California’s state and local government workers, who enjoy pensions that average at least five-times what a social security recipient can hope to receive, love to claim they have a “contract” that makes reducing these pension benefits impossible.
They certainly do have a contract – sort of like the contract an underworld boss might order on a troublesome associate. Except in this example the underworld bosses are the public employee unions, the troublesome associates are the taxpayers, and the “contract” requires the taxpayer to cover public employee pension fund returns. That is, whenever these government worker retirement funds fail to achieve their projected returns, the taxpayer covers the difference with higher taxes. Nice deal for Wall Street brokerages, who get to manage all the money with no risk. Nice deal for California’s state and local government workers, who enjoy retirements that are, on average, five times better than social security. Really, really bad deal for the taxpayer.
Spokespersons for the government unions and the government worker pension funds have long stated that “the market has just been beat up a bit lately,” and “investment professionals assure us there is no cause for concern.” But the sobering truth is starting to emerge, and according to “contract,” taxpayers are going to get hit hard.
On December 20th the CalSTRS CEO, Jack Ehnes, in a rather convoluted acknowledgement on the “Ask Jack” section of CalSTRS website, admitted that funding to CalSTRS would have to increase by $3.8 billion per year for the next 30 years. Here is what he wrote:
“Recent media reports have suggested that to solve the unfunded liability the state will have to increase CalSTRS funding by $3.8 billion a year for 30 years for a total of more than $114 billion.
Although this is an accurate statement based on current projections, achieving adequate funding can occur several ways that would be phased in over time. The CalSTRS $56 billion funding shortfall can be managed, but it will require gradual and predictable increases in contributions.”
Despite the supposedly reassuring phrase “achieving adequate funding can occur several ways that would be phased in over time,” the fact that even the CalSTRS CEO is himself acknowledging this degree of funding shortfall should belie any thoughts that the number is overstated.
Putting aside for the moment the probability that this $3.8 billion per year is nowhere near the actual additional amount that will be necessary to adequately fund CalSTRS, how much does this latest salvo – pursuant to the contract on California taxpayers – cost per household?
First remember that of 12 million households in California, 47% of them pay no taxes. Also remember that at least another 10% of these households have a state or local government worker living in them. This means that 57% of California’s households are exempt from the contract on California, leaving 43%, or 5.2 million households to cover these new payments.
Second, remember that similar shortfalls exist within all government worker pension funds in California, and CalSTRS only covers teachers, which at most only comprise about 40% of California’s state and local government workforce. This means the $3.8 billion per year CalSTRS shortfall, applied to all state and local government worker pension funds, would expand to $9.5 billion per year.
Anyone who thinks CalPERS or the LA County pension fund, or any other local government worker pension funds in California are in any better financial shape than CalSTRS is welcome to dismiss this logic. Otherwise, according to their own spokespersons, we now are looking for another $9.5 billion per year of additional taxes to keep our unionized government worker pension funds in California solvent.
This equates to nearly $2,000 per year in additional taxes on those 5.2 million households in California who actually pay taxes. That’s just additional taxes, that’s just for pensions, and that is based on what is almost certainly the minimum amount it is going to take to establish financially sound pensions for California’s state and local government workers.
When it comes to pensions, if nothing else, the unionized government worker’s “contract on California” must make everyone who crows about the inviolability of contracts quite proud.
Edward Ring is a contributing editor and senior fellow with the California Policy Center, which he co-founded in 2013 and served as its first president. He is also a senior fellow with the Center for American Greatness, and a regular contributor to the California Globe. His work has appeared in the Los Angeles Times, the Wall Street Journal, the Economist, Forbes, and other media outlets.
To help support more content and policy analysis like this, please click here.