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California's $500-billion pension time bomb

The staggering amount of unfunded debt stands to crowd out funding for many popular programs. Reform will take something sadly lacking in the Legislature: political courage.

April 06, 2010|By David Crane

The state of California's real unfunded pension debt clocks in at more than $500 billion, nearly eight times greater than officially reported.

That's the finding from a study released Monday by Stanford University's public policy program, confirming a recent report with similar, stunning findings from Northwestern University and the University of Chicago.

To put that number in perspective, it's almost seven times greater than all the outstanding voter-approved state general obligation bonds in California.

Why should Californians care? Because this year's unfunded pension liability is next year's budget cut to important programs. For a glimpse of California's budgetary future, look no further than the $5.5 billion diverted this year from higher education, transit, parks and other programs in order to pay just a tiny bit toward current unfunded pension and healthcare promises. That figure is set to triple within 10 years and -- absent reform -- to continue to grow, crowding out funding for many programs vital to the overwhelming majority of Californians.

How did we get here? The answer is simple: For decades -- and without voter consent -- state leaders have been issuing billions of dollars of debt in the form of unfunded pension and healthcare promises, then gaming accounting rules in order to understate the size of those promises.

As we saw during the recent financial crisis, hiding debt is not a new phenomenon. Indeed, General Motors did something similar to obscure the true cost of its retirement promises. Through aggressive accounting, for a while it, too, got away with making pension contributions that were a fraction of what it really needed to make, thereby reporting better earnings than was truly the case.

But eventually the pension promises come due, and for GM, that meant having to add extra costs to its cars, making its prices less attractive to consumers and contributing to its eventual bankruptcy.

In California's case, past pension underfunding means reduced funding of current programs. This explains why pension costs rose 2,000% from 1999 to 2009, while state funding for higher education declined over the same period.

What can we do about this? For the promises already made, nothing. They are contractual, and because that $500 billion of debt must be paid, retirement costs will rise dramatically no matter what we do. But we can reduce the sizes of promises made to new employees and require full and truthful disclosure so that pension debt can never again be hidden.

Last summer Gov. Arnold Schwarzenegger proposed exactly that. Since then? Silence. State legislators are afraid even to utter the words "pension reform" for fear of alienating what has become -- since passage of the Dills Act in 1978, which endowed state public employees with collective bargaining rights on top of their civil service protections -- the single most politically influential constituency in our state: government employees.

Because legislators are unwilling to raise issues that might offend that constituency, they have effectively turned the peroration of Abraham Lincoln's Gettysburg Address on its head: Instead of a government of the people, by the people and for the people, we have become a government of its employees, by its employees and for its employees.

This explains why legislators fight harder to overturn employee furloughs than to reform pensions and elect to pay more in compensation to just 65,000 employees in one single department -- corrections -- than they spend on a higher education system serving 10 times as many people.

Simply put, the single most important step a legislator can take to protect programs and taxpayers is to embrace pension reform. There is no structural impediment to pension reform, and no initiative has forced legislators to issue all that pension debt. All of the damage has been caused by legislation, most notoriously SB 400 in 1999, which retroactively and prospectively boosted pension promises by billions of dollars without boosting contributions. Likewise, all the remediation can be accomplished by legislation.

Even the state legislature of Illinois -- a legendary poster state for pension misbehavior -- has now passed pension reform. There's no reason the California Legislature cannot do the same.

Call or write your legislator about pension reform, and while you're at it, remind him or her that we are indeed a government of the people, by the people and for the people.

David Crane is special advisor to Gov. Arnold Schwarzenegger for jobs and economic growth.

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