Government Spending

Reason Writers Around Town: One Step Toward California Pension Reform


Reason Foundation's Adam Summers writing in today's Orange County Register

The nonpartisan state Legislative Analyst's Office recently confirmed that California's budget is built around billions of dollars in accounting gimmicks, overly optimistic assumptions and improbable handouts from the federal government. It projects a $25.4 billion deficit over the next 19 months and deficits of $20 billion for each of the next five years.

What's even scarier is that those figures do not include the state's enormous unfunded pension promises to state workers, recently pegged at up to roughly $500 billion – roughly $36,000 for every household in California. Throw in the $50 billion or so in unfunded retiree health care liabilities, a $10 billion unemployment insurance fund debt, and the state's $152 billion in general obligation bond debt, and you start to get a fuller sense of the state's true financial problems.

California's public pension and retiree health and dental care spending has quintupled since fiscal year 1998-99, increasing to $5 billion in 2009. And retirement spending is expected to triple again – to $15 billion – within a decade. The coming wave of baby boomer retirements and steadily increasing health care costs ensure that this burden will continue to grow rapidly. California will be spending more and more for state retirees' benefits, leaving less and less for other budget items such as public safety, education, and transportation.

The state budget passed in October takes state pension benefits back to 1999 levels – for future/new state employees – and the Schwarzenegger administration estimates the tweak will save up to $100 billion over time. That's a minor fix at best.

The state has tried this before. In 1991, California created a second tier of lower benefits in an effort to stem rising public pension costs. Less than a decade later, the Legislature passed, with virtually no opposition, the infamous Senate Bill 400, which not only massively increased state employees' pension benefits but also made those increases retroactive. It would simply be too easy for legislators, with the support and pressure of government workers' unions, to do it again.

California needs to switch to a defined-contribution system for all new employees, as the private sector has been doing for decades. 

Full Column Here

Related Reason Cover Story – Class War: How public servants became our masters

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  1. Cali needs to be forced into the state version of Chapter 7. Until those pension obligations are wiped away in a bankruptcy, Cali will never be fiscally whole again.

    Instead, however, they’ll get a bail out like the Greeks, Irish and soon to happen to the rest of the PIIGS. Said bailout will cost everyone else rail cars full of money, add debt to a debt problem, and not fix anything, instead only delaying the day of reckoning a few years.

    1. After the last election?

      The reason the Tea Party took the House was as a reaction to a federal bailout at right about the same size!

      Why would the next congress–which came into power by way of opposition to a similar bailout–turn around and vote for another bailout?

      I’m about as cynical as you’re likely to find, but even I’m not cynical enough to think Congress is about to do that…

      The only solution is to give the government employees the shaft–for want of a better word.

      …”for want of a better word” being the only way not funding their outrageous pension benefits could possibly qualify as giving them the “shaft”.

      1. Ken

        I wish Congress, even the one just elected and soon to be seated, would have the balls to tell California “Drop Dead”. But, sadly, I’m going to bet on past history, instead of them doing what is right.

        Perhaps they’ll grow a set of balls and do what needs to be done, but I doubt it.

        The only way fiscal sanity will be forced upon the innumerate, spineless political class is by the markets. When they can’t borrow any money, at any price, THEN we’ll get a balanced budget.

        And you’re right on what’s needed as part of the solution, only I wouldn’t call it giving the public employees the shaft. I’d call it downsizing their pensions to market rates (but from their perspective, it’ll be about the same thing). Besides that, public employees unions need to be outlawed. It’s a direct conflict of interest when they give money to politicians. Damn….I wish I could bribe (uhhh, make a “campaign donation”…yeah, that’s it) to my boss and then “encourage” them to kick me a bigger raise, fatter pension, lazier work rules, more baked in inefficiency.

      2. Tar and feathers is too kind. California employees need to get RiCO charges, SWAT invasions, potential survivor benefit recipients shot, asset forfeitures, defense funds closed, and rendered to torturestan.

        1. If you’re a company in California, and you know that the state has $500 billion in unfunded pension liabilities?

          OTBE, you gotta be lookin’ to relocate.

          Some businesses need to be in close proximity to Hollywood and Silicon Valley, but that’s a lot less true than it used to be. There’s still a lot of biotech in San Diego, and being proximate to the Port of Los Angeles/Long Beach is a huge deal for a lot of companies…

          But that stuff gets marginally less important at some point. …but if our last, best hope for sanity is Governor Moonbeam?

          $500 billion in unfunded pension liabilities? Either those liabilities are tackled by the legislature–or they will get funded. And when they get funded?

          Ask not for whom that fiscal bell tolls, …

          1. How about a 90% income tax, with taxes from wages, investments, dividends, and private pensions exempt?

            1. Oh, but the solution–is getting rid of Prop 13!

              …because if the State of California had more of our money to spend?

              They’d spend less of it.

  2. “What’s even scarier is that those figures do not include the state’s enormous unfunded pension promises to state workers, recently pegged at up to roughly $500 billion…”

    $500 billion in unfunded pension liabilities! That should be the beginning and the end of it right there.

    California’s biggest problem is its government employees and their union.

    Any solution that doesn’t provoke public demonstrations involving thousands of government employees screaming about how much they hate us fiscal conservatives–for how uneducated and ignorant we are?

    …isn’t really a solution.

  3. Bankruptcy is pension reform…

  4. Nothing yet on the excellent CALPERS video?…..r_embedded

  5. Why bankruptcy? The legislature promised those ruinous benefits and pensions, and the legislature can renege on them. “Pension? I hear they’re hiring down at Wal-Mart…”

    (If only! Since the state legislatures are basically owned by AFSCME and the other public sector unions, I share the general pessimism on this board that nothing like this will happen.)

  6. Just like GM is an insurance company that makes cars on the side, CA is turning into an insurance company that extracts money from taxpayers on the side.

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