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Public Pensions and California's Fiscal Future
Governor Schwarzenegger wrote an op-ed piece for the WSJ, Public Pensions and Our Fiscal Future:
Recently
some critics have accused me of bullying state employees. Headlines in
California papers this month have been screaming "Gov assails state
workers" and "Schwarzenegger threatens state workers."
I'm
doing no such thing. State employees are hard-working and valuable
contributors to our society. But here's the plain truth: California
simply cannot solve its budgetary problems without addressing
government-employee compensation and benefits.
As former Speaker
of the State Assembly and San Francisco Mayor Willie Brown pointed out
earlier this year in the San Francisco Chronicle, roughly 80 cents of
every government dollar in California goes to employee compensation and
benefits. Those costs have been rising fast. Spending on California's
state employees over the past decade rose at nearly three times the
rate our revenues grew, crowding out programs of great importance to
our citizens. Neglected priorities include higher education,
environmental protection, parks and recreation, and more.
Much
bigger increases in employee costs are on the horizon. Thanks to huge
unfunded pension and retirement health-care promises granted by past
governments, and also to deceptive accounting by state pension funds
(such as unreasonable projections of 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. (See
the nearby chart.)
I've held a
stricter line on government employment and salary increases than any
governor in the modern era (overall year-to-year spending has increased
just 1.4% on my watch). Nevertheless, employee costs will keep marching
upwards because of pension promises, and they will never stop doing so
until we get reform.At the same
time that government-employee costs have been climbing, the
private-sector workers whose taxes pay for them have been hurting. Since
2007, one million private jobs have been lost in California. Median
incomes of workers in the state's private sector have stagnated for more
than a decade. To make matters worse, the retirement accounts of those
workers in California have declined. The average 401(k) is down
nationally nearly 20% since 2007.
Meanwhile, the defined benefit
retirement plans of government employees—for which private-sector
workers are on the hook—have risen in value.
Few
Californians in the private sector have $1 million in savings, but
that's effectively the retirement account they guarantee to public
employees who opt to retire at age 55 and are entitled to a monthly,
inflation-protected check of $3,000 for the rest of their lives.
In
2003, just before I became governor, the state assembly even passed a
law permitting government employees to purchase additional
taxpayer-guaranteed, high-yielding retirement annuities at a
discount—adding even more retirement debt. It's as if Sacramento
legislators don't want a government of the people, by the people, and
for the people, but a government of the employees, by the employees, and
for the employees.
For years I've
asked state legislators to stop adding to retirement debt. They have
refused. Now the Democratic leadership of the assembly proposes to raise
the tax and debt burdens on private employees in order to cover rising
public-employee compensation.
But
what will they do next year when those compensation costs grow 15%
more? And the year after that when they've risen again? And 10 years
from now, when retirement costs have reached nearly $30 billion per
year? That's where government-employee retirement costs are headed even
with the pension reforms I'm demanding. Imagine where they're headed
without reform.
My view is different. We must not raise taxes or borrow money to cover up fundamental problems.
Much
needs to be done. The assembly needs to reverse the massive increase
in pension formulas to government workers (including already retired
workers) that it enacted 11 years ago. It also needs to prohibit
"spiking"—giving someone a big raise in his last year of work so his
pension is boosted. Government employees must be required to increase
their contributions to pensions. Public pension funds must make truthful
financial disclosures to the public as to the size of their
liabilities, and they must use reasonable projected rates of returns on
their investments. The legislature could pass those reforms in five
minutes, the same amount of time it took them to pass that massive
pension boost 11 years ago that adds additional costs every single day
they refuse to act.
And
after they've finished passing those reforms, they could take another
five minutes to pass legislation terminating the annuity give-away they
passed in 2003 and ending the immoral practice of pension fund board
members accepting gifts or even campaign contributions from lobbyists,
salesmen, unions and other special interests.
Reforming government employee compensation and benefits
won't close this year's deficit. It will, however, protect the next
generation of Californians from overwhelming burdens. The same is true
with respect to the other reform I'm demanding, including the
establishment of a rainy-day fund so that legislators can't spend
temporary revenue windfalls.
All of these reforms must be in place before I will sign a budget.
I
am under no illusion about the difficulty of my task.
Government-employee unions are the most powerful political forces in our
state and largely control Democratic legislators. But for the future
of our state, no task is more important.
Governor Schwarzenegger is in for the fight of his life. Reading the daily headlines on Jack Dean's Pension Tsunami
gives you a flavor of just how dire the fiscal situation is. Without
serious public pension reforms, California is heading towards fiscal
hell.
And it's not just California. Other states will suffer
the same fate if they refuse to reform public pensions. You simply can't
promise more than you can afford to pay out. At one point, you have to
address the problem or face much higher borrowing costs. Raising taxes
is not a long-term solution to mounting pension costs. It's akin to
placing a band-aid over a tumor.
With so much economic pain and
uncertainty, it's irresponsible to ask more from the private sector to
deal with public sector pension shortfalls. I sympathize with many hard
working public sector employees who had nothing to do with the financial
crisis, but I also realize that pension apartheid is not the solution.
You can't expect people who lost considerable sums in their 401K plans
to pay more in taxes to make up for public sector pension deficits.
Stakeholders
need to sit down and figure out a way to reform their public pensions.
And it's not just about cutting benefits, raising the contribution rate
and retirement age. They need to introduce meaningful, comprehensive
reforms which include world class governance standards so that the
public and stakeholders are reassured that pension monies are being
managed properly and in everyone's best interest.
Finally, listen
to New Jersey's governor, Chris Christie, below on how he handled
powerful public sector unions and introduced measures to address the
state's fiscal woes. Nobody likes reforms, especially when it hits their
pockets, but ignoring the problem is only delaying the day of
reckoning.
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California can't declare bankruptcy. No state can. There's no provision for it in the bankruptcy code.
http://www.knoxnews.com/news/2010/jul/25/tennessees-retirement-fund-good-shape-compared-oth/
"Steve Curry, assistant for programs to the Tennessee state treasurer, said every governor and General Assembly since 1975 has funded the Tennessee Consolidated Retirement System at the rate recommended by an outside actuary, an amount that includes money to cover any unfunded liabilities. As long as that continues to happen, the state shouldn't run out of money in its pension system."
Al Gore notwithstanding, our state has a lot of common sense.
Great article Leo, and your best point above. I sit on a pension investment committee. You cannot put to much emphasis on the above. The leeches know where to attach and they will suck every last drop if you let them.
These reform proposals are meaningless... all defined pensions should be eliminated and the state should tax any current pension over 100k at 90% to prevent abuse of the current system. (to start)
To be honest about it, is there anything Arnold could have done to stop this? IMO, probably not. Between manufacturing being lost in America, stagnant wages, and Prop 11, what could be done to save it?
Neither of these Governors go halfway far enough. Get ready for Lower Living Standards (TM), which means a vastly smaller public sector, lower service levels, lower benefits, lower pension payouts, more unemployment and lower salaries.
(Or massive price inflation).
And it's all good!
33% of California residential real estate mortgages are in "negative equity" category.
15% of California residential real estate mortgages are deliquent.
15% of all residents in the USA live in California.
12.3% U3 unemployment rate July 2010 California. (prelim)
21.9% U6 unemployment rate July 2010 California. (prelim)
8% of California's residents are illegal aliens.(conservative est.)
13% of the GDP of the USA is from California.(2008)
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California's state government has not passed a budget this fiscal year. The state government is not capable to manage the current crisis.
The collapse of California, taken alone, ended any economic recovery in the United States. Past tense. There is no escape... there has not been an escape since the Grey Davis administration... Arnie is a moron in his own right... and the state legislators are lunatic looters worse than the juntas of South America...
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http://www.corelogic.com/uploadedFiles/Pages/About_Us/ResearchTrends/CL_Q2_2010_Negative_Equity_FINAL.pdf
http://calculatedriskimages.blogspot.com/2010/08/mba-state-mortgage-delinquency-q2-2010.html
http://www.bls.gov/lau/stalt.htm
Unions need to be corralled and even terminated. Thay have become leaches sucking every dime out of society. Wreaking havoc if they don't get their way. Today purple shirt union leaches were bused in to shut down traffic in Los Angeles, all to show their support for 19 laid off janitors. Fortunately LAPD arrested some of their asses before they could cause major traffic jams.
Need another good example of unions killing business? How about GM? When you have more people retired collecting pensions than you have working employees, you have a company doomed. Until the taxpayers come in to pick up the tab.
I moved away from California 7 years ago. I was sick of 55% of every paycheck being taken in taxes before I received a dime!
Good riddance!
Look like I will need to follow you soon...
Any areas you can recommend?
"Government by employees for the employees...pension apartheid."
it is a disaster but the root problem is the runaway health care costs that shoot up these benes
you would think with all the sharp minds on ZH tellin the world the dollar is dead and get 'store of value' they would be the first ones to compliment workers who were shrewd enough to take a good portion of their compensation in something OTHER than dollars.. it is called diversifying your compensation..
yet they get blasted, like unions, for being stupid thugs.. yet they made the smart move
I live in this crap hole of a state also - fortunately not burdened by a perpetual property tax hole. It is encouraging to see the govenator address the issue. Not sure why it is in the WSJ though. Haven't really heard two peeps out of the issue here. The best legacy the govenator could leave would be to let the state grind to a halt until the issues are resolved. We are so f-ed if something happens here outside of the measly discrectionary part of the budget - like we don't have to worry about earthquakes, fire, floods, housing bubbles and collapses, ....
That first chart is just awesome. I live in this crap hole of a state and I can only hope it blows up soon. The entire government is made up of a bunch of retards on both sides of the aisle and the only thing that will address the problem is a complete reset of the system.
Too complimentary? Of course California will default, like many states, unless Zimbabwe Ben unleashes the printing press and big time. And California should default--time to start over.
Bureaucrats, America's Royalty, crave control, when they get it the society collapses.
It has all ways been that way.
California leads the nation to the brink.
If the State of California declares bankruptcy, will retired State Employee's get screwed?
I know several teachers close to retirement in California, and the School Administration is harassing every one of them and pulling lots of dirty tricks to get these teachers to retire early. Constant bullying, etc... Nasty situation. These teachers have worked for the State of California for around 20 years and are being treated like red-headed step children.
In fact, one teacher near retirement was recently sent to the Principal's Office for calling Obama an "idiot."
Of course they'll get screwed. But so will everybody else, since the money will be gone.
No state pensions, no state services, no nothin'. The sad fact is that there will be a day of reckoning coming upon California and most other states very soon. Allowing anybody to get in the way of the very nastiest sort of financial trimming merely makes the inevitible collapse that much nastier.
Yes, Draconian cuts are going to hurt EVERYBODY. They can either be made with some foresight or they will make themselves when the whole financial system collapses all on its own.
Either do a controlled burn of the fire ravaged landscape now, to save some of it; or let it burn on its own and it will eventually level everything in its path.
The fiscal fires are already ravaging most of the states as well as the feds. We have the power to do some desparate damage control. But everybody here knows that's not going to happen.