California's Leaders Still Ignoring State Pension Debt
California has just 72 percent of the assets needed to make payments to retired public workers, many of whom get to collect six-figure annual payments.
When arguing about whether the Treasury needed to take urgent action to deal with soaring federal debt in the 1980s, the late former chairman of the Council of Economic Advisers Herb Stein coined Stein's Law. It was simple and obvious: "If something cannot go on forever, it will stop."
I hate to pick nits with such an esteemed economist, but I'll offer Greenhut's Corollary: "Never underestimate politicians' ability to kick the can down the road." In 1986, federal debt was $2.1 trillion. In 2024, the debt is $34 trillion. Debt spending of this magnitude cannot go on forever, but it can fester for a long time and cause economic damage in the process. But, yes, it probably will stop eventually.
I thought of Stein's oft-cited quip when pondering California's pension crisis. A recent CalMatters report reminds us the state never has gotten its pension debt under control and that Gov. Gavin Newsom and the Legislature keep making the problem worse: "More generous-than-expected raises for California state workers are nudging up the cost of public employee pensions."
Back to my corollary: The report adds that Newsom "sidesteps the growing cost of CalPERS pensions" by using an accounting gimmick. The California Public Employees' Retirement System is only 72 percent funded, which means it only has 72 cents on the dollar to pay for the promised pensions—and they are one of the state's senior obligations. If the state budget ever collapses, government retirees are at the top of the list to get paid.
Per CalMatters, the Legislative Analyst's Office questions whether Newsom's shifting of funds from paying down CalPERS debt toward funding next year's pension costs runs afoul of Proposition 2, the 2014 ballot measure requiring the state to pay down certain debts. But let's not get too deeply into the weeds. The point: Even as the state's pension debt continues to spiral, Newsom and the Legislature won't tackle the problem head on.
Peruse the state legislative website and you'll find lawmakers fixated on every miniscule concern—concert ticket monopolies, landlord pet policies, healthcare wages, social-media age-verification policies—but nothing dealing with pension costs. The reason is obvious. The state's public employee unions rule the roost in the state Capitol and lawmakers better not touch their pensions.
Most normal people find pension reform to be mind-numbing. I'm not particularly normal, having written a While most Californians will depend on Social Security and meager savings for their Golden Years, the state's public employees will retire at ages 50-57 with 60 to 90 percent of their final years' inflated pay. If you think that we're "all in it together," then peruse the total compensation numbers on Transparent California. You'll find the average local firefighter earns well over $200,000 a year and pages of police sergeants with packages in the 400s and above. This comes at a cost: fewer public employees providing services, higher taxpayer-funded debt, and higher taxes. Note the large number of local tax measures on every ballot. Officials sell them as ways to improve public safety, upgrade parks, provide affordable housing, and fix the roads. But money is fungible. The growth in pension costs is fueling these tax grabs. These costs are "crowding out" spending on public services. A dozen years ago, pension reformers predicted, a la Stein, that this could not go on forever. Some believed the state's then $30-billion-plus deficit would lead to fundamental budgetary changes. Local governments and voters—even in liberal jurisdictions such as San Jose—passed pension-reform measures that reduced pension formulas (or limited pensionable pay) in the face of budget cutbacks. But they ultimately lost every battle. The courts rebuked San Jose's measure based on the California Rule, which refers to a series of court interpretations claiming that governments can't reduce pensions even going forward unless they provide something of equal or greater value in return. The California Supreme Court sidestepped that issue when it had a chance to change the rule. A union-friendly state agency derailed San Diego's effort at reform. In the end, Gov. Jerry Brown passed a useful but exceedingly modest pension reform law and spearheaded large tax increases to fix the budget deficit he faced. The pension reform movement lost steam. As usual, the unions flexed their muscle in the Capitol, in the courts, and in the state's administrative agencies. Reformers tried and failed—and since then talk about serious reform has been verboten in Sacramento. Can this go on forever? Probably not. The pension problem isn't going away, but neither is the power of the unions or the desire of the state's leaders to delay the reckoning for another day. This column was first published in The Orange County Register.
