The Governmental Accounting Standards Board is implementing new rules that require governments, for the first time, to report unfunded pension liabilities on their 2015 balance sheets. This sticker shock should create new urgency for meaningful pension reform.
A recent study put the unfunded pension liability for all state and local governments at $4.7 trillion. For too long, pension fund officials and politicians have increased payouts and low-balled contributions. As a result, they now have insufficient funds to pay the promised benefits. Accounting gimmicks have hidden the true cost from the public, who are now on the hook to make up the difference between pension promises and assets.
Illinois and New York have unfunded pension debts north of $300 billion each, while New Jersey, Ohio and Texas exceed $200 billion apiece. But nowhere is the problem worse than in California, which accounts for $550 billion to $750 billion of the total, depending on the calculation.
The Golden State reveals the damage from long-term financial mismanagement of pension systems. For example, Ventura County’s pension costs have gone from $45 million in 2004 to $162 million in 2013. Overall from 2008 through 2012, California local governments’ pension spending increased 17 percent while tax revenue grew only 4 percent. As a result, a larger share of budgets goes to pensions, crowding out spending on core services such as police.
In San Jose, the police department budget increased nearly 50 percent from 2002 through 2012, yet staffing fell 20 percent. More money has been consumed by police pensions, leaving less money to hire and retain officers.
In Oakland, police officers were given the option in 2010 to contribute 9 percent of their salary into their pensions and save 80 police jobs, or keep paying nothing into their pensions and see 80 jobs eliminated. The police union voted to continue paying nothing. Now the department refuses to respond to 44 different crimes because of the staffing cutbacks. Any pension system that forces this trade-off is immoral by threatening life and property.
Skyrocketing pension costs also crowd out other quality-of-life services. Public libraries, parks and recreation centers are shortening their hours or closing. Potholes go unfilled, sidewalks unrepaired and trees untrimmed. A new pension rate hike for California’s local governments will cost the city of Sacramento $12 million more a year – the equivalent of cutting 34 police officers, 30 firefighters and 38 other employees.
California’s vested rights doctrine locks local governments into pension benefits for life on the day they hire an employee. They cannot modify pensions, forcing them to cut core services or declare bankruptcy, as happened in Vallejo, Stockton and San Bernardino.
Fortunately, it’s not too late to stop this death of communities by a thousand cuts. Former San Jose Mayor Chuck Reed is leading an effort to craft a statewide pension-reform ballot measure in 2016. One needed change is to give state and local governments the option of adjusting future pension benefits for all employees, including a switch to 401(k)-type plans, which are more affordable and always fully funded.
Swelling pension costs are like tapeworms, starving the public of municipal services. The new accounting rule will provide needed transparency, but action must follow.
Lawrence J. McQuillan is a senior fellow and director of the Center on Entrepreneurial Innovation at the Oakland-based Independent Institute.