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San Jose facing pension cut crisis due to bad investments

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San Jose, California is facing a tremendous pension fund crisis despite having the largest per capita income in the United States, according to America.aljaeera on March 14. Unlike other cities' financial crises, San Jose's financial crisis is due to bad investments rather than to a financially strapped citizenry. The city's financial problems were borne out of bad hedge fund, real estate and private equity investments.

The City of San Jose normally spends around 25% of its $1.1 billion budget on pensions and retirement funds. However, with the bad investments and depleting funds, the pensions and retirement funds are not self-sufficient and the city is being forced to initiate a measure to reduce pensions dramatically. Passage of the pension cutting measure potentially would compel City employees to pay up to a 16% share of their salaries toward the pension funds.

Since 2009 the City of San Jose has cut its staff by more than 20% and reduced its open library days from six days per week to four days. Even police and fire department staffs have been cut, an action that generally is of last resort even in the most financially distressed cities.

San Jose's financial crisis was so deleterious in 2012 that even its progressive mayor Chuck Reed (D) promoted a ballot initiative to reform its city employees' pensions. The measure was passed by 70% of the voters. It is interesting to note, however, that donors from outside the City contributed 97% of the money that was utilized in support of the initiative.

The voter approved city initiative has faced hurdles that have curtailed its implementation to date, one of which was a Superior Court judge's ruling that pensions already promised to current employees cannot be taken away from them. The judge predicated his ruling upon questions pertaining to the Constitutionality of the initiative in accordance to the Constitution of the State of California.

Edward Siedle, president of Benchmark Financial Services and former Securities and Exchange Commission attorney, put the San Jose pension fund crises squarely on the city's bad investments. Siedle stated:

“The missing link in debates about pension reform is poor investment performance. San Jose’s officially reported 2012 and 2013 performance was absolutely atrocious. Any discussion about the unsustainability of benefits must come after discussion of radical market underperformance.”

While this debate rambles on, the city employees of San Jose are being held captive by a political debate that they did not start and an severely adversely affected investment portfolio that they did not choose.

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