Pensions push state to insolvency

February 23, 2010 - By admin

 Retirees-on-Beach

FEB. 23, 2010

By TROY ANDERSON

As the $17 billion annual taxpayer tab for government employees’ pensions and retiree health care increases at a rate of “several billion dollars” a year, Orange County Supervisor John Moorlach says California is heading for an “economic meltdown.”

Elected treasurer in the wake of Orange County’s 1994 bankruptcy, Moorlach predicts a confluence of events – an explosion in the cost of public pensions, retiree health care and salaries, plummeting tax revenues and stock market losses – will result in a growing number of municipal bankruptcies and an unprecedented financial nightmare for the state and local governments. 

“Former state librarian (and California historian) Kevin Starr is talking about the potential of California being the nation’s first failed state,” Moorlach says. “We better start talking about this. What are we going to do when the entity (state government) above us crumbles? How do we avoid getting hammered by all the debris? I think we are already technically bankrupt.”

Moorlach’s warning come as cities and counties throughout the state are experiencing significant deficits and many are considering layoffs and cuts in salaries and benefits and public services. In recent years, the state has been able to avoid large budget cuts through borrowing, tax increases and accounting gimmicks, but it now faces a $20 billion shortfall and is running out of tricks. 

Amid the worst downturn since the Great Depression, Moorlach and other officials say the geometrically-increasing tab for public pensions and retiree health is pushing the state to the breaking point. Government agencies now face massive unfunded liabilities for public pensions and retiree health care.

These obligations, including the state’s bond debts, are conservatively estimated at $237 billion – and perhaps double that amount, according to a recent policy brief by the Stanford Institute for Economic Policy Research entitled “California’s Mounting Budget Mess.”

Joe Nation, author of the brief and director of the graduate student practicum in public policy at Stanford, says the institute is planning to release an analysis on March 10 estimating how large the promises really are to California’s government workers — public servants who receive the highest salaries and most generous pensions in the nation.

“The initial run suggested there is potentially an enormous, and I think, insurmountable shortfall for the system over the next 30 years,” Nation says. “They have come up with some really startling numbers that suggest the hole we’re in is far deeper than we thought.”

Although officials at many public pension systems expect the stock market to rescue them, Nation says that won’t fix the problem because elected officials approved costly pension enhancements and overestimated earnings while underfunding the systems by $12 billion to $13 billion annually for years.

“Most of the money that pays for pensions comes from investment earnings, but if those earnings are overestimated, as our pension funds have done for decades, then you are left with a huge deficit,” says David Crane, special advisor to Gov. Arnold Schwarzenegger for jobs and economic growth.

The annual taxpayer contribution for the state government’s pensions and retiree health care alone is expected to increase from $5.5 billion this year to $15 billion within a decade, Crane says.

“But even the ($15 billion) estimate is still assuming CalPERS earns very high investment yields over that time,” Crane says. “That figure depends on the stock market doubling every 10 years, and if it doesn’t, those figures are even higher.”

If the annual bill in all government agencies in the state is tabulated, the amount contributed totals now $13 billion a year for pension benefits, according to a recent report by the Legislative Analyst’s Office. These government agencies also pay $4 billion per year for retiree health benefits. The combined total is expected to increase by “several billion dollars” each year, the LAO estimates.

Nationwide, there was a $1 trillion gap in 2007-08 between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises, according to the “Trillion Dollar Gap” report released last week by the Pew Center on the States. This does not include the unfunded liabilities incurred by city and county pension systems.

And the Pew’s numbers likely underestimate the bill coming due because the most recent data available does not take into account the stock market and real estate losses incurred since the Great Recession began.

“While the economic crisis and drop in investments helped create it, the trillion dollar gap is primarily the result of states’ inability to save for the future and manage the costs of their public sector retirement benefits,” says Susan Urahn, managing director of the Pew center. “The growing bill coming due to states could have significant consequences for taxpayers – higher taxes, less money for public services and lower state bond ratings. States need to start exploring reforms.”

The genesis of the problems in California began in 1999 when its pension systems were well funded. Under pressure from public employee unions, state lawmakers passed Senate Bill 400 – allowing massive, retroactive and ongoing pension boosts to state employees. The bill led to the infamous “3 percent at 50” provision for California Highway Patrol officers. At age 50, they are eligible to receive 3 percent of their final year’s pay times the number of years worked. As a result, a public safety employee who began working at age 20 could retire at age 50 with 90 percent of their final salary. In 2002, lawmakers passed SB 183, expanding the “3 percent at 50” calculation to non-safety workers, including billboard and milk inspectors. The bills sparked a wave of public employee pension increases in cities, counties and other government agencies throughout the state.

“No single issue threatens the fiscal health of this state more than our exploding pension obligations,” Schwarzenegger told the Sacramento Press Club last month. “Over the last 10 years, our pension costs have gone up by 2,000 percent from $150 million per year to $3 billion a year (for state government workers). That means hundreds of billions in unfunded liabilities and it means the $3 billion we are spending now will go up to $10 or $12 billion.”

The “exploding pension obligations” are the result of a long pattern of “runaway spending” in state government, says Adam B. Summers, a policy analyst at the Reason Foundation and author of “California Spending By The Numbers: A Historic Look At State Spending From Gov. Pete Wilson to Gov. Arnold Schwarzenegger.”

This increase in spending was driven largely by an increase in the number of local and state government employees and pay increases of 50 percent to 70 percent in the last decade. The average wage for state and local government workers is now $26.24 an hour, compared to $19.45 for private-sector workers, according to the U.S. Bureau of Labor Statistics.

Since 1999-00, the number of state employees has grown from 296,076 to 356,435. During the same period, total state government spending, including federal funds, nearly doubled from $122 billion to $222 billion. Meanwhile, the number of public employees in California collecting $100,000-plus pensions has skyrocketed from about 2,500 in 2004 to 15,000 now.

Summers says the “extravagant spending” really began with the passage of SB 400 – a bill that encouraged local governments to approve similar pension and benefit increases now threatening the financial stability of cities throughout the city. Vallejo filed for bankruptcy in 2008, dozens of other cities are facing severe budget deficits and a growing number of officials throughout the state are discussing the possibility of more bankruptcies. In October, state Treasurer Bill Locker told lawmakers they needed to reform the pension system or “it will bankrupt the state.” The California Public Employees Pension System chief actuary has described the current pension system as “unsustainable.”

“I think we are starting to approach a tipping point,” Summers said. “There is talk of bankruptcy in San Diego. That is the largest city in danger of bankruptcy, but there are probably a number of smaller cities and county governments that are going to be in danger too.”

By law, the state can’t declare bankruptcy.

“The state has the power to tax and the ability to cut back on programs,” Crane says. “But I think these local governments are going to face incredibly draconian choices – shutting down parks and not hiring policemen.”
In response to the crisis, the California Foundation for Fiscal Responsibility is gathering signatures for two pension and retiree health care initiatives that would save state and local government agencies more than $500 billion over 30 years. The initiatives would require non-public safety employees to work until their Social Security retirement age for full benefits and end pension abuses.

“CalPERS’ chief actuary, the state treasurer and the governor are all saying, ‘Mayday, mayday – We have to make changes or the pension system will not be sustained,’” says Marcia Fritz, president of the foundation. “When you’ve got the top three officials saying we can’t sustain our pension benefits then you’ve got to do something.”

Comments(31)
  1. stevefromsacto says:

    Another pension rant by John Moorlach (yawn!).

  2. Pension Tax says:

    If you are a member of a provident fund, you can choose to take your entire retirement benefit as a lump sum. A portion of this may be tax-free, but you will be taxed on the portion which is not exempt from tax.
    You can check this out Pension Tax

  3. OCO says:

    Another pension rant by John Moorlach (yawn!).
    ===========
    Spoken like a TRUE trough-feeding gov employee.

    Newsflash, 76% of Californians and 78% of voters think public pensions are a problem. Google SacBee pension poll and rsad it for yourself, P. 22.

  4. Peter says:

    Mr Greenhut needs to check his facts. This began long before sb400 with PERS local contractors and 1937 Act systems, who offered 3% at 50 for safety members long before SB400 was enacted. The CHP actively pursued sb400 as an effort to stop losing its employees to local agencies!

  5. Metaphysical says:

    A “yawn”, Steve? Will you be “yawning” when the whole system collapses & economic meltdown occurs? I am guessing you are one of the privileged public employees who deems himself entitled to budget wrecking pensions & pay those paying who don’t have & can’t afford. If you’re not one of those, then you’d better wise up and see the tsunami headed our way.

  6. Kat says:

    Great piece. There is no way any of this is sustainable. It happened during the largest credit bubble of our nation and now its time to get back to reality. Public sector wages are the reality. They are not growing, and the number of people employed has been flat in the last decade while the govt has grown and grown in employment along with salaries. Who is goign to be paying these future salaries? Govt is goign to have to be downsized and pensions will have to be looked at. We need to move to a defined contribution system where taxpayers are NOT on the hook when the plans dont perform. A huge taxpayer revolt will occur when folks wake up and realize whats going on here. The whole pension spiking, cashing in on years of vacation pay, all those things are not sustainable. Its time for BIG CHANGE.

  7. john moore says:

    Here in Pacific Grove,Calpers pension costs have shut down many city services. Govt. Code,sec 20,487 prevents a Chap 9 judge from touching a CALPERS pension plan,so a Chap 9 would not help PG. We have Pension Bonds from Calpers losses,that amount to a 15% rate increase and Calpers is talking about another 15% over four years. We have huge silent deficits,i.e.,those not shown on a cash basis budget.Fortunately,Pacific Grove is so special that it is still one of the best places anywhere to live, Unless you have children. PG treats children very poorly,because library monies,teen center monies and library monies have been transferred to police and fire,shutting down those youth related services.

  8. OCO says:

    “Govt. Code,sec 20,487 prevents a Chap 9 judge from touching a CALPERS pension plan…”

    Sorry, that is not correct. In a federal court, federal law is the law of the land, not state law, the gov code section you cited has no legal authority in a BK court of law.

    Once the muni submits itself to the jurisdiction of the bankruptcy court then the bankruptcy court can do whatever they want to do to fix things, including cutting state pensions. Please Google the “supremacy clause”.

  9. OCO says:

    Peter says;

    “This began long before sb400 with PERS local contractors and 1937 Act systems, who offered 3% at 50 for safety members long before SB400 was enacted”

    Peter, will please stop lying.

    There were NO 3%@50 pension plans anywhere in America, or the world for that matter, before SB 400 was signed into law. The facts are the EXACT opposite of what you claim. Once the CHP got 3%@50 then every other PD and FD in the state started the “me too” game. Then it was a game of leap from for the entire gov welfare pension program.

    And there are still big police agencies in this state that do NOT have 3%@50 and have no problem filling their job openings (LASD). There are not too many jobs that a person with a GED can get that compensates $200K per year (before any OT) at age 20.5., in fact there are NO jobs like that in the real world, only the Fantasyland of gov employment.Same with FD’s, they get 1,000 qualfified applicants for every 1 job opening, so please stop with the lies that these scams are needed to fill these jobs-that is BS and you know it.

  10. ntheoc says:

    spreading your twisted lies and bogus info oco! we all have college degrees and never get hired at 20 y/o.. sorry but the safety of the public will always be a top priority and last to be cut…thats a fact,jack.

  11. ntheoc says:

    Only 1 percent of the nearly half million CalPERS retirees receive annual pensions of $100,000 or more. Many are retired non-unionized or specialized skilled employees or other high wage earners who worked 30 years or more. Many served in high-level management positions

  12. ntheoc says:

    “No single issue threatens the fiscal health of this state more than our exploding pension obligations,” Schwarzenegger told the Sacramento Press Club last month. “Over the last 10 years, our pension costs have gone up by 2,000 percent”
    ===========================================================================
    This statement compares a time when the State paid little or nothing during years of robust investment earnings and took a pension holiday to the recent market cycle extremes and current economic downturn.
    In 1981-82, pension contributions for the largest category of employees cost the State 19.6 percent of payroll. For the current 2009-10 fiscal year the state is paying 16.9 percent.
    Total CalPERS Fund
    Market Value
    $200.4 Billion
    oh yes arnie is looking over at that 200bil plus and would love to rob some of it..hah,to bad arnie. look also at how the NY public pensions have rebounded from the dead with an 18% investment returns and up billions again. same with calpers…sorry chicken littles but the sky is not falling.hah,lol

  13. john moore says:

    OCO: RE Govt. Code 20487. You get an F as a law blogger. Many states do not permit cities to go into Chap 9.Because of section 9 and 10 of the Bill of Rights,the right to Chap 9 is reserved to the states,so the supremacy clause does not apply. Did you notice that Vallejo is not obtaining ANY Calpers pension relief in its’ Chap 9? Vallejos Calpers pension plan is under water. Why do you believe they did not ask for relief,if it was possible? Believe me,if Calpers pension relief was available in Chap 9,Pacific Grove and hundreds of other cities and counties would benefit from Chap 9.We couldn’t file fast enough. We could have a full time library!

  14. Tough Love says:

    Oh the Insatiable appetite and entitlement mentality of Civil Servants …. the TAXPAYER be damned.

    I would how this will play out when they (the Civil Servants) are told that there is no more money and hence no more pension ? Remember, the corporations and Citizens with money to be taxed will only take so much, and then they’ll just move out.

  15. Tough Love says:

    Quoting …” ntheoc says:
    February 24, 2010 at 12:19 pm

    spreading your twisted lies and bogus info oco! we all have college degrees and never get hired at 20 y/o.. sorry but the safety of the public will always be a top priority and last to be cut…thats a fact,jack.”

    He’s back ! Do you ever “work” for the $100+/hr ?

  16. Jane Q Public says:

    The issue will be whether the United States Constitution, Amendments 9 and 10 dealing with reservations of rights to the states, also known as “states’ rights” will trump 11 U.S.C. 365(a) the power of a bankruptcy trustee to reject an executive contract. Bankruptcy is grounded in statutory authority. States’ rights are grounded in US Constitutional authority. California Government Code, section 20487 is a state’s expression of a right reserved by the state.

    The legal processing and decisions won’t be quite as simple as that, but basically, in a nutshell, that’s the issue.

    Since there is no Pension Benefit Guarantee Corporation protecting the retirees in a public employee pension situation, it might be politically difficult for the court to allow a state or municipality that has a power of taxation to avoid their financial obligations by choosing to use bankruptcy instead of the power of taxation. There are statutory requirements to put new taxes or bonds (case law) to the vote of the people, but there is also case law that prohibits the financial obligations of governmental entities to be discharged merely by voting them away. It could get interesting. However, in such a situation, all government creditors would also be standing in line with the pension plans.

    Finally, there is another interesting question I haven’t seen raised elsewhere. Employees expect to receive retirement checks from CalPERS. What if a local government does not pay their dues to CalPERS or even bankrupts the obligation to pay dues to CalPERS. Do the employees with service credits from that local governmental entity still get their retirement checks? Do the remainder of the participating agencies in CalPERS have to pick up liability?

  17. CHPMaster says:

    I’m tired of all the whining from the private-sector riff-raff. When I watch you poor suckers going to work to pay my pension I have to laugh. You were all clueless about the whole system. Did any of you ever even vote? You chumps deserve those canned beans you’ll be eating. As for me, I’ll be having lobster. So long suckers!

  18. Peter says:

    OCO said:
    There were NO 3%@50 pension plans anywhere in America, or the world for that matter, before SB 400 was signed into law. The facts are the EXACT opposite of what you claim. Once the CHP got 3%@50 then every other PD and FD in the state started the “me too” game. Then it was a game of leap from for the entire gov welfare pension program.

    You are so wrong. Fully one-third of local safety plans were 3% @50 OR BETTER prior to SB 400.

  19. OCO says:

    OCO: RE Govt. Code 20487. You get an F as a law blogger. Many states do not permit cities to go into Chap 9.Because of section 9 and 10 of the Bill of Rights,the right to Chap 9 is reserved to the states,so the supremacy clause does not apply.
    ===========================
    You have NO clue what you’re talking about. The Supremacy Clause applies to ALL federal laws that are in conflict with state laws. Once again, try to not make yourself look so ignorant with a limited education of federal law.

    Once a muni submits themselves the BK court, the BK court has all the power they need-and no state law can interfer with that.

    It is better to keep mouth shut and be thought the fool, than to open mouth and remove all doubt. You have now removed all doubt about you intelligence.

  20. OCO says:

    Did you notice that Vallejo is not obtaining ANY Calpers pension relief in its’ Chap 9? Vallejos Calpers pension plan is under water. Why do you believe they did not ask for relief,if it was possible.
    ========================

    And your point is what???? That because Vallejo did not attack the pensions they would not have gotten releif from them?? Says who-YOU??? Vallejo also did not try to break some of the union contracts (they renegotiated them), so by your thinking because Vallejo did not try to break them they couldn’t break them under the law. Such ignorance.

    You are most likely a GED cop the could not pass a semester of community colllege, but now are Johnny Cochrane Junior.

    Please, stop the lies, your scam is not going to fly here.

  21. OCO says:

    There are statutory requirements to put new taxes or bonds (case law) to the vote of the people, but there is also case law that prohibits the financial obligations of governmental entities to be discharged merely by voting them away.
    ===============
    And since when is filing a BK petion a discharge of debt by “voting them away”???? It isn’t.

    The power lies with the BK court, not the muni “voting”. If a BK court were to see a muni, like Vallejo, where cops and FF’s are making $250K per year, on average with their benefits, while the average income for a Vallejo resident is $34K, do you really think, for one second, that a BK judge is not going to strike the pensions down?

    Besides, the BK court does NOT have the power to force a muni to raise taxes. That power lies purely with the residents, not the courts. The CA constitution requires a 2/3 majority to raise taxes, and the BK court could not force the muni to do that udner the 11th Amendment (the muni, as a state subdivision, would have 11th Amendment immunity) . A Chpt 9 BK is a strictly cash flow BK, not an asset/liability BK. The BK court cannot force a liquidation of muni assets.

  22. OCO says:

    “You are so wrong. Fully one-third of local safety plans were 3% @50 OR BETTER prior to SB 400.”

    Wrong again.

    Hey, I bet you were one of those GED educated cops that used to claim cops all die 5 years after retiring. Calpers put that whopper to rest a long time ago, so I don’t see it much anymore. But now we have your bogus claim.

    No muni had 3%@50 before 2000, none, zero, nada. They all played leap frog AFTER SB 400. That is a well known fact.

    Please feel free to prove me wrong though and post a link to the hundreds of PS jobs that had it prior to 1999.

  23. Tough Love says:

    Quoting …” CHPMaster says:
    February 24, 2010 at 2:14 pm

    I’m tired of all the whining from the private-sector riff-raff. When I watch you poor suckers going to work to pay my pension I have to laugh. You were all clueless about the whole system. Did any of you ever even vote? You chumps deserve those canned beans you’ll be eating. As for me, I’ll be having lobster. So long suckers!”

    Boy, will it be a PLEASURE watching you squel “but I was promised” when (not if) your Plan defaults.

  24. Peter says:

    OCO, you are just an uninformed agitator. You have no knowledge of any of the topics of which you choose to speak, and believe that because you think something that makes it right. Go stick your head up your ass somewhere else.

  25. Peter says:

    City of Vallejo went to 3% @50 for public safety on June 30, 1995 as one factual example….

  26. Bruzzy says:

    This appears to me to be class warfare brought about by open borders and the financial burdends open borders places on citizens of the USA. Closing the borders will reduce spending, increase nationalism, reduce taxes, reduce imported socialism, and increase the individual wealth of working Americans. No more amnesties. The obstacle is the “voter-be-damned” attitude of the Federal Government which has upgraded itself to the “voter-go-to-hell” attitude. This attitude applies to the states as well, evidenced by unfunded Federal mandates. The only positive to come from class warfare is that citizens get mad enough to do something. I recommend the anger be channeled in more constructive ways. –Bruzzy

  27. Think4Myself says:

    Envy may be defined as an emotion that “occurs when a person lacks another’s (perceived) superior quality, achievement, or possession and either desires it or wishes that the other lacked it.”

    Envy can also derive from a sense of low self-esteem that results from an upward social comparison threatening a person’s self image: another person has something that the envier considers to be important to have. If the other person is perceived to be similar to the envier, the aroused envy will be particularly intense, because it signals to the envier that it just as well could have been he or she who had the desired object.

    Bertrand Russell said envy was one of the most potent causes of unhappiness. It is a universal and most unfortunate aspect of human nature because not only is the envious person rendered unhappy by his envy, but also wishes to inflict misfortune on others.

  28. Jerry says:

    Re: Jayne Q Public, john moore, OCO, et al views on Bankruptcy and vested pensions.

    Article 1, Section 8 of the US Constitution (powers of Congress), “To establish…uniform Laws on the subject of Bankruptcies throughout the United States;”

    As to the issues on states rights, have a look at http://www.uscourts.gov/…/BankruptcyBasics/Chapter9.aspx for an discussion of municipal bankruptcy under Chapter 9 of the code.

    Interestingly, someone who actually knows something, John Ryan, the Federal judge who presided over the largest municipal bankruptcy in history, Orange County’s 1994 case, has said Federal bankruptcy code trumps state law, meaning protections offered by the state and cities don’t have to apply.

  29. RU Serious says:

    spreading your twisted lies and bogus info oco! we all have college degrees and never get hired at 20 y/o.. sorry but the safety of the public will always be a top priority and last to be cut…thats a fact,jack.”

    Complete Horse s%^t!

    I’m tired of all the whining from the private-sector riff-raff. When I watch you poor suckers going to work to pay my pension I have to laugh. You were all clueless about the whole system. Did any of you ever even vote? You chumps deserve those canned beans you’ll be eating. As for me, I’ll be having lobster. So long suckers!

    You’ll die and rot in hell before costing us much, lol! Karma’s a bitch.

  30. Lynold says:

    Wow,
    After 26 years with the state I am going to make a whopping
    30,000 a year!!!! Wow I can buy a closet for that much.
    Where in the hell are these golden goose egg retirements
    we are going to get? Oh by the way Wisconsin has over 300,000
    government employees that have a retirement that is totally
    paid for by the taxpayers. It has a population in the whole state
    of just over 6 million people. California has 10 times the
    population not including illegal immigration and has a work
    force of 240,000 blue collar workers. We pay into our retirements
    and we pay taxes.

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