CA public worker pay soars to unsustainable levels

Dec. 19, 2012

By Wayne Lusvardi

Last week Bloomberg News reported that California has the highest paid state workers in the 12 largest states by population.  But that didn’t tell the entire story.

Sure, California has the highest paid public workers. But it also has the highest median income. Adjusting for median income levels, California still has one of the highest levels of public employee pay, as shown in Table A below.

But that doesn’t tell the bigger story about the huge submerged public pension iceberg approaching California.  It isn’t only pay levels, but benefit levels that are going to overwhelm California local government budgets.

Table A: Public Pay Levels by State as Percent of Median Income

State	Median Income (U.S. Census)	Average Public Pay (Bloomberg)	Percent of Median Income
Ohio	$48,071	$48,812	101.5%
Michigan	$48,669	$49,022	100.7%
New York	$59,951	$55,560	92.8%
California	$61,317	$60,317	90.8%
Illinois	$56,576	$51,387	90.8%
North Carolina	$46,291	$41,878	90.5%
Pennsylvania	$51,561	$39,868	77.2%
New Jersey	$71,180	$54,064	76.0%
Florida	$47,827	$34,481	72.1%
Texas	$50,920	$35,442	69.6%
Georgia	$49,736	$28,682	57.7%
Virginia	$63,302	$36,004	56.9%

Let’s estimate the amount of investment that need to be set aside per public employee to generate just the underfunded portion of their future pensions. California has the highest unfunded pension liability per public employee of the twelve largest states.

Moreover, it would require providing a separate investment fund of about $453,980 at 5 percent annual interest for each public employee just to close the gap for the unfunded portion of their pension, as shown in Table B.

But once again, this needs to be adjusted by the average pay for each state to consider different standards of living.

Table B: Amount Needed to Fund Unmet Pension Liability by State

State	Amount Needed to Fund Unmet Pension Liability@ 5% Rate of Return Per Employee
California	$453,980
Ohio	$434,380
New Jersey	$348,920
Illinois	$323,860
Pennsylvania	$291,260
Virginia	$249,300
Michigan	$259,120
Florida	$242,180
Georgia	$218,800
North Carolina	$209,740
New York	$181,520
Texas	$164,640

Accurate picture

Now, to get a more accurate picture, let’s divide Table B’s numbers by the average pay in each state. We do this in Table C. The key is Average Salary Years: that is, the total salary of that year dedicated to one thing.

Table C – Number of Salary Years Needed to Fund Unmet Pension Liability

State	Number of Average Salary Years Needed to Fund Unmet Pension Per Public Employee
Ohio	8.9
Georgia	7.6
California	7.5
Pennsylvania	7.3
Florida	7.0
Virginia	6.9
New Jersey	6.5
Illinois	6.3
Michigan	5.3
North Carolina	5.0
Texas	4.6
New York	3.2

It would take 8.9 Average Salary Years in Ohio to fund the unmet pension liability, 7.6 years in Georgia and 7.5 years in California.

By contrast, it would only take 3.2 years in New York, 3.9 years in Virginia, and 4.6 years in Texas.

So, no matter how you cut it, California still has one of the highest levels of unmet pension liability.

Dangerous combination

California politicians and unions tend to pooh-pooh the large unmet pension liability in California by saying that California also is the wealthiest state and thus pays its public employees higher.  But even if we spread the estimated $516.3 billion of unmet pension liability over the 12,433,172 households in California, that would reflect a staggering added debt burden of $41,526 per household (without considering interest, which would make the sum about three times greater).

Bloomberg is right that California public employees are paid the highest wages. And unions can argue back that California also has the highest median income. But California has not only high average wages, even when adjusted for state median income, but it also has the highest pension levels even after adjusting for the higher average wages.

California has a dangerous combination of the highest pay levels and the highest unmet pension liability.  States such as Texas and New York have relatively high pay levels, but correspondingly much lower unmet pension funding gaps. Closing their pension gaps by lowering pension levels is more reachable.

Pay levels for public employees can’t be considered in isolation from benefit levels. Bloomberg.com has exposed that California public employees are living in high-income state. But it missed reporting on the state’s looming crisis of unsustainable pensions.

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DETAILED TABLES

Detailed Table B: Amount Needed to Fund Unment Pension Liability by State

State	Unfunded Pension Liability (Source: Pew Trust)	Number of Public Employees (per U.S. Census in 2009)	Unfunded Pension Liability Per Employee	Unfunded Pension Liability Per Year Over 15 Years Per Employee	Amount Needed to Fund Unmet Liability @ 5% Rate of Return Per Employee
California	$516.306 billion	1,516,367	$340,489	$22,699	$453,980
Ohio	$175.368 billion	538,288	$325,789	$21,719	$434,380
New Jersey	$123.234 billion	470,902	$261,699	$17,446	$348,920
Illinois	$138.794 billion	571,383	$242,909	$16,193	$323,860
Pennsylvania	$118.165 billion	540,938	$218,445	$14,563	$291,260
Virginia	$75.889 billion	405,852	$186,986	$12,465	$249,300
Michigan	$77.848 billion	400,560	$194,347	$12,956	$259,120
Florida	$148.116 billion	815,427	$181,643	$12,109	$242,180
Georgia	$81.093 billion	494,144	$164,108	$10,940	$218,800
North Carolina	$79.558 billion	505,749	$157,307	$10,487	$209,740
New York	$156.572billion	1,150,047	$136,144	$9,076	$181,520
Texas	$163.417 billion	1,323,369	$123,486	$8,232	$164,640

 

Detailed Table C: Unmet Pension Liability Adjusted for Pay Level by State

State	Amount Needed to Fund Unmet Pension Liability Per Public Employee	Average Pay Per Public Employee	Number of Salary Years Needed to Fund Unmet Pension Per Public Employee
Ohio	$434,380	$48,812	8.9
Georgia	$218,800	$28,682	7.6
California	$453,980	$60,317	7.5
Pennsylvania	$291,260	$39,868	7.3
Florida	$242,180	$34,481	7.0
Virginia	$249,300	$36,004	6.9
New Jersey	$348,920	$54,064	6.5
Illinois	$323,860	$51,387	6.3
Michigan	$259,120	$49,022	5.3
North Carolina	$209,740	$41,878	5.0
Texas	$164,640	$55,560	4.6
New York	$181,520	$55,560	3.2