In 2013 Governor Edmund G. (Jerry) Brown signed AB 340 and AB 197 enacting the California Public Employee’s Pension Reform Act of 2013. Few people noticed that the intent of this law was to allow California to cut pension benefits, for existing retirees. Currently there are three lawsuits regarding this law headed toward the Supreme Court. Governor Brown personally intervened to encourage the Supreme Court to rule in favor of those this law.
Here is what Brown just said:
“There is more flexibility than there is currently assumed by those who discuss the California rule,” Brown said during a briefing on the budget in Sacramento. He said that in the next recession, the governor “will have the option of considering pension cutbacks for the first time.”
What Brown knows, and dare not tell you, is that it won’t take a recession to have the problem. The problem is already here and the economy can’t possible grow fast enough make a difference.
The California Public Employees’ Retirement System (“CALPERS”) doesn’t have nearly enough assets to cover its liability. CALPERS reports about $344 billion in assets. If we assume that represents 68% of what is required, as reported by CALPERS, it is underfunded by $161 billion.
Unfortunately that estimate is almost certainly too low. Sanford did a study published in December of 2016 and it showed that the market value of California’s pension debt was $1 trillion dollars. That amounts to a cost of $93,000 for every California household. If that is true, then CALPER was underfunded by $656 billion in 2016. It is almost certainly worse today.
Let’s put that in perspective. According to the Los Angeles Times, the total budget for California during the 2017-18 fiscal year is $190.3 billion. Of that amount, the General Fund budget is estimated at $131, billion. If CALPERS cannot pay the pensions due, you and I have to pay them. There have been attempts to require public sector union employees to contribute a little more, like everyone else. The unions fought them tooth and nail. Courts have consistently ruled that these benefits are guaranteed.
When Jerry Brown talks about flexibility, he means the ability to make any cuts at all. Right now, retired Public Sector employees are guaranteed the first bite of the California apple.
If CALPERS is underfunded by a mere $161 billion, that is 122% of the entire general fund budget. If the Stanford estimate of $656 billion is accurate, that is 5 times the general fund budget. This is why Governor Brown is beyond desperate to change the law. But even if he succeeds, that won’t solve the deficit problem. It will just include cutting existing pension benefits as one of the many painful things that will be required for the state to stay solvent.
Imagine paying; say $10,000 more per year in Tax. Imagine K-12 Education spending, Health and Human Services, Higher Education, Corrections and Rehabilitation and everything else, including any spending on infrastructure cut to the bone. You are paying much higher taxes and getting next to nothing in return except a degrading educational system, poor health care and lousy roads. Everyone, except your former neighbor who used to work for the state, is feeling the pain.
That former neighbor is now living the high life with his generous California pension, including free lifetime health care. He sold his home and moved to Nevada, where he purchased a better home for a lot less money. He loves Nevada, because now he doesn’t have to pay California Income Tax, which he considers to be too high. Any attempt to reduce his pension, even by a small amount, will be met with outrage.
Even if Governor Brown gets his way and is able to cut pensions, by a little, at some distant point in the future, you will still be paying much higher taxes and all or most of that increase in taxes will be going to people like your former neighbor. This is what happens when you keep electing Democrats, totally under the control of public sector unions, who make promises with your money they can’t possibly keep.
The only question is when this will happen? The California workforce, like the rest of the country, is aging rapidly. Public sector workers can retire at a much younger age than the rest of us, and that makes the problem even worse. Perhaps, just perhaps, politicians in California will be able to kick this can down the road, a little farther, but we are rapidly running out of road.
There was an article in the Sacbee published in March 2015 that explains what is happening:
I love the following quotes from Joe Beck, who now lives in Las Vegas: “You could see it coming in California, the big tax increases, the poorer quality of life. You know what the difference is between the people on the Titanic and people in California who voted for Brown? The people on the Titanic didn’t have a choice.”
Beck left out the part that he is very happy collecting his California pension and his primary complaint about Brown is that he is trying to cut his pension even a little.
Sadly, as bad as this is, Jerry Brown was probably a better choice for Governor than any other Democrat.