George Rebane
California’s governor published a strong appeal for pension reform in the 27aug10 WSJ op-ed section. In a piece titled ‘Public Pensions and Our Fiscal Future’ he lays out a case for why we are headed for disaster. None of the arguments are foreign to regular RR readers. They may come as a surprise though to those lefties claiming the “middle of the road”, and definitely to those of a hard list to port. And specifically those who are of a strong opinion that all the past alarums posted here have been only from a fevered brain sequestered equally with theirs.
Let me begin with a pre-punch line, our governor flatly states that “government employee unions are the most powerful political forces in our state and largely control Democratic legislators.” While this should come as no surprise to anyone who reads, it does explain away how the catastrophe has been catalyzed. Willie Brown, that astute observer of the state’s political scene in which he formerly played a starring role, observed that “roughly 80 cents of every government dollar in California goes to employee compensation and benefits.”
Schwarzenegger makes the point that “spending on California’s state employees over the past decade rose at nearly three times the rate our revenues grew, crowding out programs of great importance to our citizens” that “include higher education, environmental protection, parks and recreation, … .” This state of affairs has been difficult for the new hope and change students of socialism to pin on Bush, but God knows they’re still trying.
So here comes the punch line (actually punch line #1) – “Much bigger increases in employee costs are on the horizon. Thanks to huge unfunded pension and retirement health-care promises granted by past governments, and also to deceptive pension-fund accounting that understated liabilities and overstated future investment returns, California is now saddled with $550 billion of retirement debt.
The cost of servicing that debt has grown at a rate of more than 15% annually over the last decade. This year, retirement benefits—more than $6 billion—will exceed what the state is spending on higher education. Next year, retirement costs will rise another 15%. In fact, they are destined to grow so much faster than state revenues that they threaten to suck up the money for every other program in the state budget. (See the nearby chart.)”
Meanwhile, “since 2007 over one million private sector jobs have been lost in California.” And the rest of us are having to guarantee $1M trust funds for every $36K annual pension paid to a 55 year old state retiree. Do the arithmetic, over 15,000 state workers currently get pensions greater than $100K a year. A, say, $118K pension means that there must $3M somewhere working hard to generate those checks for the expected longevity of the retiree.
The solution of Sacramento’s liberal left to all this is to raise tax and debt burdens on the private sector to cover the pension costs which have been increasing at over 15% per year during the last decade. And there is no end in sight for these increases, the unions are not budging an inch.
But here is punch line #2. There exists no feasible financial scenario for paying off the existing $550B of California’s retirement debt. In ten years that debt (see chart) will be $28T (yes, T like in trillion). At 5% just the annual interest on that sum will be $1.4T (yes, there’s that T again) which will amount to about the state’s entire annual budget. No one in California will peaceably pay the tax rates required to service that debt. That means that the state retirees are not going to get their pensions unless 1) California turns into a police state, AND 2) the state’s economy will grow sufficiently under these slave labor conditions to generate the needed cash. I’m sure that some readers are going, ‘there he goes again’, and of those I ask for another scenario that can maintain currently contracted payouts. If you can come up with one, then get your tux ready for a trip to Stockholm to make a speech and collect your well-deserved prize.
A more detailed accounting of the coming pension panic is found in the heavily documented book Plunder! by Steven Greenhut, head of Pacific Research Institute’s journalism center in Sacramento.
Exit question – If the state retirees took time to puzzle on it, would they vote for or against Prop23?
rebanesruminations.com 
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