Anyone who reads the papers knows that cities and states are being hit hard by fast-rising pension and retirement health care costs for public employees. Cities such as Stockton and San Bernardino have even declared bankruptcy.
But few of those papers make clear that this crisis was not caused by the public employees on the receiving end of those benefits. Instead, the crisis was caused by politicians and pension fund boards that made retirement promises without setting aside sufficient funding to meet those promises.
Promises to pay pensions and post-employment health care costs are simply promises to pay deferred compensation. As with all deferred compensation promises, the party making the promise should set aside money when the promise is made so as to insulate future budgets from past costs. Failing to do so means future budgets would have to come up with enough money to meet both their own costs as well as past costs.
That’s what has happened to cities such as Stockton. Because past Stockton governments failed to set aside enough money to meet pension and health care promises to now-retired employees, the current Stockton government has been forced to cut current services to pay off those promises. The damage happens well before bankruptcy, because by the time cities declare bankruptcy they have already cut many services – such as libraries, mass transit, parks and recreation centers – to the bone. But when they start cutting into the bone – e.g., to public safety services – cities cry “uncle” and declare bankruptcy.
Neither public employees nor their unions forced governments to underfund promises. It was Stockton’s politicians who didn’t set aside money to meet promises for post- retirement health care costs, and it was the pension fund board overseeing Stockton’s pension that forecast what Warren Buffett refers to as “Alice-in-Wonderland” investment returns.
Even the few public employees who “spike” their pensions contribute next to nothing to this crisis. California could eliminate every so-called “abusive” pension yet barely move the retirement-cost needle.
It’s no different than General Motors in the 1980s, when managers promised employees big post-retirement benefits but didn’t set aside enough money to meet those promises. GM’s managers did that so the company could report higher earnings, which led to bigger bonuses for them but at great expense to future shareholders, creditors and employees. California politicians have done the same thing so they can look like heroes, making big promises without having to pay for those promises today – at crushing expense tomorrow.
To add insult to injury, public employees are being unfairly vilified at the very same time some are taking it on the chin. The Los Angeles Times recently reported about a retired Stockton parks worker who no longer receives money from the city to cover health care premiums amounting to more than 50 percent of his net income. That worker did his job and had nothing to do with Stockton’s failure to fund the promises made to him, but he, like the innocent Stockton citizens receiving fewer services, is suffering serious consequences as a result.
Retirement costs are exploding because politicians, enabled by irresponsible pension fund boards, made promises totaling hundreds of billions of dollars without setting aside enough money to meet those promises. To boot, they made all those promises without voter approval. It would be wonderful to collect from those politicians and pension fund board members but even if we could, they don’t have enough money to cover the shortfall. So far, the burden has fallen on citizens receiving reduced services, taxpayers paying more in taxes without getting additional services and future employees getting reduced benefits. But as Stockton demonstrates, current retirees are now starting to feel the effects and in some places, the same holds true for current employees.
Resolving hundreds of billions of dollars of politician-made promises will be painful. Even though the stock market is near historical highs, pension and other retirement costs are going to keep growing for decades because those highs are just half as high as pension fund boards forecast by now. But we can do it by spreading the costs over not only taxpayers, citizens and new employees but also current employees and retirees. And we can prevent it from happening again by requiring voter approval of retirement promises and populating pension fund boards with citizen-interested rather than self-interested members. Whatever steps are taken, public employees should not be blamed for this problem.
David Crane is the Former Jobs and Economic Adviser to Gov. Schwarzenegger and President of Govern for California