SAN JOSE — Here in the wealthy heart of Silicon Valley, the roads are pocked with potholes, the libraries are closed three days a week and a slew of city recreation centers have been handed over to nonprofit groups. Taxes have gone up even as city services are in decline, and Mayor Chuck Reed is worried.
The source of Reed’s troubles: gold-plated pensions that guarantee retired city workers as much as 90 percent of their former salaries. Retirement costs are eating up nearly a quarter of the city’s budget, forcing Reed (D) to skimp on everything else.
“This is one of the dichotomies of California: I am cutting services to my low- and moderate-income people . . . to pay really generous benefits for public employees who make a good living and have an even better retirement,” he said in an interview in his office overlooking downtown.
In San Jose and across the nation, state and local officials are increasingly confronting a vision of startling injustice: Poor and middle-class taxpayers — who often have no retirement savings — are paying higher taxes so public employees can retire in relative comfort.
In many places, the problem is proving difficult to address because public-sector pensions have strong legal protections and, union officials argue, the benefits are hardly lavish. But the strain on government budgets is undeniable, and California officials are taking the first steps toward a great leveling between retirement’s haves and have-nots.
Voters in San Jose have ratified unprecedented cuts in public workers’ retirement benefits, and Reed is pushing to make it easier for city leaders to enact similar reductions statewide, inviting the ire of unions and many fellow Democrats.
But as Reed works to shed government liability, state officials may be piling it on. In Sacramento, lawmakers want to create the nation’s first retirement savings plan for private-sector workers in which the state manages the money and guarantees a minimum rate of return.
Financial industry executives scoff at the program, known as the California Secure Choice Retirement Savings Trust Act.
“There is some irony, given the financial problems faced by some government pension plans, that the state would guarantee a return on a pension plan,” said Larry Zimpleman, chief executive of Principal Financial Group, which administers 45,000 private retirement plans, covering 3.5 million workers.
But as many as half a dozen other states, including Maryland, are exploring similar ideas. Analysts generally agree that solving the retirement puzzle is likely to require public officials to reduce benefits for some workers while spending more to help others who are in need.
“This is an enormous problem, for different reasons, in both the public and private sector,” said Joe Nation, a professor of public policy at Stanford University and former California state legislator. “Lawmakers are awakening to this retirement crisis we are having now. But the solutions are not ones that people want to hear.”
The quandary is being acutely felt in San Jose, the third-largest city in a state where more than half of private-sector workers have no access to retirement savings plans on the job. Meanwhile, annual retirement costs for public-sector workers in the city have nearly quadrupled over the past decade.
As city officials struggled to pay the pension bill, the number of city employees plummeted from 7,400 to 5,400, Reed’s office said. That includes hundreds of positions cut from the city’s police force. A police substation completed in 2010 remains closed because the city cannot afford the $2 million annual operating cost.
Frustrated, Reed proposed an initiative two years ago that would have significantly trimmed pensions for public workers. A large majority of San Jose voters approved the idea.
“I got sick and tired of cutting services to my people — 10 years of services cuts — in order to balance the budget,” Reed said. “We got to the point where we were facing service delivery insolvency.”
Unions representing city workers quickly filed suit, however, and a state judge agreed to invalidate several key provisions. Now Reed is trying again, along with leaders in four other cities, this time pushing a state constitutional amendment that would give him broad authority to reduce promised benefits.
The new effort has brought strong opposition from union officials, who say pension benefits for government workers should be decided not at the ballot box but at the bargaining table. They note that hundreds of municipalities have won concessions in recent contract negotiations. Meanwhile, public pension benefits statewide average just $2,600 a month — a reasonable sum, union officials say, given that many retirees are not eligible for Social Security.
For now, Reed’s statewide ballot initiative is bogged down in a court fight over the language that would appear on the ballot, and it is unclear when — or whether — it will go before voters. Union officials say that if it does, they are confident that it will not pass.
“There may be some resentment out there, but it really is an entrenched minority,” said Dave Low, chairman of Californians for Retirement Security, which represents 1.6 million public workers and retirees in the state. “Once people get the facts, they do not support slashing people’s pensions.”
But other governments are also struggling. In Chicago, Mayor Rahm Emanuel (D) has been pushing to scale back pensions for city workers, warning that without reform, city services will wither. Rhode Island enacted pension reforms in 2011 that trimmed retirement benefits for new workers and for those already on the payroll.
And last year, Detroit filed the nation’s largest-ever municipal bankruptcy, in part because of pension and retiree health-care costs. The city last week proposed slashing pensions by as much as 30 percent as part of its plan to emerge from bankruptcy.
In California, cities large and small are struggling to pay the growing public-sector retirement tab. Meanwhile, 55 percent of the state’s private-sector workforce — 6.3 million — have no retirement plan on the job, compared with about a third of private-
sector workers nationwide.
Efforts to bolster retirement security for those who have little are moving slowly. Two years ago, state legislators passed the California Secure Choice legislation. The program is similar to one President Obama created this month by executive order. But while Obama’s MyRA would be voluntary for employers, invest in government bonds and offer only modest returns, the California plan aims much higher.
People would contribute 3 percent of their pay to a retirement account their employers would be required to offer through payroll deductions. The money would be pooled and professionally managed, and the state would guarantee a minimum level of return backed by insurance, should market returns fall below projections. The account would move with people from job to job, and at retirement it would be converted to an annuity that would pay benefits for life.
“We clearly recognize there is a retirement tsunami on the horizon,” said state Sen. Kevin de León (D-Los Angeles), who sponsored the legislation. “We tried to close this gap between what Americans should be saving and what in fact they have saved for retirement.”
But California Secure Choice remains far from implementation. In addition to concerns about costs to the state, financial services firms are protesting that the government is intruding on their turf — and their potential profits.
“Anybody talking about retirement savings is a good thing,” said Alison Hawkins, vice president for communications at the Financial Services Roundtable, the lobbying group for asset managers, banks and other financial firms. “But there are a lot of red flags around this California idea. People already have access to the investment market. What is needed is more financial education.”
Lori Montgomery in Washington contributed to this report.