Governor Arnold Schwarzenegger penned an op-ed for the Wall Street Journal last week that lays out the stark reality of California’s budget crisis. Bluntly stated, without significant public pension reform, the state budget is shot all to heck – leading to its inevitable demise. “Here’s the plain truth,” says Schwarzenegger. “California simply cannot solve its budgetary problems without addressing government-employee compensation and benefits.”
Right now, 80 cents out of every government dollar is being spent on public employee compensation and benefits. The costs over the last decade rose THREE TIMES faster than revenues. There must be trade-offs, so on the chopping block has been higher ed, state parks and even one of California’s sacred cows – environmental protection.
It gets worse. According to the governor, “much bigger increases in employee costs are on the horizon.” He continues:
Thanks to huge unfunded pension and retirement health-care promises granted by past governments, and also to deceptive pension-fund accounting that understated liabilities and overstated future investment returns, California is now saddled with $550 billion of retirement debt.
The cost of servicing that debt has grown at a rate of more than 15% annually over the last decade. This year, retirement benefits—more than $6 billion—will exceed what the state is spending on higher education. Next year, retirement costs will rise another 15%. In fact, they are destined to grow so much faster than state revenues that they threaten to suck up the money for every other program in the state budget.
Over the last TWO years, the private sector has seen the loss of almost 1.2 MILLION jobs in California. The public sector? Virtually none. 401K’s have declined 20% nationally since 2007. Public sector? Up in value, to the point that in California public employees who retire at age 55 can look forward to a million bucks for their retirement.
Before he signs a state budget, Governor Schwarzenegger insists that the Democrat-controlled California assembly:
#1: Reverse the massive and RETROACTIVE increase in pension formulas enacted 11 years ago.
#2: Prohibit “spiking” – the practice of giving someone a big raise in his last year of work so his pension is boosted.
#3: Require public pension funds to make truthful financial disclosures to the public.
#4: Require public pension funds to use REALISTIC projected rates of return.
#5: End the “annuity give-away” they passed in 2003.
#6: Require employees to up their contributions.
#7: End the immoral practice of pension fund board members accepting gifts or even campaign contributions from lobbyists, salesmen, unions and other special interests.
#8: Establish a rainy day fund.
So far, his demands are falling on deaf ears. The Washington Examiner published a piece two days before the Guv’s op-ed titled “California rejects even modest pension reform.” In fact, recent California legislation allows government employees to PAD their pensions during their last year on the job. “We should be taking away the candy, not adding more,” Marcia Fritz of the California Foundation for Fiscal Responsibility complained to the Los Angeles Times.
There is one state, though, that has addressed the pension black hole. Any guesses? Yep – it’s Utah. In March, the state legislature became the first in the nation to pass a major overhaul of the state’s defined benefit pension system after it lost 30 percent of its assets ($4 billion) in the stock market. All current employees are “held harmless” and will continue in the current system. All new workers hired after July 1, 2011 can choose to enroll in either a 401(k) or a hybrid pension system that caps state contributions at 10 percent of employees’ salaries – no matter what the stock market does.
I admit – this one flew under my radar during the last session. I went to a couple of committee meetings where it was discussed and heard blah, blah, blah, actuarial tables, blah, blah. I did understand Representative John Dougall who said something like this on the House floor: “Without these changes, pensions blow a HUGE hole in the state budget and we go bankrupt.” (Dougall didn’t think Utah’s changes went far enough, by the way.)
According to the Washington Examiner,
Utah state Senator Dan Liljenquist, who sponsored the legislation, said it was the only way to honor current pension commitments and also keep unfunded pension liabilities from bankrupting his state.
Other states have tried increasing retirement age, scaling back retiree benefits, freezing cost of living increases and requiring employees to start contributing to their pension plans, but hybrid plans like Utah’s are increasingly viewed as the best way to keep government promises to current employees while scaling them back to sustainable levels for future workers.
“We’ve completely eliminated the pension-related bankruptcy risk. This is exactly what California needs to do,” Liljenquist told The Examiner, adding that all the public unions in Utah were initially opposed to the idea. “But they eventually realized that we preserved benefits for current employees, and if we go bankrupt, all pensioners will be out of luck.”
Contrast that with California’s irrational ability to make even minor adjustments to its unsustainable pension system, virtually guaranteeing its own demise.
I still don’t fully understand all the ins and outs of pension systems – but I do recognize a broken, unsustainable system when I see one. I don’t buy for one second the line that “California is too big to fail” (nor do the companies leaving CA and flocking to Utah, apparently). I wish Governor Schwarzenegger luck in pulling his state back from the brink.