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.