we will pile-on a bit and add that these folks are not even the most highly compensated city employees; that dubious honor goes to seven police and fire officials who earn even higher compensation.  For a complete listing of City salaries see this link  (be patient it is slow to load).  While we would dub these levels of compensation “ Polito-Crazy,” for any local government we don’t see how that addresses the problem of a massive, increasing, unfunded pension liability.  Nevertheless, we will point out that we would love to see Mayor Reed turn his attention to these high salaries with the same tenacity that he has approached the unions about overall pension reform — but realistically we are not holding our breath.

The “No” folks also correctly point out that the unions have already agreed to wage concessions and argue that they can’t afford yet another reduction in overall compensation.  However, a review of the data compiled by the Santa Clara Grand Jury suggests that city employees’ compensation packages have been increasing at far too high a rate:

Increases in median combined wages and benefits for San Jose City Employees:

SJ Non-safety Employee:

  • 2000  $66,264  
  • 2010   $101,043

SJ Police/Fire Employee:

  • 2000 $101,928
  • 2010 $162,604

The Consumer Price Index over the relevant 10 year period rose about 27%, while non-safety employee compensation rose 53% and safety employee compensation rose an astonishing 60%.  In short, the average benefits per full time employees in San Jose far outpaced the economy or inflation.  (Source:  2010 Santa Clara County Grand Jury Report)

Again, however, we feel this argument largely misses the point.  While obviously we would not want our dedicated City employees to suffer needlessly, we agree with the Grand Jury’s conclusion that essentially stated that San Jose (and other cities) simply cannot afford to continue to provide their existing employee compensation packages.  Thus, in an economic and political environment where it is unrealistic and undesirable to substantially raise the City’s revenues (through a substantial tax increase) we believe that Measure B should be approved.

Measure C – Bond & Property Tax Increase To Fund Facilities Improvements to West Valley College

Recommendation:  Weak No

This measure proposes $350,000,000.00 of bonds to be used to build and repair physical infrastructure for local community colleges.  Moneys may not be expended on costs to staff the institutions.  The bond measure will assess an additional new property tax in order to pay for the debt and interest that will be incurred.  If approved, this would be the 19th separate tax (including assessments) that currently appears on property tax bills, over and above the 1% property tax.  According to the official Ballot Tax Statement current estimates are that the tax will total $16.25 per 100,000 of assessed property value or about $120 per home per year (assuming an assessed value of $750K).

The opposition statements for this bond measure come from a former Three-term Trustee for the West Valley Mission Community College District and a former President of the West Valley-Mission Community College District Governing Board.  Both statements provide a litany of fairly detailed criticisms of the College District’s use of the last $240 million of funds approved by taxpayers in 2004.  We have been unable to confirm or refute the allegations but we note that none of the criticism leveled by these former insiders are refuted by the proponents of this measure.  That is a cause for concern for us.

While we note this concern about the allegations of misuse of the last round of funds (and resulting taxes), our analysis does not turn on that issue. Instead, we urge a no vote because, while facilities and infrastructure are generally a good long-term investment that can be a justifiable use of debt (bonds) we do not feel that this investment is the best one in light of the pressures that federal, state, and local budgets are facing.

At Politomuse we expect that based upon the financial state of nearly all government systems from the Federal down to the local, the state of our social security system, and decades of taxpayers using more resources than they paid for (deficit spending while continually reducing taxes), we will be recommending voting in favor of the governor’s tax increase that is anticipated in November, in favor of an increase in the Federal tax structure for upper-income citizens (that we expect to hit early next year), and we expect that we will favor some kind of increased revenue stream in the coming years to save the social security safety-net.  In short, we see a rather long list of “have-to” taxes coming and do not wish to add to that list with a “want-to” tax to help make a particular school’s infrastructure better.  Put another way, there are always “good” reasons to spend money.  Because we have made those decisions “voter” decisions, we feel that we must exercise discretion in increasing those burdens on the citizenry.  In light of the current financial pressures being felt by individuals in our community (which we do not expect will abate in the near term), the anticipated additional tax burdens that we predict in the near term, and the government systems that are in jeopardy because of current financial difficulties, we do not feel that this particular “good” cause is good enough to justify burdening all homeowners with an additional expense at a time when many of those families are already feeling a heavy financial strain.

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