The Public Pension Problem
Collectively, every California household is on the hook to pay for the public pension promises and retiree healthcare commitments made by elected leaders to not only the 2.6 million public employees who currently are employed in California, but also the 2.4 million retired public workers, who are now living longer and enjoying lifetime employment benefits for themselves, their spouses, and their children.
California state and local governments currently face more than $401 billion in unfunded liabilities for public employees, according to a joint study from Calmatters, the Los Angeles Times and Capital Public Radio. The cost to state and local governments of unfunded retirement benefits has more than tripled since 2003 and will continue to grow aggressively.
That $401 billion in unfunded debt comes in two chunks: $254 billion in unfunded pension liabilities and $147 billion for unfunded retiree health care.
Santa Barbara County
Peter Adam, Santa Barbara County’s 4th District Supervisor, sounded the alarm a year ago on behalf of County taxpayers: “Santa Barbara County is going broke…The number-one expense that will ultimately break us is our pension obligations. This year, pension payments will constitute over 30% of our discretionary revenue. This is entirely unsustainable.”
Adam went on to say that Santa Barbara County will spend over $145 million this year on pensions alone. He adds that the solutions proposed by his colleagues will be more taxes. They will promise the money will be spent wisely. Make no mistake, any future taxes will go toward pension payments whether the politicians admit it or not. County funding for pensions and retiree health care leaves road maintenance, affordable housing, homelessness, public safety, fire and flood control, and education underfunded and undeliverable.
The Unfunded Shortfall
Three-quarters of the pension shortfall in California comes from the state’s two biggest public pension providers: 1) CalPERS (California Public Employees Retirement System), the nation’s largest public pension fund that manages benefits for 1.9 million state and local government employees, retirees and their families, and 2) CalSTRS (California State Teachers’ Retirement System), the nation’s second-largest public pension fund with 933,410 public school teachers and administrators ranging from pre-kindergarten through community college, and their families. CalPERS’ unfunded liability grew from $111 billion in 2015 to $138 billion in 2017. CalSTRS reported a gap of more than $107.3 billion in unfunded liabilities.
The University of California system has its own separate retirement program. In 1990, the University of California Retirement Plan (UCRP) cancelled all UC employee contributions because of an excess in state funding for its University system. Even when employee payments were resumed in 2010, the UCRP plan and its 129,879 members remain vulnerable to future economic slumps and reductions in investment earnings.
California has 130 public pension programs, according to the Public Policy Institute of California. Nearly one in nine Californians is a member of one or more pension programs.
Retiree Health Care Shortfall
Most government agencies do not set up reserves to pay for retiree health coverage (although some are beginning to do so). Unlike pensions, which are pre-funded with contributions from both the employer and employee, retiree health care benefits are more often funded out of current operations. Public pension retirees are often offered a choice of medical plans including dental and vision coverage. The current unfunded retiree healthcare shortfall is estimated by Calmatters at $147 billion.
For retired state workers, the state now chips in up to $21,000 a year per retiree for lifetime health insurance premiums. California State Controller Betty Yee calls this annual state contribution of $91.5 billion in health care payments for retired state workers a crushing blow that will become even more expensive as retirees live longer and request and receive more expensive medical treatments.
Montecito’s Special Districts
The Montecito Sanitary District (MSD) with 17 employees is a perfect example of public service generosity. With only 17 employees, staff salaries amount to $1,851,678 or $109,000 per employee per year.
MSD, like most public service districts, offers generous benefits. MSD’s employer paid pension payments, retiree medical benefits and social security (FICA) contributions last year amounted to $506,437, or $29,800 per employee. Total paid employee benefits, including retirement, group medical, dental, Medicare, life insurance, auto allowance, disability, workers comp – amounted to $940,169 or a whopping 51% of payroll costs. That means that for every dollar paid in wages, it cost MSD ratepayers $1.50 in salary and benefits. The comparable cost for employee benefits in the private sector is much lower, coming in at approximately 32% of payroll.
MSD is not singled out here as excessive. A similar story exists for all 2.6 million public workers in the State of California. No one begrudges high pay for public service but excessive pay and benefits needs to be studied rigorously.
Bankruptcy as a Solution
State bankruptcy is prohibited by the U.S. Constitution and so is a bailout of a state by federal taxpayers. However, federal bankruptcy codes do allow municipalities including California cities, towns and villages, counties, and taxing districts such as municipal utilities, water districts, school districts, bridge authorities, highway authorities and gas authorities to declare bankruptcy to discharge their pension obligations.
Since 2010 the City of San Bernardino, the City of Stockton and the Town of Mammoth Lakes in California and the County of Boise, Idaho have voted to declare bankruptcy. When the City of Detroit filed for Chapter 9 bankruptcy on July 18, 2013, it was the largest municipal bankruptcy filing in U.S. history, with unfunded debts in the neighborhood of $18 to $20 billion.
How it Happened
Prior to President John F. Kennedy’s 1962 Executive Order 10988, public service unions were limited to employees of the U.S. Post Office and a few states. Previous presidents and Congress saw little need for union collective bargaining in government monopolies. After 1962, public service unions began to grow exponentially. Today, union membership in the private sector has shrunk to an all-time low of a 7% share of workers while public service union membership has swelled to 37% of public workers.
Picking Taxpayers’ Pockets
At the state and county level, powerful public service unions provide money, campaign workers, and reliable votes to place elected legislators in office. In return, grateful politicians vote for a steady stream of public largesse demanded by the unions, including increased public wages, guaranteed lifetime pensions, reduced work rules and guaranteed public pension plans that are the envy of comparable private sector workers.
Private Industry Solutions
Private industry has swapped traditional pensions for 401K plans. IBM closed its pension plan to new hires in 2005 and froze benefits in 2008. Boeing closed its pensions in 2009 and froze benefits in 2016.
In 2011, General Electric (GE) stopped giving pensions to new employees. In 2015, faced with a crushing defined pension plan underfunded by $30 billion, GE ended healthcare plans that supplement Medicare for nearly 200,000 retirees and their dependents.
Of the Fortune 500, only 16 private companies still offer traditional defined benefits to new hires.
Solutions for Consideration
Why is the conversion of defined benefit pension plans to 401K plans for retirement never considered for public workers? Why not drop the current plan for new public service hires?
When the Montecito Water District (MWD) Board asked CalPERS what would happen if they canceled pensions and retiree healthcare for new employees, the answer was that MWD and its new hires would still have to pay CalPERS their regular contributions because CalPERS funds were needed to pay current workers, so not a nickel would be saved.
Why not a pension freeze? Why not a retirement plan that matches or exceeds the average Fortune 500 private plan? Why not a single fiscally responsible plan instead of 130 public pension plans in California?
Public indifference makes the current mess possible. What would it take to make Governor Newsom or the Santa Barbara County ruling trio of Das Williams, Gregg Hart, and Joan Hartmann advocate for financially prudent changes to pension and retiree healthcare funding? My bet is that all four of these elected leaders will continue to brag about minor tweaks, without the courage to look ahead and solve the problem. The path to election has sadly become one in which majority candidates must support labor unions, please uber-environmentalists and hope that they personally will have retired from public office before the next serious economic recession threatens to bankrupt California cities and counties.