Public Pensions Could Bankrupt California

By Adam B. Summers and Jon Coupal 

California’s $19 billion budget deficit seems to worsen by the day, but
an even larger financial crisis is brewing in the state’s pension
system. Over the last two decades, state lawmakers have bestowed massive
pension and benefit increases upon government workers. Unfortunately,
taxpayers are now getting the bills for these handouts. Recent studies
estimate California has $500 billion in unfunded pension liabilities,
not to mention over $50 billion in unfunded retiree health care
liabilities. It’s important for the state to recognize how it got into
this fiscal disaster—and how to get out of it.  

California’s public pension and retiree health and dental care
expenditures have quintupled since fiscal year 1998-99, going from about
$1 billion to $5 billion this year. And retirement spending is
expected to triple again—to $15 billion—within the next decade. 

Part of the problem is the growth of state government. Since 1998,
California’s state workforce has grown by 31 percent and taxpayers now
pay for more than 356,000 state workers. Even during this terrible
recession, instead of cutting back, California has added over 13,000
workers to the state payroll since 2008.  

The benefit increases doled out by Sacramento are also crushing the
state. Consider that public pension benefit increases passed in 1999 via
SB 400, which offered retroactive benefit increases to government
workers, were supposed to cost $650 million in 2010. The actual costs of
SB 400 to taxpayers: $3.1 billion this fiscal year and $3.5 billion
next year.  

To make matters even worse, California is the only state in the nation
that calculates pension benefits based on an employee’s highest salary
in a single year. Most states use three- or five-year periods to
determine pension benefits, making their systems less susceptible to
pension spiking. SB 2465, which implemented the one-year final salary
rule in 1990, has cost taxpayers more than $100 million a year. It was
supposed to cost “only” $63 million per year. 

The results are lavish pensions for government workers and big bills for
taxpayers. California taxpayers are now paying pensions that exceed
$100,000 a year to over 12,000 former state and local government
workers, including more than 9,000 state and local employees covered by
the California Public Employees’  Retirement System (CalPERS) and over
3,000 former school administrators or teachers covered under the
California State Teachers’ Retirement System (CalSTRS). 

This pension crisis threatens to bankrupt the state. To his credit, Gov.
Arnold Schwarzenegger has urged action on this issue but current
reform proposals merely tinker around the edges of the current
defined-benefit system and do not go nearly far enough. There are
several steps California must take to permanently get pension costs
under control.  

The private sector long ago abandoned defined-benefit pensions due to
their volatility and unsustainable costs. California is going to have to
do the same. Close the defined-benefit pension plans for state
employees and enroll all new or future employees in 401(k)-style
defined-contribution plans for pensions and other post-employment
benefits, such as retiree health care and dental benefits. These 401(k)
retirement plans are good enough for the rest of the population; they
should be good enough for government workers. 

To prevent the handouts and pension favors that politicians have been
giving to certain groups, California should adopt an amendment to the
state constitution requiring that all future government employee benefit
increases be approved by voters, who end up stuck with the bills. It
should also pass another amendment prohibiting retroactive benefit
increases. 

In the short-term, the state should also require employees who have
previously retired to forfeit their retirement checks while they are on
the state’s payroll to avoid double-dipping and collecting multiple
checks, as over 5,000 former state employees are doing today.  

California’s pension and retiree health care benefits are unaffordable
and unsustainable. Gov. Schwarzenegger and a few politicians, from both
sides of the political aisle, are now calling for action on this
tremendous problem. They’d better hurry. Taxpayers are sick and tired of
being forced to pay ever-greater amounts of their hard-earned money
towards increasingly generous benefits for government employees, all
while their own retirement accounts shrink amidst the recession. To
avoid bankruptcy, governments at all levels are going to have to switch
from defined-benefit pensions to more affordable 401(k)-style
defined-contribution systems.

Adam B. Summers is a policy analyst at Reason Foundation and author of a new study on the state’s pension crisis.  
Jon Coupal is president of the Howard Jarvis Taxpayers Association –
California's largest grass-roots taxpayer organization dedicated to the
protection of Proposition 13 and the advancement of taxpayers' rights.