California Forum

Big pensions drive proposed tax increases on California ballots

Philadelphia Daily News

When Californians go to the polls on Nov. 4, they will face 140 different proposed tax increases on various local ballots. These range from old favorites like hotel and sales taxes in Palm Desert and Palo Alto to new targets like soda and marijuana taxes in San Francisco and Santa Cruz.

Taxes keep on rising while infrastructure keeps on crumbling. The American Society of Civil Engineers estimates that 40 percent of California’s bridges are in some need of repair. Tax-weary Californians looking to explain this paradox need look only to former Vernon (population 114) city administrator Bruce Malkenhorst for an answer.

Malkenhorst received a $552,000 pension in 2013, according to just-released 2013 CalPERS pension data on TransparentCalifornia.com. Though Malkenhorst was convicted in 2012 of using public money for personal play during his time in office, (supposedly) causing his pension to be cut to a mere $115,000, the data show that his massive pension lives on. Malkenhorst has successfully tied up the cut to his pension in legal challenges.

Malkenhorst is part of a growing number of 99 California retirees who received at least half-million-dollar pension payouts in 2013, up from four in 2012. Such lucrative pensions mean that in 2014, California will spend approximately $45 billion on pensions, equaling total state and local welfare spending for the first time. And in the zero-sum game of government spending, an extra dollar spent on pensions means one less spent on welfare, infrastructure or safety – or returned to the taxpayer.

Though Malkenhorst and his ilk personify California’s pension profligacy, they do not drive it. That distinction goes to the 40,000 California retirees who took home pensions greater than $100,000 in 2013. While not as eye-catching as the half-million-dollar payouts, the combined effect of systemic six-figure pensions – triple the maximum Social Security payout – is what’s necessitating yet more tax increases in the state.

These are the pensions of Susan Kent, a retired Los Angeles city librarian, who took home a $137,000 pension in 2013. And Thomas Place, a retired San Joaquin court reporter, whose pension was $105,000. And, Betty Smith, a retired Alameda nurse, who received $116,000.

Six-figure pensions for mid-level public servants have brought the state to the point where one out of every nine state and local tax dollars goes to pay for pensions. That’s up from one in 16 tax dollars in 1994. Tax increases now do not increase government services, but simply service government pensions.

And these compensation figures do not include five-figure health benefit obligations, which will only increase as the population ages and health care costs inflate. Bankrupt Stockton, where city employees who worked as little as one month receive a lifetime of retiree health benefits (including spousal coverage), is already paying this price.

Barring pension reform, Stockton – where one in five tax dollars will soon go to pensions – is a harbinger of things to come for other California cities that find themselves at some point on Stockton’s adverse pension spiral: Big pension obligations mean fewer tax dollars for services like safety and infrastructure, driving away taxpayers and increasing pension burdens further. Hence the need for yet more tax increases.

But taxpayers are having trouble keeping up: California pension funds are currently only 74 percent funded. And this is an optimistic estimate given that pension funds assume a very high rate of return of about 7.5 percent per year, an ambitious goal in this investment climate. For every 1 percent this projection drops, California taxpayers must contribute $10 billion more per year to maintain the same funding level, according to a recent analysis by the California Policy Center, using investment formulas provided by Moody’s Investors Service.

The only alternative is reform. Earlier this month, federal Judge Christopher Klein ruled that CalPERS is not above bankruptcy protection in the Stockton bankruptcy case, paving the way for Stockton pensioners to take pension haircuts. If other municipalities want to avoid Stockton’s fate, they will need to look beyond tax increases and make similar pension reforms proactively. Start with Malkenhorst and six-figure pensions for mid-level civil servants.

Mark Bucher is president of the California Policy Center, a nonpartisan public policy think tank focused on California’s public institutions.

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