* Auditor also questions pension cost projection in bond statements
* City says pension projections not overstated
* City says auditor confirms pension costs a fiscal challenge
Aug 21 (Reuters) - Multiple projections of public pension costs may have confused voters in San Jose, California, who approved a measure in June requiring current city employees to contribute more to their retirement accounts, the state auditor's office said on Tuesday.
The measure approved by California's third-largest city, at a time when the costs of public pensions are coming under increased scrutiny, would reduce pension benefits for employees who do not increase contributions. The measure also requires less-generous pension benefits for new city employees to help rein in retirement expenses.
The state auditor's office in a report criticized projections by San Jose of $400.7 million and $650 million in retirement costs for its fiscal year 2015-2016.
"Reporting multiple retirement cost projections in a short period may have caused confusion among the city's stakeholders attempting to make informed decisions," the report said. "For instance, it is unclear which retirement cost projection the voters relied on, if any, when they voted for these changes."
The state auditor's office said San Jose's retirement costs have increased significantly and appear to have crowded out spending for nonpublic safety spending, but it questioned the estimates by the city as to how much it would spend on pensions.
The city in 2011 "used one inadequately supported projection that its annual contributions toward retirement costs would increase to $400.7 million by fiscal year 2015-16 in three bond statement documents that disclosed its financial condition to potential creditors," the report said.
Additionally, Mayor Chuck Reed and certain city council members cited a projection that San Jose's annual retirement costs could rise to $650 million by fiscal year 2015-2016, a projection "that our actuarial consultant determined was unsupported and likely overstated," the report said.
The auditor's office said San Jose's pension costs in fiscal 2015-2016 would be $320.1 million when assumptions approved by the boards of the city's two pension funds are taken into consideration.
In a letter to the auditor's office, San Jose's city manager said a professional actuary in the city's Department of Retirement Services developed the $400.7 million projection.
The $650 million projection was not an official forecast but a scenario discussed by city officials early last year and cited earlier this year by local media, the city manager said, adding the projection was not used for labor talks or budget purposes.
The city manager said San Jose disagrees that the projections were out of line, noting they "evolved over a nearly two-year period."
The city manager added that 23 percent of San Jose's general fund base budget is being used to pay for retirement benefits and that its annual retirement costs have increased to $245 million from $73 million over the past decade.
Reed in a statement said the auditor's report "confirmed what San Jose residents know from experience: San Jose is facing real financial challenges and increasing retirement costs have forced us to make significant cuts to core city services."
"I appreciate the auditor's recommendations for clearly reporting retirement cost information," Reed said. "In fact, the City of San Jose already does this and will continue to do so for both official projections and any estimates developed by its professional staff."