California is enjoying a remarkable economic turnaround. Job creation is up, the unemployment rate is down and elected officials are getting raw hands from all the back patting they’re doing.
But there’s one problem a lot of folks are overlooking: Generous public-sector pensions up and down the state remain hugely underfunded. It’s an immense and deepening hole. And we’re only starting to sense the enormity of it.
You may have seen the Dec. 30 article in the Los Angeles Times about the little San Gabriel Valley town of El Monte. Thanks to a supplemental pension plan city officials gave themselves in 2000, city workers get a pension from the city in addition to the generous one they get from the state. That means city workers can retire early, with fully paid health care benefits for life, and double dip on pensions.
As a result, the former city manager pulls in $216,000 a year. The newspaper pointed out that one quarter of El Monte’s residents live below the poverty line, yet they must pay extra taxes for those pensions. In fact, 28 percent of the city’s general fund budget goes to pensions for city workers. (Most other cities in the country pay less than 10 percent.) As more money is paid for pensions, there’s less money for street repair, police protection and the like.
The city of Los Angeles isn’t far behind El Monte. It pays 20 percent of its general fund budget for retirement costs. That’s up from 10 percent in 2005, and it could go to 27 percent in the next five years, according to a column by Jack Humphreville, an LA Watchdog writer for CityWatch.
Statewide, the pension shortfall is enormous. Ed Ring, writing in the California Policy Center last May, pointed out that if all the public pension funds in the state lived up to the rosy scenario that they could earn 7.5 percent returns in the markets year after year, it still means taxpayers should be putting $38 billion a year into the various public pension funds instead of the $21.2 billion they did in 2014. And if the returns were more like 5.5 percent a year, it would require a taxpayer contribution of $67.6 billion a year – three times the current amount, he wrote.
The trouble is, the longer this situation festers, the deeper the hole gets. Actions could be taken to help, such as raising the retirement age, cutting off the generous pensions to incoming employees and boosting taxpayer contributions to the funds. Those actions wouldn’t be enough to make the pensions whole, but they would help.
Yes, California is basking in a warm story about how its economy has improved, and indeed it has. But any headline about that turnaround should include a big asterisk.