Will Reform Forestall Pension Junk Rating?
By CHRISS STREET
Jerry Brown, California’s quirky governor, has made a credible first step on the road to reforming the state’s insolvent public pension plans. By racking up $350 billion in unfunded pension liabilities, the state is the global leader for financially irresponsible government. But with the threat of California’s credit rating being cut to the same “junk” level that is destroying Greece, the governor has offered a 12-step recovery program to begin the long journey back to solvency.
The new urgency to reform California’s public pensions is being driven by the Government Accounting Standards Board’s new public-sector accounting rules that will require the state of California and local governments to triple their annual pension contributions. There is no law that can force California to comply with GASB; but failure to do so will result in the state’s auditor issuing a “qualified opinion” regarding the reliability of the state’s financials.
Eighteen months ago, Greece’s auditors issued this type of opinion. The credit rating agencies downgraded Greece’s debt, causing borrowing costs rise to above 20 percent and destroy the nation.
California first enacted its public-sector defined-benefit pension plan in 1932, shortly before the national enactment of Social Security in 1935. The state legislation, just like Social Security, was designed to require work until age 65, at a time when the average life expectancy of Americans was only 60 years of age. Consequently, the average public employe, just like the average Social Security contributor, was both required to contribute for decades for retirement payments he would never receive.
But through labor union negotiations, the average age of retirement eligibility for California public emplyees was whittled down to 53.75 years of age, while life expectancy rose to 78.2 years. When the average California public employee retires today, he should expect to initially receive a $35,000-a-year pension payment that is expected to rise by annual 3 percent cost-of-living increases for the next 24.5 years. The income stream necessary to pay for the combination of today’s public-sector early retirement eligibility and longer expected lifetime to receive payments has driven the costs of pension payments paid to the average retiree from $573,484 to $1,277,445.
To fully comply with the new GASB guidelines, the state must increase annual pension contributions from $4 billion to $12 billion to fund the $703,961 spike in lifetime pension payments in excess of the original state retirement plan. To fund this $8 billion annual increase in pension funding costs, California would need to cut spending by 10 percent of the $89 billion in the fiscal 2011-12 state budget. But California’s salary cost for its 393,989 public employee payroll is just $26.8 billion. So, to pay the increased pension funding costs from current public employees would require a 30 percent slashing of existing payrolls.
The pension benefit increases for the California public employees are a badge of shame for rentable politicians from both parties and a monument to the power of public-sector unions.
The Greeks are rioting and burning down Athens every day over the requirements that 30,000 government employees be forced to retire. Think what life would be like for Governor Brown if he was forced next year to fire 117,609 union workers.
Brown’s 12 pension reform proposals include increasing employee contributions, raising the retirement age, no retroactive benefit increases and no pension spiking. None of these proposals would affect current employee benefits. This is the equivalent of raising the fares for future passengers on the Titanic in order to provide more iceberg spotters and life boats.
The true benefit of the governor’s proposals is that each of these 12 steps could be negotiated with the state’s unions to become effective immediately when the rating agencies formally inform the State of California that they intend to issue downgrades and a crisis breaks out.
Little Greece continues to be bailed-out by its rich and AAA-rated big brother, Germany. California is the largest state in a nation that is the largest debtor on earth and already lost its AAA rating. When the debt crisis finally hits California, adotping Gov. Brown’s 12-step program will be an important stride in returning California to solvency.
Chriss Street is the former treasurer of Orange County. On November 1, his latest book, “The Third Way,” will be published. It will be available on Amazon.com. To order a signed copy, please contact The Forum Press at: www.theforumpress.com.
May 19, 2013