California Debt Crisis Explained

Most Americans have not been paying attention to the real cause of the California debt crisis, along with the crises in other Democrat-dominated states like New York, New Jersey and Illinois, and in the federal government. These crises are gutting American taxpayers and bankrupting entire states.

And they are being caused by the corruption and greed and massive political power of public-employee unions to simply commandeer whatever they can get in salaries, benefits and pension plans as discussed in Steven Greenhut’s book Plunder!, which was the subject of a recent C-Span Book TV segment.  The book’s subtitle is How Public Employee Unions are Raiding Treasuries, Controlling our Lives and Bankrupting the Nation.

Greenhut was the deputy editorial page editor and columnist for The OrangeCounty (Calif.) Register from 1998 to 2009 and now heads the new InvestigativeJournalismCenter and News Bureau at the Pacific Research Institute in Sacramento, Calif.

For decades Americans have been fed the sob story that unionization has been shrinking in the private-sector economy, and that us “common people” have suffered as a result.

And in fact it has been shrinking, but this is a positive thing. Because for decades Americans watched unions run companies out of business and destroy millions of jobs and trillions in wealth. But not before those unions and their multimillionaire bosses had drained those companies of every last penny they could.

The other side of the story, however, is that unionization has expanded its power exponentially in the public sector and now is, in essence, driving entire states out of business, particularly in the area of pensions.

And this union power is so entrenched and so corrupt in California that even liberal Democrats like state treasurer Bill Lockyer are alarmed at what their union friends are doing  in running up the state’s bills. Said Lockyer of the Democrat-dominated legislature, “…it’s impossible for this Legislature to reform the pension system, and if we don’t it will bankrupt the state.”

Note: No state ever has been driven to bankruptcy by a capitalist, a corporation or a so-called ‘robber baron’.

Now the trend is toward less and less in public services costing more and more money, or the classic socialist outcome as predicted by any rational economist who really understands the numbers.

On City-Journal.org, William Voegeli wrote:

It’s neither a coincidence nor a surprise, then, that California’s government employees receive higher compensation than those in any other state. The Census Bureau’s latest figures cover the year 2006, and show that California’s local government employees were paid at an average annual rate of $60,780, 33% above the national average. … California’s public workers receive more, often significantly more, than government employees in other states with high living costs. Californians who work for local governments were paid 7.7%, 9.1%, 11.5%, and 21.4% more than their counterparts in New Jersey, New York, Connecticut, and Massachusetts respectively. (end of excerpt.)

Note that these California salaries are higher than all the other most expensive states…

In Plunder! Greenhut discusses the sweetheart deals and insider politics that have turned lifeguards on public beaches into unionized ‘public safety officials’ with skyrocketing salaries, rich benefits, early retirements and overstuffed pension plans that are gutting the state’s taxpayers and causing an exodus of productive residents.

Meanwhile the California public education system, run by the same unionized public employees, has its own exorbitant salaries, lifetime employment, early retirements and plush pensions along with failed schools and a 50+% dropout rate in many cities, leading to an exploding growth in the deadbeat population, leaving fewer and fewer productive people to pay the taxes to bankroll all those wealthy civil servant retirees. The average public schoolteacher salary in America today is $35 an hour while California is certainly higher.

In other words, the state is being squeezed on both ends by the unions in a vicious cycle that simply is unsustainable.

Conservatives have warned for decades that this would happen, and that public salaries should not be set artificially by unions, but by markets. In other words, by the will of rational consumers, also known as ‘voters’. Yet conservatives today have little voice in California with every statewide office in the hands of pro-union Democrats except for governor Schwarzenegger, who is just a figurehead liberal Republican with no real power and a propensity to agree with Democrats.

Greenhut exposes the tactics used by unions and their elected Democrat cronies, as well as some Republicans,  to rig the system in favor of public employees, while Democrats in return get huge campaign contributions. He talks about public officials announcing at the last minute on Friday evening that crucial pension issues will be settled at a meeting on Tuesday, leaving little time for opposition forces to muster. He talks about the widespread tactic of ‘pension spiking’ or basing a pension on the income in just the last year of employment. So an employee will work many extra hours during that final year, and fix his pension at a much higher rate.

Or Greenhut talks about laws like Three-for-Thirty that allow public employees to get 3% of their salary for every year they work, so that a pension after only 30 years of work and retirement at age 51 can amount to 90% of that final year’s inflated salary. And when pension fund investments cannot pay those figures, taxpayers pick up the difference as is happening big-time in California right now.

Look here to see a list of 3,000 public school teachers with annual pensions of more than $100,000 per year, some collecting more than $150,000. These teachers generally are retiring in their 50s and have an expected lifespan longer than the American average at 82 years. And remember that they only worked 9 months a year during their careers and often will spend as many years retired – or more years retired – as they did working. And those years of retirement are going to have all 12 months, you can rest assured.

Greenhut talks about the abuse of the disability system where 80% of the police administrators in one city had applied for special pensions for disabilities – including irritable bowel syndrome and other fictional maladies – that magically appeared in their final year in service.

He also talks about the ‘wall of silence’ surrounding public employees who refuse to reveal wrongdoing in their ranks, or about special license plate numbers issued to state workers that cannot be traced for running red lights and skipping through toll booths, or parking in restricted areas etc. Greenhut also calls lifetime state employment a “benefit” that has incomparable value.

You can extrapolate all this to the federal workforce as well. That is why the richest counties in America per-capita are in Maryland and Virginia, directly outside of Washington, DC, which are populated mostly by federal government bureaucrats.

And now that these unions have pushed California into the ditch, the federal government is being asked to bail out California. This is like Obama bailing out the car companies but not asking United Auto Workers members to make any concessions in their $70+ per hour salary/benefit/pension packages. So in both cases, public and private, taxpayers all over America are being asked to work more and more hours to satisfy the fiscal demands of union workers who earn more money and work many fewer hours than the average American taxpayer.

Groups like the California Foundation for Fiscal Responsibility (californiapensionreform.com) are offering serious proposals to fix the pension crisis.

Here is a column from Thomas Elias writing on December 29, 2009 on vcstar.com, the website of the Ventura County Star newspaper about the inner workings of the crisis:

Here, for example, is what the California Public Employees’ Retirement System, better known as CalPERS, told its retired members early in the fall of 2008, when it had lost more than $70 billion on its investments so far that year, more than one-fourth of the previous $260 billion value of all its investments:

“It is important for you to know that the current credit crisis does not directly affect your retirement benefits, which are securely protected by law, or our ability to pay benefits.”

Translation: Not to worry; the taxpayers will have to bail us out.

In fact, retired public employees from the 2,000-odd cities and counties that contribute to the plan have not seen a nickel’s reduction in their stipends. CalPERS paid out $10.88 billion in retirement benefits in 2008, plus an estimated $5.7 billion in health benefits.

This meant, for instance, that in the small San Francisco suburb of San Bruno alone, 12 retirees received benefits totaling at least $100,000, with the top city retiree getting $187,358 for the year. Plenty of larger cities and counties had many more six-figure pensioners.

But until now, those cities and counties have not been forced to cut services and work forces or seek new taxes. That’s because the setting of CalPERS “dues” generally lags two years behind investment performance. Rates paid by member cities and counties have been flat during this fiscal year because fiscal 2007 was a very good year for CalPERS investments, the peak of the real-estate bubble producing gains of 19.1 percent on the huge fund’s often-risky investments.

That fat year is long past, and CalPERS will be challenged this year to attain the 7.75 percent annual gain on investments it has said it needs to meet its obligations. That’s where things get back to the reassuring statement the fund sent its pensioners 15 months ago.

For pensions are protected by law and contract, even when the pension fund can’t pay. Where does the money come from in such times? Cities and counties, of course. Us.

So CalPERS has warned state, city and county governments their annual pension contributions could increase by nearly one-third — the same percentage as the losses in the value of the fund’s investments during the disastrous 2008-09 nosedive of stocks, bonds and real estate. No one is quite sure what the fund will actually dun its contributors, though, as stock and bond markets might rebound before next summer even more than they already have. The CalPERS portfolio has reportedly recovered about $40 billion of its former value since bottoming out early last year along with the markets.

Contributions from cities, counties and special districts now come to about 13 percent of payroll, but that could rise anywhere from 2 percent to 5 percent of payroll despite efforts to spread the losses and increases in contributions over 30 years. “If investments perform well, then rates go down. If not, then rates have to go up,” Edward Fong, a CalPERS spokesman, told a reporter.

For a city like Fullerton, in OrangeCounty, that could mean $5.5 million a year for four years in added payments that have to be made regardless of other obligations. Payments by larger cities might increase far more even as they’re seeing big drops in tax revenues from 2007 levels because of recession and the housing bust. For sure, labor unions won’t willingly give back any pension rights.

The result will be that hundreds of cities and counties will have to tap their rainy-day funds — if there’s anything still in them after two tough years. Some local governments will surely seek to cut employee pay, decreasing both direct expenses and pension contributions.

Because public employee pensions of all but a few cities, counties and other public entities are administered by CalPERS, the crunch will be felt in every part of the state — unless CalPERS’ investments suddenly pick up.

With that in mind, the fund has lately taken new risks, hoping to resolve its crisis internally rather than pass it along to participants. The beleaguered CalPERS board, under fire for making large payments to middlemen who steered it into bad investments in the past, has authorized a big increase in the percentage of plan holdings that can be invested in private equity funds — which took even bigger losses than publicly sold stocks during the crash. The hope is that these funds will also recover faster than stocks — but that’s only a hope.

In the end, taxpayers stand to pay plenty for all this, either through increased taxes or diminished public services — closed libraries and shelters for battered women, fewer trash pickups, shuttered courts, slower police and fire response times, more potholes, early county jail prisoner releases and much more — if local governments see layoffs and furloughs as their only way out. (end of excerpt)

Please visit my website at www.nikitas3.com for more. You can print out for free my book, Right Is Right, which explains why only conservatism can maintain our freedom and prosperity.