California Crowd-Out

When pension costs increase, absent tax increases, significant changes to actuarial assumptions, prudent fiscal decisions or even substantive reform, other core governmental services are often negatively impacted through “crowd-out.” In a recent in-depth study, “California Crowd-Out: How Rising Retirement Benefit Costs Threaten Municipal Services,” Manhattan Institute senior fellow Stephen D. Eide writes, “Balanced budget requirements mandate that when costs grow more rapidly than revenues, something must give. All too often, this has meant reductions in core government services, most of which-police, fire, libraries, parks, and street and sidewalk maintenance-are delivered at the local level in California.”

While there are many causes of crowd-out such as structural problems found during economic downturns and increasing costs for employee benefits, unfunded pension liabilities have also play a major role. Eide notes that “between 2004 and 2012, growth in pension costs for California local governments outpaced spending on core services, such as police and fire, and quality-of-life services, such as parks and libraries.” Inasmuch as governments try to protect their personnel, staffing for various departments continues to lag behind growth in the private sector. Additionally, it is difficult to maintain major capital investments and infrastructure when money is diverted to pay down hefty unfunded liabilities. Eide writes, “But local services are not improving at a rate proportionate to economic growth. When the next recession hits, more municipal bankruptcies will come. For the moment, the greatest threat is mediocrity, not insolvency.”

To read the full report and see recommendations for improving the situation, click here.