California At The Breaking Point

April 15, 2010 03:50

California’s public-employee retirement funds are $500 billion in the hole. It’s news that unions and their candidate, Jerry Brown, don’t want to hear.

From IBD Editorials

Pensions: A new Stanford study says California’s public-employee retirement funds are $500 billion in the hole. It’s news that unions and their candidate, Jerry Brown, don’t want to hear.

The government union money machine has had a good run. But increasingly there are signs that it is heading for a crackup with the taxpaying public. Such an event may occur as early as this November in California, where the machine has had probably its greatest success and has done the most fiscal damage.

The “machine” to which we refer was engineered in the 1970s when California’s legislature cleared the way for public-employee unions to organize and bargain. Then-Gov. Jerry Brown signed a crucial bill in 1978 that gave public workers, already protected under civil service, collective bargaining rights on top of that.

Such legislation created far more than mere bargaining power. It also gave the unions access to dues money that could be deployed to reward friends in the legislature as well as beating back reform efforts at the ballot box. Winning a Democratic legislative primary without the support of public-employee unions is now unthinkable.

The unions certainly have delivered for public employees, pushing the legislature to grant handsome pay raises and, most critically, lavish pension benefits.

Since 1999, police officers, firefighters and highway patrolmen have been eligible to retire at up to 90% of their last year’s pay (based on 30 years’ employment) at 50.

Workers outside public-safety occupations can retire at 55 and get 70% of their final pay if they’ve worked for 35 years. The pensions are adjusted for inflation, so that longtime retirees can easily end up being paid more in retirement than when they were working.

It’s no secret by now that public workers’ benefits are a drag on the state budget and the source of huge future liabilities. The real question now is how bad — and obvious — the problem has to get before voters do something about it.

A new study by Stanford University’s Institute for Economic Policy Research should help move things to that point. It shows that, under suitably conservative assumptions for investment returns, the three largest public pension funds have an unfunded liability of $500 billion.

David Crane, an adviser to Gov. Arnold Schwarzenegger, points out that this is seven times the sum of all general obligation bonds approved by the state’s voters.

The state already has a deep recession-induced fiscal shortfall. But the pension hole is something different — a chronic condition that will not go away when the economy recovers. The only solution to it is pension reform, a reining in of pay hikes or some combination of both.


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