Funding for schools, parks, civil services and just about everything else that California governments fund will have to be cut as increasing pension obligations consume larger shares of budgets.
As recently as 2003, California’s state government paid about $1.3 billion toward the state’s two biggest pension funds — CalPERS, which funds retirements for state workers and public safety employees, and CalSTRs for the state’s teachers. This year, the state will spend more than $8.7 billion on those two pension funds. By 2030, those annual payments will exceed $19 billion, according to projections in an extensive new report released this week by the Stanford Institute for Economic Policy Research.
“Pension costs have crowded out and will likely to continue to crowd out resources needed for public assistance, welfare, recreation and libraries, health, public works, other social services, and in some cases, public safety,” says Joe Nation, the author of the report and former Democratic member of the California state Assembly.
The state’s pension costs have climbed by 423 percent since 2003. By comparison, spending on higher education, something that is typically viewed as being on an unsustainable fiscal course as annual cost increases strain schools and students, have climbed by “just” 47 percent over the same period of time.
Compounding the state-level pension crisis, local governments are facing similar straits. The Stanford report includes case studies for more than a dozen cities, large and small, across California. In Sacramento, for example, pension costs are projected to hit $150 million by 2023, up from $42 million in 2008. Pension costs have already forced cuts to its cultural programs, neighborhood services, transportation and police, Nation says. By 2030, the increasing costs will require eliminating $94 million in non-pension spending — equal to a 25 percent reduction in both police and fire expenditures, or 10 percent across-the-board expenditure reductions.
California is in many ways the poster child for America’s ongoing public employee retirement crisis. The reputation is well-earned. Consider the trouble facing El Monte, where a retired city manager named James Mussenden could very well be the face of California’s municipal pension crisis. Mussenden pulls down more than $216,000 in retirement benefits each year, along with free health insurance and the promise of annual cost-of-living increases.
While Mussenden is living the good life, more than a quarter of the city’s population lives in poverty and the local government is groaning under the weight of pension bills that consumed more than 28 percent of the budget last year, according to a report from the Los Angeles Times.
He’s hardly the only one making bank from the pension system. According to a report from Transparent California, there were 20,900 public workers in California who pulled down more than $100,000 in retirement benefits during 2015.
California’s pension crisis is worse than most, but it is by no means alone. Major cities across the country are facing the same difficult choices. Using data from Merritt Research Services, Governing Magazine determined that American cities with a population of more than 500,000 spend, on average, about a quarter of their budgets on debt service — including payments to pension systems. More worrisome is the fact “that legacy costs are rising, taking up ever-larger shares of budgets,” writes Mike Maciag, Governing’s data editor.
Annual budget outlays for debt payments, pension costs and other post-employment benefits for cities in Governing’s analysis have crept upwards from about 20 percent in 2011 to more than 22 percent in 2016. In some places, the increase has been much greater. “The trend continues to squeeze out other operating expenses over time,” Richard Ciccarone, president of Merritt Research, told the magazine.
Americans could almost certainly make do with fewer government services — the silver lining of all this is that increasing budget pressure is a good way to force cuts to wasteful and ineffective programs.
But the pension crisis will only reduce the scope of government, not the cost of it.
You’ll be paying more, but getting less.
Eric Boehm is a reporter at Reason.com.
