SAN JOSE -- The California State Auditor on Tuesday reported San Jose "likely overstated" that its future pension costs could reach $650 million by 2015, a figure the audit called "unsupported" and which the mayor cited early last year in building the case for a ballot measure to reduce retirement benefits.
A bipartisan legislative committee commissioned the audit at the height of San Jose's Measure B pension reform campaign. City voters have since overwhelmingly approved the June measure to reduce pensions for new hires and make current employees pay more for their pensions or switch to a reduced plan for their remaining years.
"Although we believe that San Jose's financial challenges are real, we found that some of the retirement cost projections reported in the city's official documents in 2011 were not supported by accepted actuarial methodologies," the state audit said. "It is unclear which retirement cost projection the voters relied on, if any, when they voted for these changes."
Mayor Chuck Reed and City Manager Debra Figone denied misleading anyone about the city's pension problem. They argued while projections vary depending upon underlying assumptions, the city's actual costs have more than tripled in a decade to $245 million and already devoured funding for city services. By all accounts, they noted, those costs are expected to continue rising.
"These skyrocketing costs and the loss of services were the main reasons why
But leaders of city employee unions suing to block Measure B, which they call an illegal breach of their pension rights, pounced on the audit as proof that city officials cannot be trusted. They insist the city must negotiate pension changes. But months of negotiations last year ended in impasse.
"The mayor's political strategy of over-inflating costs proved to be the largest barrier in negotiating legal pension reform with San Jose's employees," said John Mukhar, president of a city union representing architects and engineers.
Jim Unland, president of the San Jose Police Officers' Association, said a negotiated deal would have put more officers on the streets faster than Reed's reform measure and that a recent crime spike "is the outcome of Mayor Reed not being truthful" about pension costs.
The $650 million estimate arose during a City Council meeting in February 2011 when the city's retirement director said that projections at the time of pension costs reaching $400 million by 2015 could be $250 million higher under more conservative and pessimistic assumptions. Reed cited the $650 million figure often during the following months in arguing that retirement costs could be much higher than official projections.
The state audit said those figures were developed internally by city retirement staff, "based on assumptions that had not been approved by the boards of administration of its two independent retirement plans" and "not supported" by appropriate documentation. The official projection adopted this year by the retirement boards whose members are city employees, retirees and finance experts, now stands at $320 million, a figure the audit affirmed.
Figone said in the city's official response that the current projection is less than the city had cited earlier only because pay cuts and layoffs last year to help cover the rising retirement bill have slowed its future growth. She said any projection is inherently unreliable, noting that the city's current retirement costs already exceed official worst-case estimates from a decade ago.
Figone said that the $650 million figure was never an official projection or used in any city campaign material for Measure B, and that the state audit "did not cite any evidence about speculative voter confusion." But she added that a civil grand jury report this year said outside experts considered the $650 million figure "within reason and easily justified" using more conservative assumptions.
The audit did affirm that the city's retirement funds remain $3.5 billion short of covering promised benefits and that retirement costs have doubled in two years, "from $136 million to an estimated $244 million." Those rising costs have forced the city to spend more on its police and fire departments while cutting staffing.
"San Jose may be providing reduced services at an increased cost," the audit said. "Moreover, these increased costs appear to have crowded out some of the funding previously available for services other than public safety, such as parks and libraries."
The audit recommended that if San Jose cites retirement cost projections other than those officially adopted by the plans' independent boards, "it should develop projections that are supported by accepted actuarial methodologies, report this information in the correct context, and disclose significant assumptions that differ from those in the boards' retirement cost projections."
Reed said "I appreciate the auditor's recommendations for clearly reporting retirement cost information" but added that "in fact, the city of San Jose already does this and will continue to do so."
Contact John Woolfolk at 408-975-9346. Follow him on Twitter at Twitter.com/johnwoolfolk1.