Administration December 16, 2011

Stanford Institute Says Pension Contribution Rates Could Double in San Jose

December 16, 2011 (PLANSPONSOR.com) – Contribution rates that San Jose, California’s state government pension plans pay each year are expected to double over the next four years. 
 
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The Stanford Institute for Economic Policy Research (SIEPR) released a report on San Jose’s Federated and Safety pension systems, which provide retirement benefits to miscellaneous and safety employees. According to the report, barring new revenues, pension spending for the San Jose plan is likely to rise from its current 18.4% share of General Fund spending to 32.7%.

Other key findings from the report include:
•  Delay in implementing solutions to the pension problem increases the costs to San Jose. Under mid-case assumptions, the annual cost of delaying pension solutions is more than $8 million over the next year. Costs increase in subsequent years.
•  June 2010 funded ratios, under middle case assumptions, are 46.4% for Federated and 54.8% for Safety. Most argue for a funded ratio of at least 80%. Private plans with a funded status below 80% are required to freeze benefits and face other restrictions.
•  The total unfunded liability for the Federated and Safety systems under middle case assumptions is $3.6 billion, or $11,500 per household.
•  It is highly unlikely that San Jose’s pension systems will invest their way out of their funding problems. Even assuming investment returns of nearly 8%, the probability of San Jose’s systems fully meeting their obligations is only 12%. In fact, the likelihood is 33% that the systems will fall short by a combined $10 billion in the next 16 years.

The authors conclude that San Jose should continue with its reform measures and seek general fund revenue increases, further increases in employee contributions and prospective benefit reductions for current employees.

The report was authored by Stanford Professor of the Practice of Public Policy Joe Nation, with the assistance of California Common Sense (CACS) and Stanford junior Evan Storms. Earlier this week, SIEPR and CACS released another report on statewide pension systems (see SIEPR Report Calls For Reform to Calif. Pension System).

To view the report, visit siepr.stanford.edu. 

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