Pensions, Perpetuity, and Personal Responsibility

Judy Lloyd
President of Altamont Strategies

On Tuesday, January 24th, council members in the City of San Jose will decide if they wish to curb their own lifetime benefits and those of future council members to reduce the city’s pension obligations.

A proposal offered by San Jose Councilman Pete Constant, a former San Jose police officer, suggests elimination or amendment of the city’s defined benefit system under CalPERS. His plan could pave the way for other municipalities to curb their pensions to infinity programs if they choose to act.

The main premise of the proposal, according to Constant, is based on his belief that people in a four to eight year job should not receive lifetime pensions.  Council Members in San Jose are term limited to eight years in office.  Constant has served on the City Council since 2006.

Constant decided to take a look at the system and what could be done to remedy unfunded liabilities now to prevent fiscal catastrophe later.

Constant analyzed the pension benefits he and his colleagues receive.  His study revealed a system that encourages lifelong career employees who get bloated pensions to eternity.  Due to the term limits placed on Council Members in San Jose, many serve and finish before they’re 55.  At age 55, they are allowed to collect their pensions, a benefit that has only been provided since 1998 for the ten retired elected officials and nine current ones.

“With budgets the way they are and rising pension costs, it really makes no sense at all for a job you’re in for four to eight years to get a lifetime pension,” said Constant. “Right now, there is not enough money in the system to fund people coming out of the system and we have to fix that.  We already have over $400,000 in unfunded pension liabilities since about 1998 which will only grow over time.  By July 1, 2012, the City of San Jose will have a $25 million deficit.  We need to make some tough, responsible choices.”

Constant is a great role model as a former police officer, taxpayer advocate, and believer in a citizen legislature where public servants serve their term and move on.

“Sometimes people are in public service their entire adult career.  They never work in a private sector job so they may not be as aware as they should be of how 401(k) defined contribution plans and other retirement plans work that are not defined benefits,” said Constant.

What makes the situation worse is that because of reciprocity, pensions are earned based on your final salary – not the salary you earned when you received the pension benefit.

“We’re in the CalPERS system, you spend 4-8 years making a salary that is about $80,000 and if you move on to the county board of supervisors with a salary of $140,000, because of reciprocity, your pension is calculated at the higher salary rate for all your service,” said Constant.  “It really makes no sense.”

And get this: once you’re in, you cannot extract yourself from the system.  The CalPERS system just doesn’t allow it.  Pete Constant knows because he tried to opt out.

“All I’m asking is for on Tuesday is for the City Council to terminate its contract with CalPERS, said Constant.  “CalPERS will not even calculate a bill unless the contract is terminated,” said Constant. “It’s pension insanity.  It has been going on for about 14 years and is upside down.”

Constant’s proposal is of course controversial for some currently on the council who had planned on receiving lifetime benefits.  Still, Constant believes that council members should set an example for other municipal and county employees who have expressed outrage over proposed cuts in city worker pensions.

“We should not ask our employees to do anything we are not willing to do ourselves.  We’re in a fiscal crisis and we should be willing to make tough choices even if it means that we personally sacrifice,” said Constant.  “That’s what the voters expected us to do when they elected us.”

Mayor Chuck Reed has joined Constant and is ready to take the issue of municipal worker pensions to voters in June as part of a ballot measure on pension reform.  The proposed measure honors all promises currently made but from that day forward, city workers accrued pensions would be calculated at a new rate.  Constant says the public is very much in favor of this.

And don’t expect that if the measure fails that Pete Constant will stop fighting.  He is currently completing a doctorate in organizational leadership and doing his dissertation on the study of public pension systems and their governance.  He views decisions to allow defined benefits systems as they are today as governance decisions that reap unintended consequences.  He sees these decisions as not well thought out when the systems were put in place.

“Unless we change how our boards are governed, we will continue to have this problem in perpetuity,” said Constant.  “Then what do we leave to our children – more unfunded liability and weaker communities?  I want to leave my kids in a better position when they’re ready to enter the workforce and start a family,” said Constant.

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