California's Pension Problem

The next time a California government worker starts talking about furlough days and pay cuts, remind them about their pensions and lifetime medical benefits. Or, just give them a link to this Judy Lin 7/31/09 article:

http://news.yahoo.com/s/ap/us_california_budget_pensions

California has at least $63 billion in unfunded pension liabilities, an amount equal to roughly two-thirds of all annual general fund spending...

Government workers and their union representatives often say the more generous pensions offset lower pay.

But the latest U.S. Census survey, from 2007, shows the average annual salary of California state government employees was $53,958, compared with $40,991 for the average private-sector worker.

"The pension benefits for public employees in California are extravagant and they are going to bankrupt cities and counties, along with the state," said Keith Richman, a former state assemblyman who said he plans to launch an initiative campaign to change state employee pension benefits.

I predicted California's pension problem back in December 2007:

Someone must pay for all of these employees and their pensions, sabbaticals, and health care. Teachers’ unions usually ask for more money, but the California State Teachers Retirement System is already worth around $125 billion. It has around 750,000 members and is the third largest public retirement fund in the country. Yet, after health care, education reform remains crucial, and the CTA continues to ask for more money.

As a result of government salaries and benefits spiraling out of control, California’s bond ratings have gone from AAA to single A and are approaching status that is slightly above junk (see http://www.treasurer.ca.gov/ratings/current.asp). The high salaries and unusual benefits of local government workers are just one small part of major fiscal problems that will not get better on their own.

Regarding the state's bond ratings, my prediction recently came true: "Moody's Investors Service downgraded California's general-obligation bond rating to Baa1 from A2, a drop of two notches and only slightly above junk status." (See Sacramento Bee, Capitol Alert, July 14, 2009)

It's nice to see the mainstream media finally discussing public sector benefits--even if it is over a year late. Having $63 billion in unfunded pension liabilities is shockingly irresponsible. No wonder California can't balance a budget.

Update: the SJ Mercury points out that public sector pensions are based on unrealistic actuarial projections. See here:

The current level of benefits is built on an assumption of an 8.25 percent annual gain on investments after expenses for Federated, and 8 percent for safety workers. These unrealistically high assumptions leave taxpayers solely on the hook when returns come up short, as they have — drastically — the past two years...

City Council members are reluctant to confront unions on bread-and-butter issues and, with term limits, have little incentive to tackle long-term problems. But if nobody faces up to this, a taxpayer revolt is inevitable. And waiting will only make things worse.