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California's fiscal troubles are far from resolved

Last week's passage of Proposition 30 avoids some cuts, but cities and counties face mounting challenges that could require slashing services and hiking taxes.

November 14, 2012|Steve Lopez
  • LAPD Chief Charlie Beck, left, is touting a sales tax increase. Former Mayor Richard Riordan is pushing pension reform.
LAPD Chief Charlie Beck, left, is touting a sales tax increase. Former Mayor… (Los Angeles Times )

Last week, Proposition 30 sailed to victory, and $6-billion worth of nasty budget cuts were avoided.

Problem solved?

Guess again, Goldilocks.

K-12 schools and community colleges, in particular, won a temporary reprieve, but they're still wobbly after taking hits for several years. And the state's financial problems extend into counties, cities and towns, many of which are having to slash services in order to fund the growing burden of employee retirement plans.

I wouldn't say the sky is falling, as some anti-union zealots claim. But Joe Nation, who teaches public policy at Stanford, has an alarming take on the matter. We're not headed for trouble, he says.

"We are in trouble."

And Nation, a former state legislator from Northern California, is not some tea party barker.

"A lot of people introduce me as a Democrat who does math," said Nation, "and the math is so strong with respect to problems we're facing."

Nation, who's been looking at pension systems up and down the state, recently studied the situations in Fullerton and Orange.

"It's just crystal clear that they're getting squeezed, that pension costs are accelerating, and higher pension costs are leading to cuts in parks and street maintenance and so forth," said Nation, who said that across the state, we're seeing "the tip of the iceberg."

In Los Angeles, we've now got a snapshot of the dilemma elected officials are facing. Do you raise taxes and fees to cover the deficits, try to rein in retirement plans, or both?

On Tuesday, the City Council voted to put a half-cent sales tax increase on the March ballot to raise $215 million a year. Coincidentally, the city is looking at a projected $216-million budget deficit next year even as city contributions to retirement costs continue to rise. In 2005, according to City Administrator Miguel Santana's numbers, the city contributed $435 million — 10.5% of the city's general fund receipts — to employee retirement funds.

The annual payment has since doubled, and by 2016, it's projected to triple, requiring a city payout of $1.28 billion. That would be 25.5% of projected revenue.

Without more concessions from employee unions, and/or new taxes, that translates into more cuts in services. That's why LAPD Chief Charlie Beck, who fears the layoff of up to 500 police officers, is touting the sales tax increase. And it's why former Mayor Richard Riordan is pushing a pension reform proposal that would put new city employees on a 401(k)-style plan instead of a defined benefit plan.

This scene is going to play out in one town after another for months if not years, with one side arguing for tax increases and the other for pension reforms far greater than the ones Gov. Jerry Brown engineered last year for state employees.

So how'd we get into this mess?

In the boom-time 1990s, said UCLA professor emeritus Daniel Mitchell, the party was on, and not just for government employees. People ran up credit card debt, bought big houses and borrowed against them thinking appreciation would go on forever. The projections for growth were so rosy that in 1999, the state Senate approved a big pension hike, and I need you to sit down for this next part.

There was not a single dissenting vote.

Even the Republicans were all in.

Today, it's hard to believe that anyone thought the state could forever afford to have thousands of employees retire in their 50s with up to 90% of their pay and family health benefits for life. But easy money made people loopy, and they all believed there would be no end to the gold rush. By one prediction, the Dow Jones ticker was expected to hit 25,000 by 2009. We've come up a little short there, haven't we?

When the hangover began, private citizens put away their credit cards and corporations rolled back retirement benefits. But government was contractually stuck with the deals that had been cut, and so here we are.

Professor Mitchell says we'll have to "muddle through" with different approaches, depending on the specifics in each locale. In addition to later retirements, there may have to be larger employee contributions to pensions and healthcare costs, and less-generous formulas to determine monthly checks.

Mitchell cautions that converting to 401(k)s isn't necessarily the right solution. The administration of those funds isn't free, lay people have no training as investment managers, and we may create monstrous new burdens down the road if people's nest eggs shrink.

One great variable in all of this is the market, which will largely determine whether retirement funds are adequate in years to come. Nation recommends dropping the commonly predicted rate of return from 7.5% to between 4% and 6%, with employer and employee contributions based on the more conservative estimates. And he said he thinks we'll get to where unions are faced with a choice — either agree to givebacks for current employees or prepare for layoffs.

It's worth keeping in mind that teachers, nurses, cops, firefighters, accountants, clerks and secretaries aren't the bad guys here, nor are many of them getting rich. Some have already agreed to givebacks with furlough days, bigger contributions to retirement and pay freezes or cuts.

Labor leader Nick Berardino, general manager of the Orange County Employee Assn., thinks the grim forecasts on retirement fund returns are scare tactics. But, he said, "Pensions do need to be reformed." In his union, retirement age for some new employees has gone from 55 to 65, with much less generous formulas for calculating pensions. There's also a 401(k)/defined benefit hybrid plan, and a proposal for employees to make lower contributions but get less later, or to make bigger contributions if they want more later.

I can't predict the market, but I'm certain of this:

You can brace for some ugly battles as we muddle through.

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