Pensions Leaving Cities in Holes

Charles Crumpley
Editor and Publisher of the San Fernando Valley Business Journal

The economy certainly has improved in California.

L.A.’s unemployment rate, 7.6 percent last month, was down a full percentage point from a year earlier. Silicon Beach and Silicon Valley continue to burgeon. There’s such a flurry of building in Los Angeles County that construction costs are soaring, as we chronicled in last week’s Business Journal.

But have you noticed that the improved economy isn’t translating much into improved services from state and local governments? Potholes are still lying in ambush for your tires. There’s still no grand plan to pay the $15 billion needed to improve L.A.’s crumbling water lines. The state still doesn’t have enough prison space, and L.A.’s teachers last week finally were given a raise – after eight years without – but that’s expected to open a $550 million deficit.

Why this dichotomy? Shouldn’t government coffers be filling up with all this increased economic activity?

A report came out earlier this month that went a long way toward answering that. Basically, California’s governments are spending so much more on pensions now that most everything else is underfunded.

(By the way, if you’re interested you can read the 28-page report online. It is titled “California Crowd-Out: How Rising Retirement Benefit Costs Threaten Municipal Services.” It’s by Stephen Eide and put out by the Manhattan Institute.)

It’s no secret, of course, that pensions have been generous in California for years. Pension payouts that exceed $100,000 a year used to be rare, but they’ve become common. There were nearly 13,900 pensioners from the city of Los Angeles and the Department of Water and Power in the 100K club two years ago, and of course more are coming.

You can debate whether that’s good and fair, but at this moment, that’s academic. The point is, the rising cost of pensions is with us now and it is crowding out other spending. In Glendale, according to the report, tax and fee income increased nearly 12 percent from 2005 through 2014 but pension costs soared 192 percent in that time.

You might think that, sure, pension costs are rising fast, but they’re still a small part of a city or county or agency’s overall budget. But that’s no longer true. Los Angeles spent 2 percent of its general fund budget on pensions in 2000, but now it’s 18 percent and growing.

These rising costs mean deferred maintenance and fewer improvements. Fire departments may be slower to respond, potholes may go unfilled longer and aging water lines may be left in place with fingers crossed that they hold out another hundred years.

The crowding out also results in fewer government employees. According to the report, while private-sector jobs in California increased 2.4 percent since 2007, local governments’ staffs decreased 8 percent.

Solutions? Well, you can’t rightly diminish current pensions or future pensions of existing employees since they are essentially a contract right. You can, however, limit the pensions of all incoming employees. You can extend retirement ages. And governments can contract out more work.

Higher taxes are an obvious temptation. But as the report points out, the state already is among the most heavily taxed. The state has a hard time keeping businesses now; higher taxes would incentivize more to leave.

The real solution: a thriving, growing, dynamic private sector. More businesses and more economic activity would create the taxes that governments crave. Businesses already are doing their part – as noted, the economy has improved – but the state and local governments could do more, much more, to create a business-friendly environment.

OK, OK. That’s naïve. California would never create a business-friendly environment. But if elected folks in the state pinched their nose and agreed to create at least a business-tolerant environment, that would go a long ways toward bailing them out. Out of this mess they created.

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