San José has two retirement systems. The Police and Fire Department Retirement System serves sworn public safety employees. The Federated City Employees’ Retirement System serves all other employees.

Note: Employees who participate in the City’s pension plans do not contribute to Social Security and do not earn credit for Social Security benefits while working for the City. The Mayor, City Councilmembers, Redevelopment Agency staff, and non-benefited (i.e. part-time, temporary, contract) employees do not participate in the city’s pension plans.

Source: San José Retirement Services Department. Visit the Additional Resources section for retirement benefit fact sheets.

Both the City and employees make contributions into the retirement funds. However, the City is responsible for a significantly larger share of the costs than employees. Unlike some governments, the City of San José has consistently made its annual retirement contribution (ARC) for pension benefits and is moving toward fully funding the ARC for retiree healthcare.

Contribution rates (see below) are set annually by the Retirement Boards based on actuarial reports and cost-sharing formulas between the City and employees. These contributions help cover both the "normal cost" of retirement benefits and any "unfunded liabilities."

"Normal cost" contributions, along with investment earnings, are expected to pay for all future benefits. These costs are split between City and employees according to the following ratios (City's share listed 1st, employee's share listed 2nd):

• For Pension Benefits - 8 to 3
• For Retiree Medical Benefits - 1 to 1
• For Retiree Dental Benefits - 3 to 1 (for police/fire), 8 to 3 (for federated)

However, if retirement investments lose money in the market or don’t meet actuarial projections, the City is responsible for covering 100% of the resulting "unfunded liability." In other words, taxpayers assume all of the risk for the performance of the plans' investments. As of June 30, 2010, the City's two retirement systems had approximately $3 billion in unfunded liabilities .

Together, these funding arrangements place a significant financial burden on the City and have had an ever-growing impact on the General Fund.

* Note: The City's contribution rate includes its share of the normal cost AND contributions necessary to pay down the unfunded liability. View the following fact sheets for the precise breakdown: Police Department Plan, Fire Department Plan, and Federated (Non-Sworn) Plan

Sources: Office of the City Auditor, Report on Pension Sustainability ; Office of Employee Relations, City of San Jose Retirement Benefits FAQs

Click on the above image to enlarge

The cost to the City for providing employee retirement benefits has more than tripled over the past decade, growing from $74 million in FY 2001-02 to $245 million in FY 2011-12. The City's retirement costs now consumer more than 20% of the City's entire General Fund.

Unfortunately, the city's retirement costs are expected to continue rising at an unsustainable clip, and will grow even larger if actuarial assumptions are modified to more realistically reflect modern conditions.

These costs are not just rising for the City, they are also escalating for city employees. In FY 2011-12, city employees will pay anywhere between 11% and 18% of their base wages to the retirement systems (see above section) and these contributions will consume an even larger portion of employees' paychecks as retirement costs continue to rise.

Put simply, the city’s retirement benefits are unsustainable and threaten the City's ability to provide basic city services to our community. Read about Mayor Reed's efforts to implement critical Fiscal Reforms

Sources: Cheiron FIve Year Retirement Contribution Projections ; Fiscal and Service Level Emergency Report

There are a number of factors that have contributed to the City’s growing and unsustainable retirement costs:

1. Retirement Benefits Have Been Continually Enhanced

The City Council - and in some cases, outside arbitrators – have enhanced pension benefits numerous times over the past two decades. Among these fiscally irresponsible actions:

• The maximum pension benefit for San José police officers and firefighters was increased multiple times: first to 80%, then to 85%, and finally to 90% of compensation.
• The cost of living adjustment (COLA) was changed to a guaranteed 3% annual adjustment.
• The definition of Final Compensation for the Federated Plan (non-sworn employees) was changed from highest 3-year average to highest 12 consecutive months.

Even worse, some of the above enhancements were made retroactively. This is what happened when police officers (in 2006) and firefighters (in 2008, via outside arbitration) were awarded a maximum pension benefit equaling 90% of final compensation. These retroactive increases immediately added more than $70 million in unfunded liabilities that the City has been obligated to pay.

• Scroll over or click on the above image to enlarge.

Overall, retirees are receiving significantly larger pension payments today than they did 20 years ago. Even after adjusting for inflation, the average annual pension benefit has increased by:

• 75% for Police and Fire retirees.
• 54% for Federated retirees.

Furthermore, total annual pension benefit payments from the retirement funds have grown seven-fold over the past 20 years (see chart to right).

2. Employees Are Living Longer and Retiring Earlier.

The average life expectancy continues to rise (currently 78 years in the U.S.) and more individuals are opting to retire at an early age. This means that retirees are collecting benefits for a longer period of time. In fact:

• The average retiree in the Police and Fire plan receives a pension benefit for 21 years.
• The average retiree in the Federated plan receives a pension benefit for 18 years.

In addition, the overall number of retirees receiving benefits is now 2½ times greater than 20 years ago.

These changing demographic factors have had a significant impact on the cost of providing the City's retirement benefits. It has also meant that past actuarial assumptions (i.e. those based on a lower life expectancy) haven’t held true, resulting in new unfunded liabilities.

3. Investment Gains Have Not Kept Up with Projections

Any time that retirement fund investments fall short of their projected returns, a new unfunded liability is created. Most recently, investment losses between 2007 and 2009 created a $978.8 million unfunded liability.

However, the retirement funds were experiencing gaps between projections and actual returns long before the current economic downturn. That’s because, over the past 30 years, the retirement systems have assumed an unrealistic rate of return - typically between 8.0% and 8.25% annually - that has outpaced its actual investment earnings (note: the retirement boards have recently begun using a more realistic rate of return).

Paying off these unfunded liabilities drives up retirement costs in future years. And because the City is responsible for 100% of the plans' unfunded liabilities, the burden falls completely on the taxpayers.

Source: City Auditor's Report on Pension Sustainability

• Office of Employee Relations, Retirement Benefits Information
• Retirement Services Department website
• Visit Mayor Reed's Fiscal Reforms webpage for additional articles and information on pension reform efforts.

Relevant Reports & Presentations

• Shrinking Services: Public Pension Costs and Their Impacts on San Jose - Stanford Institute for Economic Policy Research, December 14, 2011
• Fiscal and Service Level Emergency Report: An evaluation of conditions in the CIty of San José (see "Section III. Retirement Costs" starting on p. 34) - City of San Jose, November 22, 2011
• Retirement Reform Budget Study Session Presentation - City of San Jose: Office of Employee Relations, May 18, 2011
• City Manager's Fiscal Reform Plan ("Retirement Costs" p. 11-21) - City of San Jose: Office of the City Manager, May 9, 2011
• Pension Sustainability: Rising Pension Costs Threaten the City's Ability to Maintain Service Levels - City of San Jose: Office of the City Auditor, September 2010

Retirement Benefit Fact Sheets

• Federated (Non-Sworn) Plan (detailed breakdown of contribution levels ) - June 2011
• Fire Department Plan (detailed breakdown of contribution levels ) - June 2011
• Police Department Plan (detailed breakdown of contribution levels ) - June 2011
• City of San Jose Retirement Benefits - Frequently Asked Questions - September 2010