Maybe the Pension Mess Can Go on Forever
SACRAMENTO, Calif. — “If something cannot go on forever, it will stop.” That phrase, coined by the one-time chairman of the Council of Economic Advisers, Herbert Stein, was a tongue-in-cheek retort to concerns about the accelerating federal debt. As National Review’s Dominic Pirro explained: “What Stein was saying is that the fact that the federal debt can’t increase forever is not, in itself, a problem.… We don’t have to be worried about it increasing forever, because it will stop at some point. It has to. That doesn’t mean the debt isn’t a concern, though. It’s just a concern for different reasons.”
I thought of Stein’s Law this week as I considered Assembly Bill 1383 in the California Legislature, which will surely expand the state’s massive and growing pension debt by allowing public-sector unions to negotiate bigger pensions and earlier retirement ages for new hires. It would gut some key aspects of the Public Employees’ Pension Reform Act of 2013 — Gov. Jerry Brown’s modest reform that helped stave off a fiscal crisis caused by rapidly rising unfunded pension liabilities.
During that era’s fight over pensions, many of us in the pension-reform movement had argued that the state’s overly generous, underfunded pension system was not sustainable. It couldn’t go on forever, as local municipalities’ costs for retired workers were outstripping their costs for current employees. These crazy levels of pension debt would crowd out services, boost taxes, and — like any Ponzi scheme — eventually run out of suckers. We were wrong, or at least only half right. We had every reason to be concerned about the state’s pension systems — but we underestimated the ability of our governments to kick the can down the road.
Here we are 13 years later and, sure enough, the pension mess is continuing along. Overspending on public employee retirement benefits has not stopped and likely won’t as long as the people who control the system have a vested interest in manipulating it in a way in that it won’t stop producing payouts, at least until we’re all long gone. And as long as the state has taxpayers who ultimately will foot the bill. Lawmakers will continue to ignore the naysayers — not because their numbers are wrong, but because the financial disruptions they predict aren’t imminent.
Let’s look at some data from the California Policy Center’s Marc Joffe in December: “Our analysis finds that California’s non-federal public sector entities collected $828 billion in revenue in FY 2024 — consuming 20.6% of the state’s entire Gross Domestic Product (GDP). Despite this massive intake of taxpayer funds, total long-term debt has ballooned to $1.37 trillion, or 34.1% of state GDP.” It found that some major California local agencies “now have debt loads exceeding 200% of their annual revenue, driven largely by generous public safety retirement formulas.”
Other reports give hints at a problem that our governors and Legislature have steadfastly ignored since PEPRA went into effect. In December, the Reason Foundation noted that “California’s state and local governments have the most public pension debt in the country, with total unfunded pension liabilities of more than $265 billion,” amounting to more than “$6,000 in pension debt for every state resident.” The report reminded us that taxpayers ultimately are responsible for any shortfalls. The likely results are higher taxes and service cutbacks.
Meanwhile, California’s pension funds now have around 79 percent of the money they need to pay out their existing promises, which are senior obligations of the state. With defined-benefit pension plans of the sort offered in California, public employees receive a guaranteed benefit based on a formula. Public safety officials — police employees, firefighters, prison guards — often receive 3 percent at 50. That means they receive 3 percent of their final pay (now the average of their final three years’ salary) times the number of years worked, available at age 50. PEPRA extended retirement ages, but that latest legislation would start ratcheting down the ages again.
To pay for this, the major pension funds such as the California Public Employees’ Retirement System (CalPERS) invest the employer and employee contributions into the stock market and other investments. The liabilities are calculated based on guesses of investments returns. The more generous the benefits, the more aggressive the funds have to be in their investment strategies to assure a sufficient rate of return to cover their outlays. The funds are dependent on a stock market that has fluctuated greatly in recent months. A severe downturn could of course precipitate another crisis of the sort that led to the 2013 pension reforms.
Big debt numbers are hard to visualize. We’re all used to reading eye-popping numbers about, say, the federal debt, which is now above an inconceivable $38.8 trillion. But it’s easier to grasp the enormity of the state’s problem by looking at the public data about individual compensation. The first page of my search on Transparent California shows 50 fire officials earning total compensation packages ranging from $600,000 to $1.4 million. Keep that in mind when, say, Los Angeles officials claim that they need more money for additional firefighters.
And yet, despite signs of growing pension problems across the state, the Legislature is not only refusing to address the issue by revisiting reforms — but it’s actively trying to make the problem worse. “By increasing the cost of these benefits, AB 1383 would result in less money for salary increases, which could therefore harm future recruitment efforts. Additionally, the changes in this bill could result in labor unrest by furthering the equity issues between safety and non-safety employees,” according to a letter from city and county governments quoted by the Sacramento Bee.
Of course, the state never learns. In 1999, police unions secured a law that retroactively boosted pensions for California Highway Patrol officers. That “equity issue” was resolved in a predictable way: other public-safety unions then secured the same benefit for their bargaining units. Then non-safety unions also, one by one, secured massive increases in their benefits. That precipitated that 2012 pension crisis and this bill threatens to do so again.
To those who say that this can’t go on forever, I’d argue that the last 13 years proves that it maybe it can go on — if not forever, for at least a few more decades. That doesn’t mean we shouldn’t be concerned, as allowing the current system to fester will continue to increase state and local taxes, and erode our already poor public services. It’s just that lawmakers or voters are going to need to show some courage. It’s not going to stop on its own.
Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.
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