California’s pension system for state workers is $60 billion underfunded, the state teachers’ plan is nearly $75 billion underfunded, and the University of California pension system is almost $15 billion underfunded. The state budget continues to pay less than required into the systems so pension debt just keeps growing.
Local governments are in a pickle, too. Vallejo, Stockton and San Bernardino have filed for bankruptcy in recent years. Unfunded pension promises to government workers are helping drive bankruptcies, and experts expect more are on the way. In 2013, USA Today compiled a list of 10 cash-strapped California cities that could end up in bankruptcy, including Compton, Fresno, Oakland and San Jose.
A recent California Policy Center report found dozens of California cities are spending 10 percent or more of their revenue just to pay for their workers’ pension benefits. In Costa Mesa, pension costs are gobbling up 15 percent of city revenue and in Orange, the figure is 10 percent. No local government budget can sustain that kind of pressure.
Similarly troubling, the Orange County pension system is only 60 percent funded, making it one of the worst-funded pension systems in the state.
The public is increasingly aware of these pension problems. As a recent Register editorial noted, a new Reason-Rupe poll found 72 percent of Americans are worried that their state and local governments can’t afford to fund the pensions promised to government workers. And there is growing consensus behind sensible reforms.
More than four of five Americans say current public employees should pay more toward their own pensions and health care benefits. And 58 percent of taxpayers favor capping the annual pension benefits government workers can receive. When asked, open-ended, how much that cap should be, the average answer was a maximum of $57,000 per year. That’s about a quarter of the actual $240,000 annual pension that Anaheim’s former city manager James Ruth got from taxpayers in 2013, according to California Policy Center’s pension database. Similarly, former Newport Beach employee Timothy Riley got $236,000 in pension payments from taxpayers in 2013.
To prevent these outrageous pension benefits, 78 percent of Americans say the public should get to vote on any future increases to government worker pension benefits. San Francisco has already implemented this reform.
Additionally, 67 percent of Americans support shifting all future government workers – those who haven’t been hired yet – into 401(k)-style retirement plans instead of the guaranteed pension payouts most government workers have received. Almost as many, 59 percent, support moving current government workers into 401(k)-style plans, but that number flips, and 58 percent oppose changing pension plans for current workers, if it breaks a contract.
Taxpayers don’t want to break promises to government workers, but they will if they have to.
When presented with the tough choice – either cutting government services or changing public pensions promises – 80 percent of Americans would renegotiate pension deals before cutting government spending. Just 15 percent favor reducing public services, ranging from police and fire protection to recreation, so that pensions can be maintained at current levels for past and present public employees. Similarly, 81 percent of Americans would renegotiate pension contracts before raising taxes to pay for pension promises made to government workers.
The public knows that tough pension choices have been put off for far too long. Taxpayers actually view many pension reforms as uncontroversial fixes that should be made right now. They think political leaders should ask government employees to contribute more to their own retirements, cap lavish pension payments, shift future government workers to 401(k)-style retirement plans and give voters approval over future benefit hikes.
If political leaders follow the public’s lead, we can stop burying future generations in debt and get back on a sustainable fiscal path.
Adrian Moore is vice president at Reason Foundation.This article originally appeared in the Orange County Register.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.