is Director of Government Affairs for the Reason
Foundation and coauthor of "Roadmap to Reform."
Of Reasons To Reform
State tab for pensions is up 1,500% in five years...
buy the gripes?
Just five years ago, California paid $160 million to support
the retirement costs of state workers. This year, the state will
kick in more than $2.6 billion, more than a 1,500 percent increase
in five years. And by 2009, the taxpayer bill for state retirement
costs is projected to hit $3.5 billion per year.
Despite the obvious fiscal dangers of this explosive growth,
Gov. Arnold Schwarzenegger's efforts to reform the pension system
have run into a buzzsaw of opposition from angry public employee
The governor's critics claim lucrative pension plans for government
workers are needed because government jobs pay less than private
sector jobs, and without these high-paying pensions, the state
would have to significantly raise salaries in order to attract
a high-quality work force.
But according to the U.S. Bureau of Labor Statistics, the average
wage for state and local government employees is $23.52 per hour,
easily topping the $16.71 private-sector employees earn per hour.
When you include benefits in the equation, state and local government
employee compensation jumps to $34.13 an hour. In fact, a government
employee - without benefits calculated - earns more ($23.52)
than aprivate-sector employee with benefits included in their
to the retirement benefits that state employees in 15 other
receive, the nonpartisan Legislative Analysts
Office found California offers the highest retirement benefits
and is "comparatively generous."
But let's set these facts aside for a moment. Even if new strategies
are needed to recruit the future state work force, relying on
pension promises to lure them in is arguably the most irresponsible
way of doing it. When government pension promises are made, they
are carved in stone. Unlike salaries which can be frozen or otherwise
adjusted to cope with budget shortfalls, pension benefits are
forever. That's because courts have repeatedly ruled that once
enhanced benefits are bestowed upon state employees, they can
never be reduced.
Equally troubling, the state's traditional pension plans are
vulnerable to election-year pandering and campaign promises that
lead to irresponsible benefit increases that taxpayers are forced
to finance without any say in the decisions.
Perhaps the worst example of this occurred in 1999, when then-Gov.
Gray Davis signed Senate Bill 400, ushering in massive benefit
increases for many state employees. That one piece of legislation
created an estimated $10 billion obligation over 20 years that
the state, and taxpayers, clearly can't afford. However, unlike
a state-issued bond, the taxpayers didn't get to vote on it -
they were just handed the bill while Davis handed out gifts.
past several decades private companies have increasingly concluded
that "paycheck for life" pension
guarantees are too risky and unsustainable. Businesses have
shifted to the
defined-contribution 401(k) plans that we are all familiar with.
California needs to learn that lesson too and move to a system
that prevents lawmakers from running up new unfunded liabilities.
Shifting new state workers to a 401(k) plan would stabilize
the state's skyrocketing pension costs, while still allowing
state workers to retire with dignity. Schwarzenegger's proposal
would put newly hired state workers in 401(k)-style accounts
that the employee contributes to, with the state also contributing
a portion. Upon retirement, the size of each employee's pension
would depend on the contributions made and the personalized investment
strategy the employee used - unlike today's guaranteed pensions
that can pay many state workers 80 percent to 90 percent of their
annual salaries for life.
This way, the state could still offer attractive retirement
plans, but lawmakers couldn't make promises they can't pay for.
Last spring, Schwarzenegger pledged to tear up California's
credit cards, and most of the Legislature actually said that
was a good idea. If lawmakers are sincere in their effort to
restore fiscal stability, they need to tear up the defined-benefit
pension credit card as well - it's the one hidden in the back
of the wallet that continues to wreak billions of dollars of
havoc on the budget. CRO
This piece first appeared in the Orange County Register
copyright 2004 Reason Foundation