Opening Remarks Moderator R. Kinney Poynter Executive Director NASACT Speaker Sharon Erickson City Auditor City of San Jose Speaker Eduardo Luna City Auditor City of San Diego

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Pension Sustainability in San Jose ALGA webinar February 2013 Based on a Report from the City Auditor Issued September 2010 3

Did costs really skyrocket in San Jose? 4

Benefit Payments Grew Ten Fold Over 20 Years Audit of Pension Sustainability

City and Employee Contributions Up Significantly Over the Past Decade Audit of Pension Sustainability

Pension Benefit Payments Have Exceeded Contributions Since 2001 Audit of Pension Sustainability

Pension Funded Ratios Have Fallen Audit of Pension Sustainability

As of June 30, 2012 $4.2 billion in assets (market value) Most Current Estimate of San Jose’s Pension Liability Is $6.3 Billion As of June 30, 2012 $4.2 billion in assets (market value) $2 billion unfunded liability (market value) In addition, a nearly $2 billion unfunded retiree healthcare liability

The City’s Contribution Rates for Pension and Retiree Healthcare Increased Dramatically Audit of Pension Sustainability

What happened? 11

Retirement Plans’ Investment Gains and Losses No Guarantees that Even a Fully Funded Plan will Stay That Way Retirement Plans’ Investment Gains and Losses Audit of Pension Sustainability

Retroactive pension benefit enhancements The Liability Can Grow Retroactive pension benefit enhancements Longer lives, earlier and more retirements Changes to the assumed investment rate of return Audit of Pension Sustainability

Declining Ratio of Employees to Retirees and Beneficiaries Creates a Risk of Even Higher Future Contribution Rates Audit of Pension Sustainability

What is the impact of those cost increases? 15

FY 2010-11 budget deficit of $118 million Rising Retirement Costs Threaten the City’s Ability to Maintain Service Levels FY 2010-11 budget deficit of $118 million About $52 million attributable to retirement costs Deficit closed with cuts to services, layoffs, pay and other employee concessions FY 2011-12 budget deficit of $115 million About $61 million attributable to retirement costs Deficit closed with additional cuts to services, layoffs, additional pay and other employee concessions FY 2012-13 budget $9 million surplus Budget forecasts show deficits for next two years

Library staffing down 25% Parks and recreation staffing down 47% Significant Reductions to City Services Fire staffing down 11% Police staffing down 20% Library staffing down 25% Parks and recreation staffing down 47% Inability to open and operate new library facilities Reduction in the days and hours of operation in libraries and community centers

How is San Jose Addressing the Issue of Pension Reform? 18

Pursue one or a combination of pension cost-containment strategies: Audit Recommendations (September 2010) Explore prohibiting pension benefit enhancements without voter approval, and retroactive pension benefit enhancements that create unfunded liabilities Pursue one or a combination of pension cost-containment strategies: Additional cost sharing Eliminating or limiting retiree bonus checks Negotiate prospective changes for existing employees Establish a 2nd tier for new employees Consider joining the state plan to reduce administrative costs Audit of Pension Sustainability

Propose ongoing budget for actuarial services Audit Recommendations (continued) Actuarial audits every five years to ensure reasonableness of assumptions Propose ongoing budget for actuarial services Provide annual updates to the City Council on the status of the plans and forecasts of pension costs Distribute annual summary of the plans’ financial condition to all plan members Audit of Pension Sustainability

Today – Most provisions of Measure B pending Pension Reform Timeline November 2010 – Voters overwhelmingly pass Measure W allowing establishment of 2nd tier May 2011 – City Council approved Fiscal Reform Plan (goal to contain retirement costs and halt service reductions) December 2011 – City Council considered but did not declare a fiscal and service level emergency June 2012 – Voters overwhelmingly pass Measure B amending pension plans September 2012 – 2nd tier for new non-sworn employees established (arbitration for sworn) Today – Most provisions of Measure B pending

For new employees, a 2nd tier pension Key Components of Pension Reform For new employees, a 2nd tier pension For current employees, additional cost sharing or opt-in to revised plan Lower cost retiree healthcare plans Tighter limits on disability retirements

Conclusion San Jose has experienced dramatic increases in retirement costs Measure B changes future benefit accruals, but implementation of most provisions pending $2 billion unfunded liability for pension benefits already earned Plus $2 billion unfunded retiree healthcare liability Meanwhile, costs are outpacing revenues, and the City’s ability to maintain service levels is threatened

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A model for other cities? Association of Local Government Auditors Update on San Diego Pension Situation A model for other cities? Association of Local Government Auditors February 2013

Outline Why pension reform in San Diego? Ahead of the curve How much do we still owe? Proposition B After Prop B passed

Documented Pension Problems Leadership & Government Failures Why Pension Reform in San Diego? Documented Pension Problems Leadership & Government Failures Enhanced Benefits

Ahead of the Curve After SEC Investigation/Actions Major reforms to government structure and pension system

How Much Does San Diego Owe? Billions

Funding Ratio

two main parts with many nuances Proposition B: two main parts with many nuances 401 K for all new hires except police “City’s initial bargaining position in labor negotiation is zero salary increase for the next five years”

Prop B Fiscal Impact Analysis Does not account for 30 % wage disparity resulting from cumulative effect of salary freeze Does not reduce $2.18 B UAL

After Proposition B Passed Litigation and more litigation Interim 401k deal reached FY 2014 Annual Required Contribution is $275.4 million (compared to $231.1 million in FY 2013)

Unintended Consequences Higher staffing costs? Turnover? Will other municipalities follow?

Questions? Moderator R. Kinney Poynter Executive Director NASACT Speaker Sharon Erickson City Auditor City of San Jose Speaker Eduardo Luna City Auditor City of San Diego

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