FAREWELL, MY LOVELY: How public pensions killed progressive California.
In 1999 Davis signed a law that retroactively increased pension benefits for all government employees by 25 percent to 50 percent—including all workers employed at the time and all new hires. Senate Bill 400 (S.B. 400) was, in the words of David Crane, Schwarzenegger’s special adviser for jobs and economic growth, “the largest issuance of debt in California history, and it was issued without voter approval or voter knowledge.” At the time the bill was passed (after a mere five minutes of debate, according to legend), returns on capital market investments were paying 75 percent of CalPERS benefits, with another large chunk coming from the state’s general fund and a small portion from employee contributions. In a now-infamous prospectus for the bill, CalPERS told legislators the increase would leave state costs little changed for a decade.
A Long Road to Small Reform
It quickly became apparent that there were serious errors in those estimates. But it wasn’t until 2008, when CalPERS lost somewhere between a quarter and half of its portfolio, that the vast taxpayer liability became too clear to ignore. Wall Street’s subsequent series of fools’ rallies has done little to restore CalPERS’s solvency, and investments now cover only 63 percent of CalPERS’ ongoing commitments, far short of the federal government’s minimum threshold of 80 percent for basic pension plan health. Taxpayers are on the hook for the remainder.
The Golden State’s 2010 budget shortfall included an additional $3.9 billion in unexpected charges for pension payouts. Legislative sources expect that gap to increase more than threefold, to nearly $14 billion, in 2011. The gap is increasing, at an accelerating rate, year by year; and there is no realistic scenario in which market performance can begin to close it. CalPERS, whose accounting house of mirrors is still built on projections of 7-to-8-percent annual returns indefinitely, claims to be untroubled. But it also continues to ask for more help from the state’s general fund, citing market losses as well as longer retiree life spans.
Arnold Schwarzenegger, whatever his failings as a governor, quickly recognized the scope of the problem. He fought for public-sector compensation reform on several fronts—actuarial, fiscal, political, and financial. And he lost on all of them.
How is California going to survive? Jamie? Selma? Any thoughts?