Deep-rooted dysfunction
A key expression of this campaign is Measure B, a referendum that Reed successfully persuaded city voters to adopt in 2012. The measure is designed to effectively force employees out of their current pension plans and into far smaller ones. It would also cut benefits by, among other things, lowering cost-of-living adjustments and making it much harder for injured workers to receive disability payments. As of now, Measure B has been prevented from achieving its intended transformative effect. While a Santa Clara County Court in December upheld some of the cuts (like the restrictions on disability benefits), it struck down many of the measure’s central provisions. (The city is likely to appeal.)
But Measure B is a product of Reed’s one-sided focus on expenses, specifically the cost of worker benefits. Reed has allowed some minor tax increases while in office, but these are dwarfed by the effort he has expended on cutting costs. “The central problem in the whole pension reform issue is that these benefits are too expensive,” Reed told Remapping Debate.
Everyone agrees that the costs of retirement benefits have been rising since the early 2000s, and that the portion of the city’s general fund dedicated to paying for basic services has dwindled as a result. Part of this, as Reed stresses, is due to substantial increases to benefits made in the late 1990s and early 2000s, the large majority for police and fire.
But those outside Reed’s camp see the city’s longstanding fiscal problems as deeper and more complex; even the portion of the problem related to pensions, they say, involves many more factors than what Reed and his allies describe as overly generous benefit levels. At the top of the list: the city’s two pension funds lost $1 billion in the 2008 financial crash. While the recovery of the market has brought the funds back to nearly the values they had before the crash, the initial losses still mean that the funds are worth far less than they were projected to be today. “There are multiple factors” to the rising retirement costs, Brownstein said. “But of those, the 10,000-pound gorilla was the financial meltdown.”
A structural problem — but which structure?
Reed’s opponents point out that he and his allies on the council have declined to pursue tax measures that would have helped significantly in relieving the pressure. Most recently, in 2012, they voted against a quarter-percent rise in the city’s sales tax. Other possibilities have received even less consideration, like rewriting rates for a business license tax that hasn’t changed since 1984. The city currently pulls in only $40 million from the tax. “If you adjust for inflation,” said Brownstein, “it’s half what it used to be.”
This is part of a deeper aversion in Reed’s camp to raising taxes, said Ash Kalra, a city councilman opposed to the pension cuts. “They hesitate any time we talk about revenue generation,” Kalra said. “This continues to put the onus of balancing the books on the employees and on the residents who suffer from service cuts.”
A fundamental roadblock to San Jose (or any California locality) pursuing new revenues is traceable to Proposition 13, a 1978 statewide referendum that, along with a few successors, erected all sorts of constraints on the ability of cities to raise taxes. Any new tax requires a vote by the public, and some require two-thirds approval. The law also choked property taxes throughout the state at 1 percent and curtailed the government’s ability to reassess property values; to a massive suburb like San Jose that had relied almost entirely on its residential tax base, this was especially ruinous.
But while Reed has no interest in removing the structural obstacles to raising more revenues, he is aggressively pushing for structural change on the cost side. Well before the court decision on Measure B, he had already launched a statewide ballot initiative to amend the California Constitution to allow cuts to existing contracts. The initiative has made him something of a national poster child for pension reform, gathering hundreds of thousands of dollars from prominent Republican donors and giving keynote speeches at Manhattan Institute for Policy Research panels.
Reed acknowledges the significant limitations that constrained revenues imposed on the budget but treats those limitations as an inalterable reality. He is content to operate along the established routes, which mainly consist of subsidizing private growth. In explaining that he had done everything possible on the revenue side of the ledger, Reed said: “Trust me, it’s a lot more fun to do economic development and get new revenues than it is to cut services.”
Yet others point out that there is already a tremendous amount of economic activity in and around San Jose, and suggest that the city is simply not benefitting enough from it. “You’re in San Jose, in the heart of the Silicon Valley, and the business tax rates are actually quite low,” said Chris Hoene, executive director of the California Budget Project, a Sacramento-based research and advocacy group. “Which doesn’t really make sense, right? The city can’t even tap into the wealth that it has in the community.”
One glaring example is the way that, through a particular quirk of Proposition 13, many large corporations pay extraordinarily low taxes on commercial property. Under the law, properties are only reassessed, thus generating more taxes, when they change hands. But some companies hold on to land for decades, while many others avoid reassessment by leasing land, buying it through limited liability companies (LLCs), or any number of other maneuvers.
“Commercial property assessment is a nightmare,” said Lenny Goldberg, director of the California Tax Reform Association. “It’s more loophole than tax.” Thus, a company like IBM pays half a cent per square foot on a 200-acre campus in San Jose, according to a report by Goldberg’s group. The report estimates that if the value of the land were made current in the books, IBM would pay around $6 million more per year on that property alone.
This, Hoene said, underscores how Reed’s approach to the problem leaves its principal causes untouched. “What’s really needed is for local governments to be given more space to maneuver on the revenue side,” he said. “That would get them a lot further down the road towards controlling their own fiscal destiny, more than allowing them to scale back the benefits of current employees.”
Rippling consequences
The San Jose-Santa Clara Regional Wastewater Facility is spread out across 2,600 acres in northern San Jose. Every day it processes 110 million gallons of sewage — enough, the plant’s brochure tells us, to fill the hockey arena downtown.
During an interview at the treatment plant, Teresa Harris, a senior mechanic, pointed to a sort of gulley down which water, translucent blue and smelling faintly of chlorine, cascaded underground. A few hundred yards back, the same water had been thick and dark with waste. She explained the transformation by reference to the plant’s clusters of machinery, the wards of her supervision and care. One allows solids to settle while skimming grease and debris off the surface. Another facilitates a biochemical cleansing: “The good bugs eat the bad bugs.” Finally the water arrives at the chlorinated blue state it will preserve on its underground journey to the San Francisco Bay. “That water is so clean we could drink it,” Harris said. “It’s cleaner than the actual bay.”
But the facility was one of the hardest hit by the budget crisis and subsequent political decisions, with 40 employees leaving over the course of two years. “A lot of them went to neighboring cities,” Harris said. “They were afraid they were going to lose everything, so they quit. They locked in their pension and their medical and got the heck out.”
To keep up basic operations, the city hired private contractors, which wound up costing more than the city workers. The plant is still around 25 percent understaffed. “We simply don’t have the people that we need,” Harris said.
A report from the city auditor in 2012 sounded alarms about the staffing shortage: the loss of senior mechanics and engineers left the plant in peril of failure, which could send raw sewage into the bay or overflowing into the streets.
Read the introduction (“Left behind: San Jose and the broken promises of the neoliberal era”)
Read Part 2 (“The delusions of an American Technopolis”)
Read Part 3 (“This valley is their valley”)
Read Part 4 (“Forging a different path”)