Public Employee Gain Reason for Higher Ed Loss

David Crane
Lecturer and Research Scholar at Stanford University and President of Govern for California

This Thanksgiving I gave special thanks for the University of California and California State University systems. In California, jobs and economic growth are inextricably linked to the well being of higher education. With their 33 campuses and 670,000 students, UC and CSU play central roles in providing opportunity to students, preparing California’s workforce, and powering our diverse and entrepreneurial economic growth. Put simply, a healthy California economy requires a healthy university system.

Yet, despite its essential importance, higher education’s share of the state budget has been reduced by 30% over the past thirty years, largely to make room for more compensation for state government employees. In the last ten years, cash expenses relating to state employee compensation (just for direct employees only) have more than doubled and now total more than $20 billion per year, in excess of three times what the state provides to higher education. On an accrual basis it’s more like four times.

By far the largest boost in state employee compensation took place in 1999, when the Legislature passed and Governor Davis signed a bill known as SB 400 that boosted pension benefits for state employees by more than 25% and made those boosts retroactive, lifting the cost even higher. Had the boosts been adequately pre-funded there would be no impact on higher education’s funding.

But they weren’t. Instead, because unfunded pension promises are functionally no different than debt promises, SB 400 was simply the equivalent of the state issuing tens of billions of dollars of new and unfunded debt. Since the General Fund is on the hook for all such debt, sadly that meant that inevitably billions would be diverted from higher education and other unprotected General Fund programs to meet the pension promises. No single event ever harmed our university system more, and to make matters worse, for decades California had already been underfunding pension promises generally, condemning higher education and other programs to even more pressure.

This year alone, meeting past underfunded pension promises to state employees extracted $3.3 billion from general and special funds, equal to almost half of what the state contributes in total to UC and CSU. Next year nearly $5 billion will be extracted. Worse, through aggressive accounting of the type GM employed to hide the full extent of its pension costs until it was too late, neither figure even captures the full cost of unfunded promises. In addition, payments for another unfunded form of deferred compensation (post-retirement healthcare for state employees) are now diverting more than $1 billion per year from the state budget, leaving even less for our universities and other unprotected programs.

As we all know, UC and CSU already have been forced to cut back services and raise tuition, but unfortunately they’ve seen only the tip of the iceberg that SB 400 set in their path. This is because the legislation irrevocably increased lifetime pensions not only for the state employees in place in 1999 but also for every employee hired since then, so budgets for the universities and other important programs will be under growing pressure. As a result, the only way to help university funding over time is to reduce other general fund spending, including the sizes of pensions promised to newly hired employees. That’s why Governor Schwarzenegger has proposed rolling back pension sizes for new employees to the levels in place before SB 400 and constraining GM-like underfunding of pension promises.

Legislators regularly proclaim their support for higher education but the math makes it clear that if they’re unwilling to reform state employee compensation to make room for more university funding, it’s hard to take them seriously. To protect and grow our universities we must start by reforming pensions for new state employees.

By next Thanksgiving let’s hope our universities and students have something like that to celebrate.

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