Calif. city seeks to escape soaring pension costs

(CBS News) SAN JOSE, Calif. --The economy is slowly improving, but many cities are struggling under a mountain of debt, much of it in pension obligations to people like policemen and firemen. The city council in San Jose, California voted yesterday to put a measure on the ballot that would slash the pensions of its union workers in June. CBS News correspondent Ben Tracy explores the issue.

San Jose Mayor Chuck Reed showed us his city's newest library. It cost nearly $8 million.

There are three others like it in the city. They are all empty.

"We don't have enough operating dollars to open this library up to the public," Reed told Tracy.

"Why can't you afford to run this library?"

"Our biggest cost factor over the last decade has been skyrocketing pension costs."

San Jose's pension costs for city workers have grown from $73 million in 2001, to $245 million this year. Retirement benefits now consume more than 50 percent of the city's payroll costs.

To pay those pensions, the city has cut 2000 jobs, including 49 firefighters and 66 police officers.

The new police station is also empty. San Jose can't afford to run it.

""Taxpayers are paying for services," said Reed. "They should get those service. We're unable to deliver that and it's just going to get worse if we don't get control of these costs."

These pension problems began back in the late 1990s. California was flush with tax revenue from the dot com and housing booms. Politicians gave generous pension benefits to unionized workers -- up to 90 percent of their salary for life.

Joe Nation studies government pension costs at Stanford University.

"How does the deal that government workers are getting compare to what most people get in the private sector?" Tracy asked him.

"It's out of this world good," replied Nation. "Let's say you were making a $100,000 -- you would retire at age 50 with $90,000 a year."

Those type of benefits go to public safety employees. Robert Sapien is a battalion fire chief in San Jose.

"The average firefighter will leave here with an annual pension of about $90,000 a year. Do you think that's justifiable to the taxpayer?" Tracy asked him.

"That is what was negotiated over time," said Sapien."That's the agreement we certainly see the need for a market correction and the benefits gonna come down."

Sapien says firefighters are willing to cut benefits from 90 percent of salary to 75 percent. The mayor wants to cap it at 65 percent for new hires and require current workers to pay more into the system.

Voters will decide on the mayor's plan this summer. The unions now plan to sue the city.

"We have come to the table, we have offered to give even more and all we've heard from the city is 'Here's our ballot initiative,'" said Sapien.

The mayor hopes controlling pension costs will get his city back on track and finally open those empty libraries.