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Pension Jolt

Debt Takes a Huge Chunk Out of California's Beleaguered Budget

Sacramento: Help the Private Sector, While We Still Have One

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Main Office:
385 N Arrowhead Avenue
San Bernardino, CA 92415

Chino Hills District Office:
14010 City Center Drive
Chino Hills, CA 91709

Staff Members:
Larry Enriquez,
Chief of Staff

Joy Chadwick,
Deputy Chief of Staff

Brian Johsz,
District Director

Annette Taylor,
Executive Secretary

Naseem U. Farooqi,

Burt Southard,
Media Relations

Roman Nava,
Small Business Liason

Grace Hagman,
Field Representative

Jeanna Williams,
Field Representative
May 2011

Pension Jolt

Protecting pension promises without regard to the public consequences is fiscal madness. California cannot justify retirement costs that will increasingly drain money away from public services and squeeze government budgets. State and local elected officials need to create less expensive benefits for new workers, and as much as possible, rein in the exploding price of pensions for existing employees.

The state's watchdog Little Hoover Commission recently dropped a bombshell on the pension debate by saying the state needs to create cheaper retirement plans for current workers as well as new hires. Federal law allows the private sector that power, but state court decisions suggest strict limits on altering benefits for existing public workers. So most reform efforts have focused on lower-cost plans for new employees.

Attempting to adjust current workers' retirements would undoubtedly lead to a legal struggle. But the Legislature should examine this option, because a system that shackles government to pension promises it can no longer afford furthers no conceivable public interest.

State and local officials juiced public retirements a decade ago, on the false premise that a booming stock market would cover the cost. That prediction was wildly wrong: In 1999-2000, state and local agencies contributed $363 million to the California Public Employees Retirement System, the state's largest pension fund. By 2009-10, that yearly tab was nearly $7 billion. Taxpayers need a way to correct that situation before it burns yet further through public coffers.

At the least, state and local officials should study the commission's roadmap for revising retirement benefits for new workers:

Governments should raise retirement ages for public workers to discourage early retirements that boost pension costs. Low retirement ages -- as early as age 50 -- create the ludicrous possibility of people collecting pensions for more years than they actually worked.

State and local government should also base pensions on a five-year average of salary, instead of the final year. And they should include only salary, not unused sick time or other compensation, in computing retirement payouts. Those steps would help avoid artificially inflated pensions.

Employees and employers should also share pension costs equally. Many agencies pay workers' pension contributions as well as the employer's portion. That approach insulates employees from the actual costs of their own retirements -- at taxpayers' expense.

The commission also suggests capping the amount of salary used to calculate pensions at $80,000 to $90,000, and offering workers 401(k)-style plans for any compensation over that amount. California does not need to fund six-figure pensions while escalating retirement costs erode financing for public programs.

California has little choice but to make changes, regardless of the difficulty. Taxpayers have no interest in funding retirement benefits better than anything they can expect -- particularly at the painful cost of higher taxes and fewer public services.

Debt Takes a Huge Chunk Out of California's Beleaguered Budget

After a 10-year borrowing binge, the upcoming state budget is expected to spend more on debt than public universities or state parks. Next year's repayments — $7.65 billion — could make up a quarter of the deficit.

Without that tab, officials could scrap plans to close state parks, force nearly a million low-income children to go without eye care and take in-home aid away from hundreds of thousands of elderly, blind and disabled residents.

But the state has had an insatiable appetite for debt in recent years. In the last decade, the debt per resident has tripled, to $2,362, according to the credit-rating agency Moody's Investors Service.

That means for every household of four, California owes nearly $9,500 — more than the government spends to put a child through a year of school. In the next budget, the amount devoted to debt repayment is expected to exceed the money invested in California's public universities.

Borrowed money has proven to be politically irresistible in Sacramento, a safe middle ground for politicians in the constant war between Democrats and Republicans over taxes and service cuts. Campaigns for bonds often herald them for providing projects and services without new taxes. But, that is not free money and it has to be paid back with significant interest.

Voters have approved borrowing in the last 10 years for such causes as stem-cell research ($3 billion), high-speed rail ($10 billion), and parks, water and the environment ($14 billion). They even took on $15 billion in debt to paper over a deficit that Gov. Arnold Schwarzenegger said would never reemerge — something economists have scolded the state for doing.

Because of its rock-bottom credit rating, California pays a premium for its loans. Taxpayers must fork over roughly $2 for every $1 borrowed — about 20% more than top-rated states.

Gov. Jerry Brown has called for a moratorium on the sale of bonds to slow the accumulation of debt. He proudly proclaimed in a brief interview that he is "a person of zero debt" because of its costs.

Still, the governor said, "people want a fireman to put out their fire, they want a policeman to keep the gangs out of their neighborhoods, and they want things done."

"You've got to get more money," he said recently on his way to a meeting with the state treasurer. "We can't get it always by taxes, so we get it by bonds."

Legislators have already placed an $11-billion water bond on the 2012 ballot. Nearly $1 billion in earmarks for such items as bike paths, museums, visitor centers and tree planting in key legislators' districts were inserted to grease its passage.

Stem cell officials are mulling going back to voters next year for another bond. And education lobbyists are working the Capitol corridors to promote a 2012 school construction bond that would be the fourth in a decade.

Scott Pattison, director of the National Assn. of State Budget Officers, said the state needs to prioritize its borrowing — and fast.

"You can't have it all," Pattison said. "It's simple math."

Now the bill is coming due.

The two bonds will cost taxpayers an average of $114 million a year for three decades, according to legislative analyses.

Not every state lives on credit. Some simply do with less. Others cap the amount of debt they can take on. Some assess fees instead of borrowing: They impose water levies to pay for new dams, tolls to fund highway construction, etc.

But borrowing has become ingrained in California. Schwarzenegger once hailed a debt scheme he hatched as "a gift from the future." Term limits ensure that lawmakers and governors who decide to borrow will be long gone when it's time to pay the piper.

California's debt is now in uncharted territory. Government bookkeepers have long advised state officials to keep repayments below 6% of the general fund budget. But the combination of the recession, which has sapped revenue, and years of borrowing has driven California's repayments toward 8%.

While the state faces a $25.4-billion deficit, $7.65 billion is tied up in debt service for the upcoming fiscal year, according to the state treasurer.

California has gone from No. 22 to No. 7 among all states in its ratio of public debt to personal income since 2000, according to Moody's. A raft of still-unused bonds from 2006, when voters approved a $42-billion bond package for roads, levees, waterways, affordable housing, parks and public schools, will likely drive that ranking even higher once they are sold.

"No matter what we do," Brown said of the state's debt load, "it's going up."

Sacramento: Help the Private Sector, While We Still Have One

A recent report reported that our state government paid out a staggering $22.9 billion in unemployment benefits in 2010 is one more urgent reminder that California’s leaders need to do all they can to help revive the private sector and create jobs. The cost is separate from a state deficit estimated at $25 billion over the next 17 months and is for now being covered by federal loans that eventually will have to be paid back.

In the meantime, so long as state unemployment remains higher than 12 percent – as has been the case since September 2009 – we can expect the loan tab to go up nearly $2 billion a month. State leaders have talked about reducing regulations to spur job growth, but there hasn’t been much noticeable follow-through. Meanwhile, many lawmakers depict California as the victim of larger economic trends that it can’t control. But a look at the numbers suggests matters are especially bad here.

In fall 2006, the California and U.S. unemployment rates were under 5 percent and only small fractions apart. But in January 2011, California’s rate was 12.5 percent versus 9 percent for the nation. We’re not sharing in the job growth seen nationally since October 2009, when U.S. unemployment topped out at 10.1 percent. This must change, and we wish we had more of a sense that Sacramento strongly agreed and was doing something about it.