California Now Faced With Pension Reform…Or Else

Update:  Former Chairman of New Jersey Pension Fund warns states of a projected $2 Trillion pension shortfall.

Yet another state is in a dire situation with government pensions.

From today’s LA Times op-ed:

The unfunded pension liabilities of California’s state and local governments exceed $700 billion. We can’t fix the budget without reducing public employee retirement benefits.

I’ve been following the unraveling of extravagant pension plans across the country.   (See here, here and here)  Many states are facing bankruptcy if they don’t do something to address the growing problem.  California, like the others, is facing soaring costs and tough decisions.

During the last decade, California state government payments for retirement benefits have grown at an alarming and unsustainable rate, exceeding $5 billion a year, more than state support for the entire UC system. These huge and growing slices of the budget pie are needed to pay for average state retirement packages now valued at more than $1.2 million. The taxpayers who pay for those retirement benefits have an average of $60,000 saved for their own retirement.

Local governments are facing pension bills that are starving vital services. Faced with mounting long-term budget deficits, Mayor Antonio Villaraigosa recently told labor leaders, “The days of unsustainable pensions are over.” In 2002, Los Angeles taxpayers contributed just under $100 million to the Los Angeles City Employees’ Retirement System, and it was fully funded. Today, that taxpayer contribution is more than $400 million, and the system is underfunded by more than $2.3 billion.

There are not any easy answers here.  It’s going to hurt regardless of how states choose to fix the problem.  For now, it seems like the LA Times is starting to ask the right (I know, I’m surprised too) questions…

Solving the crisis will take an ongoing public discussion of what voters in the state think is fair. Our organization has started asking Californians to consider a series of questions as we begin the work of fixing a broken system. Should public employees have different retirement plans than those available to employees of private companies? Should they pay half the cost of their benefits? Should public safety employees have different retirement plans than other government employees? Should retired public employees receive healthcare for life? These are all questions that need to be answered before the state tackles comprehensive pension reform.

Californians also need to familiarize themselves with the system that exists. Taxpayers are often shocked to learn that they are paying 100% of the cost of pension and retiree healthcare benefits for many public employees. When employees must contribute their own money toward their retirement, they generally opt for benefits they can afford, and if workers are given the opportunity to opt out of retiree healthcare benefits, many will continue to work until they are covered by Medicare. Delaying retirement just five years would, on average, cut pension costs in half.