Democrat Chuck Reed served as mayor of San Jose, Calif. from 2007 to 2014. He is probably best known for successfully undertaking a reform of the city’s two pension plans. Those badly underfunded plans had, over the years, consumed an increasingly large portion of the city budget, requiring painful cuts to city services.
Reed, who describes himself as a John F. Kennedy Democrat who believes in defined benefit pension plans, seemed an unlikely figure to take on public sector unions, which resisted any changes to the pension system. But Reed was persuasive and voters approved the reform package in 2012, by a 69 percent to 31 percent margin. Under the reform, new city employees received less generous pension benefits, and people already in the system had either to accept a lower pension or increase their contribution. All city employees took a 10 percent pay cut as well.
Reed was in Denver this week meeting with education groups and advocates for changes to Colorado PERA. He said that before Measure B passed in 2012, the city’s general fund budget of about $800 million faced a $115 million gap, primarily because of the ever-increasing amounts pension payments consumed. And this was after 10 years of budget cuts.
“We’ve now had five years of modestly restored services,” Reed said. “They’re not back to where they should be but we’ve been able to begin to restore services like library hours, which are back to being open almost full-time.”
What finally got the city council, controlled by Democrats, to accept the pension reform referendum, was the impact on city workers of the ever-growing costs. “We’d cut 2,000 from our workforce, from 7,400 to 5,400, and we were faced with cutting another 550,” Reed said. “That was enough to convince even the Democrats that we needed to take on pension reform, despite huge objections from our public employee unions. It was a gigantic fight, but we won.”
When Reed looks at Colorado PERA’s funding gaps and overly optimistic assumptions about future returns, he sees big trouble on the near horizon.
The amount of taxpayer money going into PERA has “more than tripled in the last 15 years,” Reed said. “And guess what? Even that’s not enough. You’re underfunding it; intentionally underfunding it, which makes the problem a lot worse.”
As pension costs continue to rise, public education will feel an ever-tighter budgetary squeeze, Reed warned:
That might get masked in the good years when state revenues are going up, because maybe you’ve got a little more money for education so you don’t feel bad that the pensions got a lot more. But when the recession comes, and it will come, then revenues are going too flatten out or go down, and education is going to get squeezed even more. Because the pension costs are not going to go down when the recession comes. They’ll probably go up even more. It is a monster devouring the budget. It may be in slow motion, but every year it gets worse.
Since 2001, Reed said, Colorado has underfunded PERA by what amounts to $2 billion per year. “The good news is if you shut down the state government for one whole year, and don’t do anything else, you can pay it off,” he said.
Reed’s advice? For starters, he said PERA needs to lower its absurdly optimistic assumption about annual returns from 7.5 percent to something more in line with what California’s CalPERS projects — 6.4 percent. Lower projected returns will make the situation look dire, but it’s almost certainly more realistic than wishing for the 7.5 percent. “No financial projection other than from the people inside the pension industry that are saying 7.5 percent is better than a 50-50 proposition,” he said.
My message to Colorado is that it’s time to begin wrestling with this problem. Engage the stakeholders and figure out a solution, It’s a big problem and requires a lot of effort. Action sooner is much better than waiting until later. You can see what happens when you wait til later. That’s Illinois, that’s New Jersey. They exhausted their capacity to do things, and these enormous holes they’ve dug are almost impossible to get out of.