Public employee union propaganda notwithstanding, California has a serious public pension problem.
Or, more precisely, cities and some fire districts have a pension problem because they spend so much of their budgets on highly paid, high-pension police and firefighters.
Pension obligations are consuming ever-larger portions of those budgets, squeezing out money for other services. Payments into the state’s public pension fund played central roles in the bankruptcy of three cities and the one that has emerged from bankruptcy, Vallejo, is already back in distress.
Cities are in this pickle because of a perfect storm of shortsighted decisions.
Fourteen years ago, at the behest of the California Public Employees’ Retirement System and unions, then-Gov. Gray Davis and the Legislature sharply increased state pension benefits, relying on CalPERS’ assertions that strong investment earnings would pay for them without additional money from taxpayers.
Throughout the state, local government officials in thrall to their unions followed suit. But CalPERS’ assurances turned to dust when its relatively risky real estate and equity investments turned sour, costing tens of billions of dollars.
Finally, as CalPERS’ unfunded liabilities obligations were reaching unacceptable levels, the fund began ramping up mandatory payments from its local government members, whose own revenues had also been squeezed by recession.
Many of them have borrowed money to make their pension payments, compounding their problem. Bankrupt Stockton’s largest debt is a pension bond.
Some cities have negotiated new contracts that require employees to bear larger shares of pension payments, but as baby boomer workers retire in ever-larger numbers, pension payouts will escalate and the problem will persist.
So what should be done?
Gov. Jerry Brown and legislators have enacted a very mild pension reform whose effects won’t be felt for years. Meanwhile, however, San Jose Mayor Chuck Reed is risking the political wrath of unions by proposing a deeper overhaul that would allow local governments to reduce future benefits for employees, but not benefits they have already earned.
Reed and a few other mayors want to place their measure on the ballot, either in 2014 or 2016, but so far lack funds to counter the immense sums that unions would spend to kill it.
Business interests have no stake in the battle and will stay away. Reed et al. need a deep-pocketed individual, but the one who has given the effort some money, Texas billionaire John Arnold, is already being vilified by Reed’s foes for being a billionaire and a Texan.
It’s very difficult to see how Reed’s pension crusade can succeed. But the local pension problem will not go away by itself and, if anything, is likely to worsen.