Gary M. Galles - Contributor
is a professor of economics at Pepperdine University. [go
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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).
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.
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.
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
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.
2006 Gary M. Galles