SAN JOSE -- The San Jose City Council has learned that dumping its own pension plan as it seeks to reduce costly retirement benefits for city employees won't come cheap.

The California Public Employees' Retirement System -- CalPERS -- has told San Jose that terminating the council's state-run pension plan will cost the city $5 million to $5.7 million, a figure that shocked those who had sought to discontinue it.

"I can't see anyone ponying up a check for $5 million," Councilman Pete Constant said.

But Mayor Chuck Reed said San Jose still should look into discontinuing the plan for future council members, and ask CalPERS to allow current elected officials in the plan -- including himself -- to choose a cheaper and less generous benefit formula, similar to what the city has asked of its employees.

The pension plan covers nine of the city's current elected officials -- all except Vice Mayor Madison Nguyen and Councilwoman Rose Herrera, who had chosen a 401(k)-type alternative. Also covered are 20 former mayors and council members, 10 of whom are now drawing retirement benefits. If the plan is terminated, retired elected officials would continue to receive their pensions, and current council members would keep the value of the benefit they had earned before it was discontinued.

The council had voted unanimously in January 2012 to explore terminating its pension plan amid heated debate over reducing city employee pensions whose costs had more than tripled in a decade and continue to climb. Voters in June approved a city-sponsored measure reducing pensions for new hires and calling for current employees to pay more for their pensions or accept a lower benefit formula for their remaining years on the job. City unions are fighting it in court.

Reed, Constant and other council members last year said that while their pension plan costs are relatively small, they too are growing. And discontinuing the benefit, they said, would be a gesture of leadership to city workers they were asking to accept smaller pensions.

But a question remained about how much it would cost the city to terminate the council pensions.

Pension managers typically require employers to pay more up front to terminate a plan in order to guarantee funds for benefits. That's because investment returns over the course of a career are expected to cover much of the benefit's cost. Shortening the investment horizon requires lower, more conservative return assumptions. And lowering returns also raises costs to cover losses that might have been regained over a longer investment period.

In the case of San Jose's council pensions, CalPERS reported the plan currently has only 72 percent of funds needed to pay promised benefits with a $976,000 projected shortfall, based on the agency's assumed 7.5 percent investment returns. CalPERS calculated the $5 million to $5.7 million termination cost using return rates of 2.37 percent to 2.5 percent based on U.S. Treasury yields and different assumptions about council salary growth. Reed said the $5 million exit cost bolsters critics who argue that CalPERS has used rosy investment return assumptions to hide the true cost of state pensions.

The council pension plan originated with a recommendation from the city's Council Salary Setting Commission, which the council approved in 1998. While San Jose maintains its own municipal retirement system for most city workers, the mayor and council pension plan is provided under contract through CalPERS.

The plan allows full retirement at age 55 and pays 2 percent of salary for every year worked, with 2 percent cost-of-living raises each year. At current council pay rates, it would pay an annual benefit starting at $13,000 to a council member retiring at age 55 after serving the limit of two four-year terms. That benefit could increase if the council approves the salary commission's current recommendation to raise members' pay 5 percent, something union leaders and many residents oppose. Council members currently are paid $81,000 a year. Reed has declined approved raises and said he will keep his pay at the $105,000 level it was at when he took office.

While there's no support for shelling $5 million to end the council plan immediately, there may be support for closing it to new members, which the salary commission had urged two years ago.

"I don't have any problem with that," said Councilman Kansen Chu. "But I want to definitely continue some retirement plan. If you spend eight years in a place, it should provide a decent retirement plan."

Contact John Woolfolk at 408-975-9346. Follow at Twitter.com/johnwoolfolk1.

San Jose Pensions
San Jose's pensions at a glance:
  • Current annual City Council pension cost: $162,122, up from $160,458 last year
  • Current annual city employee pension cost: $222 million, up from $209 million last year
  • Shortfall in council pension plan: $975,965
  • Cost to terminate council pension plan: $5 million to $5.7 million
  • Council pension cost as percentage of pay: 17.1 percent
  • Pension cost as percentage of pay for most San Jose employees: 56.82 percent
  • Pension cost as percentage of pay for newly hired San Jose employees: 13.36 percent.
  • Social Security cost as percentage of pay: 12.4 percent.
    (Pension cost figures include employee contributions, exclude retiree health costs. Percentage figures don't include plans for police officers and firefighters).