SAN JOSE -- While San Jose battles unions in court to enact pension cuts voters approved in a nationally watched June ballot measure, the city is already deflating its ballooning retirement bill with an unheralded move to shrink health benefits.

The fate of San Jose's Measure B pension reforms remains uncertain -- a Santa Clara County Superior Court trial is scheduled June 17 with appeals expected. But like a host of other local governments, San Jose is finding health insurance a quicker path toward trimming retirement perks that are more generous than those in private industry, and whose growing costs have devoured funds for staffing and services.

"Retiree health care is generally easier to reform than pensions," said David Crane, a Stanford University lecturer and president of Govern for California, a nonpartisan reform group, who has written extensively on pension issues. "It's generally accorded less protection legally."

San Jose workers and retirees oppose the health plan changes that add higher co-payments and deductibles. The San Jose Firefighters union and Police Officers Association have filed grievances, and a retiree representative hinted recently at possible legal action.

"You're passing these costs on to people who can least afford it," Bob Leininger, president of the San Jose Retired Employees Association, told the City Council last week. "They're older, they're not in the best of health in many cases."

But city officials believe they have a strong hand to defend retiree health care cuts, and that they're already seeing savings. The recent health benefit changes shaved $400 million off the nearly $3 billion that the city expects to owe its retirees beyond what it has funds to cover, said Deputy City Manager Alex Gurza. And that is saving San Jose $12.5 million a year, Gurza said, $6.5 million of that in the general fund that pays for most city services.

"It had a significant impact putting in a lower-cost plan," Gurza said.

Even so, the city's annual bill and unfunded debt for employee retirement continues to grow, though not as steeply as had been feared a year ago, thanks not only to health plan changes but to layoffs and pay cuts. San Jose's total yearly pension and retiree health bill will increase from $242 million to $266 million in the coming year. By comparison, the city's projected general fund budget is $858 million. The retirement bill has more than tripled in a decade. And the unfunded debt for future retirement continues to inch up, from $2.89 billion to $2.9 billion, according to the latest figures.

"We're still by no means out of the woods," Gurza said. "We need to continue on the path we're on to bring these costs down."

Retiree health plans have become rare in private employment but remain common in government. San Jose began offering retiree health care in 1986, and city officials say the perk is generous even by government standards. Most governments pay retirees a stipend toward health premiums. In San Jose, retirees can get full premium coverage for the cheapest plan available to employees, a better deal than when they worked for the city and had to share in premium costs.

San Jose was able to cut the cost by offering all of its employees a cheaper, high-deductible plan.

Because San Jose didn't define the lowest-cost plan available to retirees, the city was able to cut retiree health costs by simply adopting a cheaper plan. Instead of a Kaiser HMO with $25 co-payments to visit a doctor, the cheapest plan now has a $1,500 deductible, $40 co-payments and premiums that cost 24 percent less. Retirees who want to keep the Kaiser HMO now have to pay the premium difference.

Courts suggest that challenging the city's health care move may be tough.

That's why both Vallejo and Stockton cut retiree health benefits rather than face uncertain court battles over pensions in seeking to lower costs in bankruptcy. A federal bankruptcy judge ruled in August that Stockton's retiree health benefits can be cut as part of the proceedings. And a federal judge that month also ruled against Orange County retirees who argued they were entitled to implied rights to cheaper health premiums.

Retiree health often represents a disproportionate share of unfunded government retirement debt because until recent years most governments hadn't been setting aside funding to cover anticipated costs. A study by California Common Sense found only Los Angeles and Burbank out of 20 major California cities had socked away more than half the money needed to cover expected retiree health costs.

In San Jose, the benefit remains only 19 percent funded for most workers and 11 percent funded for police and firefighters. Unfunded debt tops $1.1 billion, more than a third of the city's total retirement shortfall.

But retiree health care still accounts for only a sixth of San Jose's yearly retirement bill. Even small changes to pension benefits can yield big savings. One piece of Measure B the city already imposed, cutting a perk that paid upside investment returns in pension funds to retirees instead of banking it to offset losses, shaved $72.5 million off the unfunded debt and $17.8 million off the yearly bill, $13.4 million of that in the general fund. Crane said that's why governments keep looking to cut pension as well as retiree health costs.

"Since both are so large," Crane said, "I expect cities to keep looking at ways to do both."

Contact John Woolfolk at 408-975-9346. Follow him on Twitter at Twitter.com/johnwoolfolk1.

SAN JOSE PENSIONS
A look at San Jose's employee retirement benefits
  • The average yearly pension for retirees who worked a full 31-year career for San Jose is $68,664 for most employees and $104,112 for officers and firefighters, including annual 3-percent raises.
  • Retirees who worked 15 or more years get full premium coverage for the cheapest city employee health plan. That used to be a Kaiser HMO plan with $25 co-payments to see a doctor. But the city now has a Kaiser plan with $1,500 deductibles, $40 doctor-visit co-payments and premium costs 24 percent lower than the Kaiser HMO.
  • The total unfunded retirement liability -- the gap between current funds and projected costs -- is $2.9 billion, of which more than a third, $1.1 billion, is for retiree health benefits.
  • The city's yearly retirement payment for the coming year is $266 million, up from $242 million. Of that, $44 million, about a sixth, is for health benefits.
  • The deductible health plan reduced unfunded retirement debt by about $400 million and the city's yearly cost by $12.5 million, $6.5 million of that in the general fund.
  • The city's pension plan is 62 percent funded for most workers, 79 percent for police and firefighters. The city's retiree health benefit is 19 percent funded for most workers, 11 percent for police and firefighters.