☆ A sustainable retirement system can weather all kinds of fiscal storms (3/4)
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Even without federal money raining down, cities often find a way to ratchet up spending. When fiscal pressures come to bear, reforms are hard to stick with. So says Reason Foundation’s Len Gilroy in Part 3 of an Opp Now exclusive Q&A. But while San Jose faces down a $46 million deficit and costly pension liabilities, governments across the country that implemented sustainable retirement systems were able to keep their pensions funded, even during the Great Recession.
Opportunity Now: So even for big cities in the Arizona system, they’re making slower progress on de-risking their pension liabilities but still getting there. What’s your take on the state of pension reform in San Jose?
Len Gilroy: About a decade ago, voters in San Jose approved, by something like 70%, significant pension reform. It was a bipartisan collaboration from a few city councilmen and Mayor Chuck Reed who put together a meaningful pension reform package, given the weight of pension contributions on the city's annual budget.
The city had built public safety substations but couldn’t afford to open them. Some other facilities were guttered. This was post-Great Recession, when city governments were wrangling budgets.
So the aim was to still provide a meaningful retirement benefit with less financial risk to the city and taxpayers.
ON: Then what happened?
LG: The meaningful pension reform survived a year or two. The public safety associations were not particularly happy. A new mayor came in, there was some turnover in the council, and the reform was watered down significantly.
That is a pattern that we’ve seen. Cities often will make painful decisions when faced with the harsh reality of the budget, and then that momentum can wane quite quickly as pressures begin to ease.
ON: That reminds us of what Mark Moses talks about, how cities decide what they’re all about literally from council meeting to council meeting.
LG: It can happen either when there’s political pressure from folks unhappy about pension reform, and/or, like what happened with COVID, a bunch of states and local governments just got a massive influx of cash from Washington D.C. raining down on them for a couple of years.
That perversely creates this false sense of security, so they spend more money and fail to fix the long-term systemic issues.
But what always happens is gravity takes effect, things come back down to Earth into a kind of normalcy. States and cities are looking at racking up deficits again in the next couple of years. Time will tell if that pans out or not.
ON: Well, now San Jose projects a $45 million deficit for FY 2025–26, and $53 million for 2026–27.
LG: You see the same pattern, a rinse and repeat cycle. It’s easy to ratchet up spending when times are good, or times are even just okay, or even kind of mediocre.
And then you get some major fiscal pressures that come to bear. It takes reforms a while to be sticky and to last. They’ve got to survive the first couple of years.
San Diego voters went to the ballot box on the same day that San Jose voted in pension reform; but in San Diego, they went with a full defined contribution plan. That got attacked by the unions who litigated it, and ultimately got the whole thing thrown out. So, poor San Diego. If you read their budget situation right now, it’s almost like nothing ever happened. They’re back to a similar place to where they were a decade ago.
ON: Has any big city been able to stick with it?
LG: Houston would be one I’d point to, where they went through a very painful moment a year or two after San Jose, around 2016. They had to do a massive pension reform effort with all kinds of guardrails built into it—that has been working pretty effectively.
ON: And you were able to get Arizona public safety pensions almost fully funded. Why doesn’t San Jose get help from an organization like Reason Foundation?
LG: You have to want to be helped. I don’t think that’s where they are now. I could be wrong.
ON: It seems they just want to make it easier to borrow money. But tell me, what are some places around the country that are doing pension reform right?
LG: Wisconsin, the birthplace of organized public sector labor in the U.S., ironically has probably the most solid pension system in the country. They built it differently. They have a guaranteed base-level benefit similar to a smaller pension, and then they put a flexible benefit on top of that, which adjusts depending on market outcomes. So if they have upside in the pension system, they share that with the employees. If there’s no upside, employees don’t take a hit.
ON: Maybe we can call that the hazelnut option.
LG: Sure. Then South Dakota has a similar kind of thing, but with a different mechanism. They build flex into the benefit. The employer contribution rate is set; the benefit flexes depending on conditions.
So the entire State of Wisconsin, the entire State of South Dakota, Washington State—I could go on—the State of Tennessee, if you look at the list of “who’s funded and who’s not,” they’re fully funded.
They mostly stayed funded during the Great Recession. There was a dip, but they bounced back quickly. Why? Because every one of those places has some form of sustainable retirement system.
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