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California’s budget woes start with its bloated state government and lucrative public pensions.

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How Do You Spell “California‚?Ě? M-e-s-s

California’s budget woes start with its bloated state government and lucrative public pensions.

California’s budget for 2010-2011 was due on June 15. By law it is to be passed by the end of June. It wasn’t. In recent years it has taken anywhere from two to four months beyond the deadline to get a budget, usually done with a combination of bookkeeping legerdemain, delayed spending, a few cuts, new bonds and, in general, a kick-the-can-down-the-road approach to the problem.

The underlying problem is that too many wants are chasing too few dollars. During the recession, state revenue has declined. California’s high-tax, heavy-regulation climate has had the effect of driving some businesses out of the state and discouraging others from coming in.

A large component of the budget problem is the size of the state’s public employee pensions.

In 1999, during flush times, the legislature’s perpetual Democratic majority and then-Gov. Gray Davis, gave large increases in pension benefits to all state employees. Most counties and cities followed suit. Now, virtually every government body in the state is facing a deficit.

A Stanford University estimate puts the size of California’s unfunded pension liability at close to half a trillion dollars.

Over the years, most counties and cities abandoned their own pension systems and joined CALPERS, the California Public Employees Retirement System. It is the nation’s largest pension fund. For years it enjoyed a golden reputation, turning in steady annual gains from its investments. That has turned to ashes. Over the last two years, CALPERS has been under the gun for risky investments in real estate projects and evidence of questionable practices. 

One practice that needs to be banned allows former CALPERS officials from becoming “placement agents” for private organizations who pay them large sums to persuade CALPERS to invest in them. One former board member, Alfred Villalobos, received $70 million from clients for doing this. On his payroll is a former CALPERS chief executive. Very cozy.

By law, when CALPERS loses money, which it has been doing of late, the public entities that are its contributors must make up the losses. So, counties, cities and the state government are getting surprise bills demanding extra contributions to CALPERS to make up for its mismanagement.

What the state needs immediately is a two-tiered pension system, with new hires getting a more realistic package of benefits. Illinois faced a similar mess when its legislature recently passed a bill that takes several steps in the right direction: upping the retirement age to 67 for full benefits, capping the maximum pension, and prohibiting “double dipping” with a pension while still getting a public paycheck.

New York is facing similar problems. According to the New York Times, 13 New York City police officers retired at age 40 recently with annual pensions over $100,000 each.

Gov. Arnold Schwarzenegger has sought similar reforms in California and a Republican state senator has put in a bill, SB 919, to create them. The chances of the legislature passing it are zero. Public employee unions as a group—civil servants, nurses, teachers, prison guards, police and fire—are easily the largest special interest in the state and the largess they spread on pliant Democrat legislators proves it. Nevertheless, Schwarzenegger, in negotiations with some small public-employee unions has obtained the first concessions. It’s a start.

Until California gets its pension system fully under control, however, it will always face large annual budget deficits. At the same time, state government agencies need a thorough “management audit” to determine if they really need all the personnel they have. The state work force continues to grow even as the population has leveled off.

Public employee unions, however, will go to any lengths to preserve the status quo. That means a Democratic legislature and access to ever more public funds. Recently, these unions underwrote a signature drive to put on the November ballot a measure that would nullify the citizens’ commission to take over legislative redistricting (approved by the voters in 2008), and return it to the legislature where it has been used for decades to preserve the status quo.

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