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Gary M. Galles - Contributor

Mr. Galles is a professor of economics at Pepperdine University. [go to Galles index]

A Fiscal Time Bomb
Deferred comp hurts taxpayers…

[Gary M. Galles] 3/17/06

California's Legislative Analysts Office recently reported that the state faces an unfunded liability of $40 billion to $70 billion (and growing) for state employees' retiree health costs, which would require $6 billion a year for 30 years to fund. This comes on the heels of the Los Angeles Unified School District's doubling its estimated unfunded liability for such costs to $10 billion. Those reports ratchet up the magnitude of the state's deferred-compensation disaster from a September review that found California's biggest government agencies faced over $100 billion in unfunded liabilities for existing pension, health care and workers' comp commitments (itself a massive increase over a $10 billion estimate in 2002).

This fiscal time bomb is the latest result of politicians' focus on the short term rather than the long term, due to voter ignorance and re-election campaigns that come before all the effects of their policies become apparent. The logic for this back-loaded compensation approach is obvious. Public employees and their unions are well-informed about their compensation packages, and do not hesitate to use their political clout to expand them. In contrast, citizens who know their votes won't alter election outcomes (especially with gerrymandered "safe" districts) pay little attention.

Mushrooming budgets can become scandals, and threaten to awaken voters' ire. But by the time the deferred obligations are due, the politicians hope to have moved on or be able to hide behind the claim, "There's nothing we can do now."

That the retirement obligation boom is a bonanza to public workers rather than a sensible policy is revealed by the less-than-credible arguments offered in its defense.

The first line of defense has been to claim public employees are underpaid, so retirement benefits must be sweetened to compensate. That may have been true once, but those days are past for most government workers, many of whose salaries now exceed those in the private sector.

The second line of defense has been to make "rosy scenario" assumptions that make new retirement commitments disappear from consideration by assuming implausibly large returns to retirement fund investments. When the assumptions don't pan out, taxpayers are already on the hook for the shortfalls.

Another defense has been that retirement promises are essential for agencies to attract and retain quality workers. Of course, those agencies seem to have no problem finding workers, and few employees quit, a refute to that claim as nothing but special pleading.

The pension spike also violates the principle of pay for performance. Benefit boosts have been applied to existing workers, often virtually unfireable and who have revealed they aren't going anywhere. For older workers, the lifetime payouts are negotiated when they have only a few more years to work, so the supposed enriched incentives hardly apply to most of their working life. They do create a boom in pension spiking (pre-retirement promotions, qualifying workers for bigger pension benefits) prior to retirement.

It is long past time the public took note of the deferred-compensation disaster. It is dramatically accelerating what California taxpayers will have to pay in the future. The once delayed future bills have begun to arrive, and unless we face reality soon, the tab will only grow worse.CRO

This piece first appeared at the Los Angeles Daily News.


copyright 2006 Gary M. Galles



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