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Without Significant Reforms, Public Pensions Will Bankrupt State and Local Governments

Adam Summers
June 22, 2010, 6:56pm

State and local governments across the country are struggling with public pension liabilities and discovering that they likely will not be able to afford the benefits they have promised. While this has become a widespread problem, California's pension obligations are worse than most. As I and Howard Jarvis Taxpayers Association President Jon Coupal note in a recent L.A. Daily News op-ed,the public pension crisis is expected to dwarf the state's notorious annual budget deficits, and could even send state and local governments towards bankruptcy (as has already happened in the City of Vallejo).

Below is an excerpt of the article.

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.

[. . .]

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.

See the full article here.

See also my new policy study on California's public pension problems, How California's Public Pension System Broke (and How to Fix It). See the full study here or the study summary here (.pdf files).

For a historical look at how a number of state and local governments got into their public pension problems, see my earlier pension study, The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform (Full Study | Policy Summary).


Adam Summers is Senior Policy Analyst


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