California Refuses to Fix Public-Sector Pensions

Golden State lawmakers close their eyes and pretend the looming pension crisis doesn't exist.

Serious people know that California faces a serious financial problem because over-sized compensation packages for the state’s public employees are consuming every public dollar in sight and imposing a long-term debt on future taxpayers. Unfortunately, one won’t find many serious legislators in the state Capitol, especially in the majority party these days.

Faced with depressing fiscal numbers, the Sacramento brain trusts have decided that the best way to deal with unfunded pension liabilities is not to reduce the benefits that are causing the problem. Their idea is to create yet another program that would boost pensions for private-sector workers after first deducting 3 percent of workers’ paychecks to fund it. In the view of the Democratic leaders who propose this goofy idea, government pensions are fine. The real problem is the stingy private sector. And they have a new government program to fix it.

State Senators Kevin de Leon and Darrell Steinberg and Assembly member Warren Furutani last month introduced SB 1234. “The bill would require a specified percentage of the annual salary of an eligible employee participating in the retirement or pension plan to be deposited in the Golden State Retirement Savings Trust … .”

The program would be funded by a non-profit or through fees paid by California employees, and could be managed by the California Public Employees Retirement System (CalPERS), which means that California retirees would get a meager paycheck from a system managed by state employees who receive the most generous pension plans on Earth. Unlike government pensions, this plan’s liabilities won’t be backed by state taxpayers and will provide a rate of return that’s about half of what the public employee system receives.

That’s further proof of the unrealistic investment-income returns expected by the state’s taxpayer-backed retirement funds. When taxpayer money is at risk, the government assumes a generous rate of return of 7.75 percent. When taxpayer funds aren’t on the line, then state officials suddenly become conservative and realize that U.S. Treasury bond rates are all we can realistically bank on to fund defined-benefit pensions.

This program also is a metaphor for how this state is run—for the benefit of the government class, which occasionally throws a few crumbs toward the rest of us when we get a little unruly. Most financial experts are worried about the coming “pension tsunami”—the tidal wave of taxpayer-backed costs that will drown budgets and burden taxpayers. De Leon’s press release said the bill is designed to address “the looming ‘retirement tsunami’ represented by the massive shortfall pending in most people’s retirement.” The state can’t manage its own books, yet it spends its time regulating the private sector. How typical.

My guess: If passed, it wouldn’t be long before the system—which imposes costly new requirements on business and would result essentially in a 3 percent tax on employees—morphs into a full-fledged government agency, but even if it doesn't, this is an absurd endeavor. Social Security is a Ponzi scheme. California’s state-run pension system is collapsing. So California’s Democratic leaders have come up with a state-created system that combines Social Security with the state’s pension system. You can’t make up this sort of thing.

Furutani said the legislation is meant to deal with “pension envy.”

Those words provide crucial insight into the thinking at the Capitol. Last year, Treasurer Bill Lockyer said that protecting defined-benefit pension plans for public employees are a key priority. That’s what this is about—creating a positive alternative to defuse complaints about public pensions.

I’ve argued, facetiously, that the real solution to the pension crisis would be to put every Californian in the CalPERS system—promising everyone the “3 percent at 50” cost-of-living-adjusted retirement formula (plus all the common pension-spiking gimmicks) that has resulted in the growing $100,000 Pension Club. After the financial meltdown and the Greek-like street protests, we all really will be in it together.

SB 1234 isn’t a serious bill. It’s meant as rhetorical ammunition to bolster this union-backed meme: “The problem isn’t that public sector employees earn too much in retirement. The problem is that the private sector pays employees too little.” It would be great to provide better retirement income for private-sector workers. But unlike in the public employee systems, private employers cannot generally foist their debt on taxpayers. The books have to balance.

One can find serious Democrats who understand that point, but they will be found outside the Legislature. “From Stockton to San Diego, government pension costs are crushing local governments,” wrote former Assemblyman Joe Nation in a recent Sacramento Bee column co-authored with a Stanford colleague who has researched the pension issue. The column blamed “deceptive accounting and unrealistic assumptions” from the state’s retirement funds on the growing pension debt.

Legislators should drive 45 minutes south of Sacramento to see the problem at Ground Zero. That would put them in Stockton, which is likely to become the largest U.S. city to enter Chapter 9 bankruptcy after it goes through a state-mandated 90-day mediation period. Stockton can’t pay its bills.

The decrepit port city spends 81 cents on every dollar on employee compensation—not to mention the unfunded debt to pay for its 94 former employees earning six-figure pension checks and the health-care program that covers employees and spouses for their entire lives. No wonder there’s no money left to patrol the streets or provide the basic services that are the reason municipal governments exist.

Matters are about to get worse as the state’s biggest pension funds consider lowering the predicted rate of return on their investments, which will add more debt to hard-pressed local governments. Then again, people who point out such things must be envious and cynical. What kind of person doesn’t believe that California’s state government can create a secure retirement for the rest of us?

Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Almanian||

    So, you can probably just re-run this article every quarter or 6 months basically forever or until Calirfornee slips into the ocean, whichever comes first.

    No need to rewrite it, cause the song remains the same.

  • elian||

    Im a single bisexual girl,but i am confident, Ijust wanna to find people who like me,be friends,start a relationship,dating,even marrige....and my friend recommended===datebi.c/o/m'It is the best place for looking for bisexual men & women dating relationship or marriage.Hope you all find your true love..

  • FreedomFan||

    No doubt you are a walking petri-dish of pathogens.

  • Rush||

    You're a Slut!

  • ||

    Hey, ya gotta loot while the lootin's good, amirite?

  • Realist||

    Not a problem....the federal government will bail them out.

  • ||

    That is what they think. It will be TARP all over again. And if the people of this country are dumb enough to re-elect Obama, then they deserve it.

  • Sparky||

    It's not going to matter who is in the White House. If a GOP President tries to let the state go belly up can you imagine all the whining about the traitor in the WH that is letting the country fall apart?

  • ||

    That is what California will say. But I think most people hate that state and will cheer. And California never votes R anyway.

  • Sparky||

    I don't know. Here's how I see the media reporting it:

    Obama WH: Once again, the great savior delivered hope to the people of California by saving the state from financial ruin.

    GOP WH: The President tried to veto the bill aimed at bringing relief to California. Thankfully, the senate had enough votes to override the veto and pass the life-saving bill. This President will now go down in history as the man who tried to destroy California.

  • Sevo||

    Sparky,
    You need to ad some 'caused by evil bankers/Wall Street' BS to complete the coverage.
    See, oh, Greece.

  • ||

    Romney wouldn't even need to veto a bailout of California because there'd be no majority of Congress passing such a bailout. And if Romney did veto a bailout, they could never get 2/3 of both houses to override.

    Any bailout of California could only come through the extralegal actions of Chairsatan Bernanke with the acquiescence of President Owebama.

  • Just and Engineer||

    I would love to see the dems try and bail out Cali. How well do you really think it would go over with all the struggling people in this country seeing the dems bailout a bunch of hollywood/silicon valley hipsters. All Fox News would need to do is find one CA DMV worker with a fancy house and it'd be over.

  • ||

    Agreed John. I seriously look forward to the time when CA pays the piper.

  • Almanian||

    "Ford 's Ghost to New York City Sacramento: DROP DEAD!"

    Yeah - it's been done before...

  • ||

    Actually, that was the New York Daily News attributing something to Ford that Ford never said.

    The Ford Administration had told NYC that they would not provide additional loan guarantees, then the media trapped the German Chancellor (Schmidt, IIRC) into saying that a NYC default would be "catastrophic" for the bond market, which was used as a lever to get the guarantees NYC later got.

  • powerpickle||

    Being a non-NYC New Yorker, what actually happened was NYC got bailed out by the State and the rest of is outside NYC got stuck with the bill. One might argue that it worked out ok since NYC came back from the brink but most of us non-city folks resented the increased taxes that paid for it...

  • ||

    No, New York City paid it's own bills. What the state did was to guarantee the city's debts -- but on condition that the state got to veto the city's budget and contracts. This continued for about a dozen years *after* the last state-guaranteed bonds were paid off. The end result was a change in NYC fiscal from irresponsible to reasonable. That's more or less what the Feds need to do with states like Illinois and California when we (inevitably) bail them out.

  • ||

    Is that even constitutional? "The Powers Forbidden to Congress" read in part from Section 9, Article 6, Clause 1: No Preference shall be given by any Regulation of Commerce or Revenue to the Ports of one State over those of another:

  • Fed Govt||

    Guess we'll need to pay all the States the same amount.

  • juris imprudent||

    I'll let you in on the secret - Sacramento isn't really the state capital, it is an insane asylum.

  • T||

    Why am I reminded of the fine members of the IAMAW? When my sister was Secretary-Treasurer of the union local, United was going through another one of its bankruptcies. As part of the negotiations, they had asked for the union members to pay more for health insurance and some other stuff. A significant portion of the IAMAW membership had the attitude that they wouldn't take one nickel in pay or benefit cuts, and if that drove the company into a Chap 7 instead of an 11, oh well. Whoever picked up the pieces would need mechanics to fix the planes.

    They were going to take United for every last dollar they could and fuck everybody else.

  • ||

    At some point the bond markets have to dry up. Who in their right mind would buy a California bond right now? I would not be surprised if they are all being bought by the Fed.

  • Sevo||

    Someone who believes the Fed will bail CA out; moral hazard has been shown to be profitable.

  • ||

    I went and looked at where California stands - both rating and yields. Reminded me why, though a libertarian, I don't always trust the market and I certainly don't trust oligoplistic rating agencies.
    http://www.treasurer.ca.gov/ratings/current.asp
    http://www.municipalbonds.com/.....d_averages

  • ||

    I think it must be like SEVO says and people just assume that we would never let California fail. There is no way to look at the numbers and think they are solvent.

  • ||

    Those ratings are pretty poor, actually. They're not junk yet, but they are on the low end of investment grade...

  • ||

    That's why State of California is busy running ads on radio urging listeners to buy California State bonds. I listen to news radio commuting, so these ads (along with the incessant 1-800-GETTHIN) shows up on the rotation quit frequently.

  • ||

    I buy CA High Spend Rail Bonds. Im a winner!

  • ||

    Sacramento may be insane, but since it utterly fails at keeping the crazy locked up inside, calling it an asylum is stretching. It's more like an insane cabbage patch. Once the little vegetables are crazy enough, they send them out into the rest of the state.

  • Almanian||

    But Cabbage Pattch kids were CUTE....

  • Old Salt||

    More like Garbage Pail kids if you ask me...

  • k2000k||

    All we need know is a guy in a bat costum and we got ourselves the next batman video game.

  • ||

    Hahaha. I click on linky-link to this article and what's the banner ad?

    http://www.letstalkpensions.com

    Paid for by Californians for Retirement Security! Handy sections to soothe any worries (Get the facts!) and all that.

    I love the blind machine-keyword marketing of the internet. Its Kafka for the 21st Century with these kinds of clashes. Last good one I remember was scanning a Krugnuts screed about tenths-of-one-percenters (only way to get himself on right side of the fence) while a Goldy Sux Flashapalooza blinked away to his left.

    Gotta laugh cause only other option is to cry.

  • ||

    Love the Thelma and Louise picture,perfect metaphor for California and the country in general when it comes to economics. We could stop and change direction,try to deal with our problems or we can bury the petal and see what happens. I think the Ron Paul experience has shown us what the average American would rather do at this point in time.

  • Loki||

    Something tells me that Thelma & Luise picture is going to get a lot of use in the coming years.

  • Kevin||

    Coming after Obama’s reelection in 2013, the US taxpayer bailout’s out California because the Union Beast must be feed.

  • Moogle||

    "Golden State lawmakers close their eyes and pretend the looming pension crisis doesn't exist."

    It's so cute when political commentators think politicians are the same species as the rest of us.

    No. They know exactly what the situation is.

    They just don't care. They suck as much money from the system as they can, and when it finally collapses into ruin they will bolt.

  • k2000k||

    or blame their opponents and their baby murdering and brown people hating ways.

  • Jeffersonian||

    Faced with depressing fiscal numbers, the Sacramento brain trusts have decided that the best way to deal with unfunded pension liabilities is not to reduce the benefits that are causing the problem. Their idea is to create yet another program that would boost pensions for private-sector workers after first deducting 3 percent of workers’ paychecks to fund it.

    More leeches. The answer is always more leeches.

  • ||

    it's leeches all the way down!

  • STEVE SMITH||

    STEVE SMITH ONLY AFRAID OF PUBLIC SECTOR UNIONS. NOBODY RAPE LIKE PUBLIC SECTOR UNIONS. STEVE SMITH GIVE TIP OF CAP FOR HIGH QUALITY RAPE.

  • MacKlingon||

    California=Greece

  • Alex||

    I know whats going to happen. Obama will steal the taxpayers again and give it to the unions. The unions will keep 90% and the rest will be used in a Superbowl advertisement to support the president for "saving" California (its halftime in California)
    Then they will make long speeches praising each others.

  • ||

    California comprises more than 13% of the entire U.S. GDP and has about 12% of the U.S. population. Do you really think anyone or any state would be spared significant pain if California were to fail?

    If California goes off a cliff, you can count on the federal government and the other states doing everything possible to prevent a crash landing, merely because it's in their own best interest to do so.

  • ||

    Actually, it's in everybody's long term best interest to allow CA to fail.

    It would be worth any amount of pain to make them take their medicine.

  • ||

    And the pain would be short compared to what happens when you drag out a soft landing.

  • ||

    So your story is that CA is TBTF? No it's not. No TARP, no welfare, no nothing.

  • ||

    "Do you really think anyone or any state would be spared significant pain if California were to fail?"

    Heck, that's the only reason I read about my ex-home-state at all. They're being stupid and greedy, and they're eventually going to cost me money no matter where I go. So, yeah, we all know that.

    But here's my fear: the press conference in which Boehner stands side by side with Reid, and he's talking about how everyone recognizes that, while California brought this on themselves and used all the missing money for themselves, everyone recognizes that we can't simply let California go broke because the economic consequences would spread all across the country, taking down businesses everywhere and resulting in billions more unemployed . . . and the Dems will write a bill asking for ten trillion dollars, but Boehner will wisely cut them down to one trillion . . . We're screwed.

  • UvalDuvalCuckoo||

    But SkippingDog, the productive are leaving CA in droves. It's possible by the time the scenario you describe happens, all the productive people will have Galted over to AZ, NV , NM and Texas. I don't really see the people with deep pockets sticking around until the bitter end -so by the time the chickens come home to roost, it CA might account for much less of the GDP. Not saying it will happen, but do think it's a pretty fair possibility.

  • ||

    It is quite astonishing that regular folks who retire in their mid to late 60's, with half or less of retirement funds, allow themselves to be nothing but slaves to their "public servants". Can anyone really say that government employees are "public servants", when the peoples taxes are used to provide these "servants" with better pay and pensions than the tax payers themselves?

  • ||

    Here's a little demographic information for you, UvalDuvalCuckoo:

    http://www.ppic.org/main/publi......asp?i=259

    California's rate of growth has certainly slowed, but not nearly as much as NV or NM. AZ is where the retired white people go to die in places like Sun City. TX does draw some people because of the lack of income tax there, but property taxes are much higher than CA.

    Even after the coming defense cuts occur, California will still have the 7th Fleet and a bunch of R&D facilities that can't be duplicated easily elsewhere. CA also has the largest congressional delegation in the country.

  • ||

    For the first time in it's history, in 2010 California lost population. Dropping by 129,000, Texas was the migrant-state of choice. What isn't known is the economic make-up of those leaving, coupled with the continued immigration of not-so-well heeled over the border. Either way, the 2010 per-capita income did fall in California some $750 per person. Simply put, those that can leave. We'll see how this all plays out in 5 years or so. Either way it won't matter, or it'll be too late to change the outcome.

  • ||

    No, those that can, stay, and live in mansions on the coast or tend the lawns of the mansion-dwellers. California has incredible wealth, but 1 out of 6 people lives in poverty. The national trend in inequality is even more pronounced here.

    Out-migration is continuing but has slowed. People leaving the state generally are middle class working people looking for jobs and cheaper housing.

  • ||

    "CA also has the largest congressional delegation in the country."

    Can you make your point without ridiculing fat people?

    At least try . . .

  • FreedomFan||

    California is a "progressive" workshop.

    Take a look everyone: You get to see in advance what will happen to the country if B.O. is re-elected and continues to "fundamentally transform America" into an 0bammunist dystopia.

    The only question is who will go bankrupt first...0bama's democrat cronies in California, or 0bama's home state of ILL-inois.

  • ||

    as a result of the last census California is not gaining a seat in Congress. First time that has happened since California joined the union. I have been here since 79 and will be moving my organization in 2013.

  • ||

    Why is the thought of SB1234 absurd?
    After all, this whole thing is the basis of Obamacare

  • ||

    Hey, I have a great idea! Let's spend 97 BILLION dollars (minus, of course, the $3 billion federal grant) on a high speed railway. Let's put the first leg of it out in the boondocks where no one will ride it. Let's also put all the taxpayers on the hook to make up the difference between rider revenue and operating costs. We could call it the 'Boondoggle in the Boondocks'!

  • ||

    Steven: you are spot on but...the real problem is the entitlement voter and all the liberal blocs here in the soviet republic of Ca.For now decades, these groups have elected liberal Dems over and over again. There is hardly a Pub Party left and conservs have nowhere to go . The absurd legislation that keeps killing energy, business, job creation in the private sector is pure lib-Dem. There are so many blocs, minorities, gays, feminists, unions that one does not speak of Ca. as America anymore but ..the Balkans.

  • ||

    I'll laugh myself silly when CA goes belly up. It's state full of narcissistic assholes and sociopaths.

  • pottfullofpith||

    So...in a state where business is being choked to death by regulation or driven out by litigation, the solution to not enough state revenue is to impose an additional pension burden?! As usual, they are drilling holes in the bottom of the boat to let the water out.

    There were some comments asking who would loan CA money. With regard to SB1234, an important advantage to the State of having a fund of private pension money under its control is that it would be an easy place to go to borrow what CalPERS needs to make good on its public pension promises. It's good to be the King.

  • ||

    Right. California with the "prop-tyranny" has choked education, public works, and yes, pensions. Pension envy is exactly what it is. With the beloved "free-market" firms raiding and dumping pensions whole-scale, despite extreme profitability, the right's solution is a race to the bottom. Anyone who believes this hack's "opinion" piece, has brain-damage. Please tell me how you would feel if the public decided to reduce or eliminate your private pension because you were making too much money, or bankers, if I decided my mortgage was just too much and I'm only going to pay half as much for the rest of the contract. No difference at all.

  • ||

    @Steven Hansmann - Unless Obama or Jerry Brown nationalizes all private industry in this country, or unless you're GM, the "public" has no control over private pensions or retirement plans. However, the public does theoretically have the power to change public policy, which includes how much they're willing to pay in taxes for public employees.

  • ||

    I can't tell - who pays the 3% tax? Public employees? Private employees?

    Who's getting the meager paychecks? "California retirees?" Public? Private?

    Is this impending pension tsunami (everywhere) generally more due to very high promises, or to pols deciding that they stood a better chance of re-election if they sort of skipped that year's pension-plan contribution and spent that money on more important things like voters?

    (If it was the second to any significant extent, the residents who have been blaming the "pols in bed with unions" demographic for their plight lose some moral cover. If they were happy with the new roads and extra police and swimming pools while knowing that the yearly budget somehow left this big overdue payment to their contractual obligations just sitting out there growing, they lose some of the high ground in the "the retirees need to share the pain" paradigm.)

  • ||

    The private employees would pay 3% of their salary into this pension program that would be managed by CalPERS, the public employees union. This is like putting the fox in charge of guarding the hen house.

    The cause of the pension tsunami is over-promising by politicians to state employees unions. When the pension plans come up short, the money is diverted from spending on state services like roads, public safety and education.

  • Eninea||

    As a resident that's trapped in this state due to a lack of finance, I honestly have to say that, as much as it would be very painful, I really think a complete failure is what this state needs. We need to learn a lesson about what happens when you put money at the top of the priority list and responsibility at the bottom. It's the only way we might actually get the ball rolling again in this place and get some long needed restructuring done.

    But I'm betting my chips that the suits in Washington D.C. will bail us out thus further enabling the selfish behaviors of people here and continuing our road to hell.

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement