CA: A Fiscal Time Bomb - Deferred comp hurts taxpayers

CaliforniaRepublic.org ^ | 3/17/06 | Gary M. Galles

[NormsRevenge]

California's Legislative Analysts Office recently reported that the state faces an unfunded liability of $40 billion to $70 billion (and growing) for state employees' retiree health costs, which would require $6 billion a year for 30 years to fund. This comes on the heels of the Los Angeles Unified School District's doubling its estimated unfunded liability for such costs to $10 billion. Those reports ratchet up the magnitude of the state's deferred-compensation disaster from a September review that found California's biggest government agencies faced over $100 billion in unfunded liabilities for existing pension, health care and workers' comp commitments (itself a massive increase over a $10 billion estimate in 2002).

This fiscal time bomb is the latest result of politicians' focus on the short term rather than the long term, due to voter ignorance and re-election campaigns that come before all the effects of their policies become apparent. The logic for this back-loaded compensation approach is obvious. Public employees and their unions are well-informed about their compensation packages, and do not hesitate to use their political clout to expand them. In contrast, citizens who know their votes won't alter election outcomes (especially with gerrymandered "safe" districts) pay little attention.

Mushrooming budgets can become scandals, and threaten to awaken voters' ire. But by the time the deferred obligations are due, the politicians hope to have moved on or be able to hide behind the claim, "There's nothing we can do now."

That the retirement obligation boom is a bonanza to public workers rather than a sensible policy is revealed by the less-than-credible arguments offered in its defense.

The first line of defense has been to claim public employees are underpaid, so retirement benefits must be sweetened to compensate. That may have been true once, but those days are past for most government workers, many of whose salaries now exceed those in the private sector.

The second line of defense has been to make "rosy scenario" assumptions that make new retirement commitments disappear from consideration by assuming implausibly large returns to retirement fund investments. When the assumptions don't pan out, taxpayers are already on the hook for the shortfalls.

Another defense has been that retirement promises are essential for agencies to attract and retain quality workers. Of course, those agencies seem to have no problem finding workers, and few employees quit, a refute to that claim as nothing but special pleading.

The pension spike also violates the principle of pay for performance. Benefit boosts have been applied to existing workers, often virtually unfireable and who have revealed they aren't going anywhere. For older workers, the lifetime payouts are negotiated when they have only a few more years to work, so the supposed enriched incentives hardly apply to most of their working life. They do create a boom in pension spiking (pre-retirement promotions, qualifying workers for bigger pension benefits) prior to retirement.

It is long past time the public took note of the deferred-compensation disaster. It is dramatically accelerating what California taxpayers will have to pay in the future. The once delayed future bills have begun to arrive, and unless we face reality soon, the tab will only grow worse.

[NormsRevenge]

Mr. Galles is a professor of economics at Pepperdine University.

[SFC Chromey]

Deferred comp works great for those being taxed, ie; wage earners.

Deferred Comp was never meant for govt employees.
Just as unions were never meant for govt employees.

Again, a great idea gets b@st@rdized by govt meddling.

Deferred comp came into being because AMT hit so many more people than it really is 'supposed' to. I still say we should scrap income tax altogether, and pay to govt expenses off of a 15% FLAT tax on all imports.

That would solve several issues all at once. It could also be used as setting the stage to stop illegal immigration.

[P-40]

voter ignorance

There, I summarized the article. :)

[SFC Chromey]

As a follow up though, this is not so much about deferred compensation as it is about retirement benefits/pensions.

These are not "deferred compensation". This pension bubble is expanded because of the removal of the 30-year Treasuries a few years back. The calculations had to be adjusted to meet the 10-year Treasury notes and thus the spike in many of the "pension disasters" that are happening today.

Of course everyone thought a 'new economy' can get away with no 30-year note, but reality is all long term financing was based on those rates.

One problem with govt benefits that you don't see in the civilian sector is the way people will get promoted just a year or two before retiring, locking in higher benefits.

Civilian companies and corporations continually negotiate retirees benefits, governments only negotiate new hire benefits. Allocated benefits are NEVER cut to govt retirees.

[paul51]

Complete the thought.

Ignorant voters fleeced by unions and gov't officials.

[goldstategop]

Paradoxically, the only way things will change in California is if things becoming worse enough. People don't think its dysfunctional enough yet to drive them to fix the looming crisis in store in the future. Our friend Zeno Of Elea would have greatly enjoyed this marvelous paradox.

(Denny Crane: "I Don't Want To Socialize With A Pinko Liberal Democrat Commie. Say What You Like About Republicans. We Stick To Our Convictions. Even When We Know We're Dead Wrong.")

[kmiller1k]

I wish sometimes that California would just go bankrupt--as awful as it might be for me (I live here) it would be a wake up call like no other. Pension promises are absurd and the priorities we place on our expenditures is equally crazy.

[Hank Rearden]

Keep a close eye on the chairs . . . . the music is about to stop.

[Amerigomag]

Many insightful and accurate comments. But here is where the rubber meets the road:

A society can't support increasingly, larger, government employment liabilities without increasing taxation. As these liabilities increase in geometric proportions, so to must taxation rates.

There are several solutions. Reduce the government work force, reduce government employment compensations, increase general taxation rates to meet these increasing costs, increase taxation rates on government employees to meet the increasing costs of their employment or force government employees to self insure letting the prevailing market control benefits.

Society must decide.

[goldstategop]

Government employees never get laid off or outsourced. Government is the only industry in which growth always outstrips demand.

(Denny Crane: "I Don't Want To Socialize With A Pinko Liberal Democrat Commie. Say What You Like About Republicans. We Stick To Our Convictions. Even When We Know We're Dead Wrong.")

[John Lenin]

Paradoxically, the only way things will change in California is if things becoming worse enough. People don't think its dysfunctional enough yet to drive them to fix the looming crisis in store in the future.

That's why I say we should dump RINOLD next election. He is prolonging RAT control of CA. No one is going to escape tax hikes to pay for a small minority of government workers. Once people get the bill the RAT party implodes.