1. 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

2. Intentionally Blank

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

4. Did costs really skyrocket in San Jose?4

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

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

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

8. Pension Funded Ratios Have Fallen
Audit of Pension Sustainability

9. 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

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

11. What happened? 11

12. 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

13. 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

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

15. What is the impact of those cost increases?15

16. FY 2010-11 budget deficit of $118 million
Rising Retirement Costs Threaten the City’s Ability to
Maintain Service Levels
FY 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 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 budget $9 million surplus
Budget forecasts show deficits for next two years

17. 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

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

19. 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

20. 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

21. 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

22. 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

23. 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

24. Intentionally Blank

25. 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

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

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

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

29. How Much Does San Diego Owe?
Billions

30. Funding Ratio

31. 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”

32. 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

33. 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)

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

35. 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

36. Intentionally Blank