California Pension Crisis: Whos To Blame - Essay Example

California Pension Crisis: Who’s To Blame? California’s $19 billion budget deficit was staggering and seemed to worsen every day. However, the budget deficit was only the financial tip of the iceberg, as it were. An even larger financial crisis loomed, its core, the state’s overstressed pension system. Over the last two decades state lawmakers had approved large and often criticized pension and benefit increases for public and government workers. Billionaire Warren Buffet contends “Public pension promises are huge and, in many cases, funding is woefully inadequate” (Summers 2). Taxpayers getting the bills were steaming mad-- at somebody. Several recent studies had estimated California’s unfunded pension debt at a staggering $500 billion and counting. The Sacramental Bee as late as November 10, 2010, quoting a Stanford study, put the debit for the state's three pension systems at over $400 billion and local government pension systems at nearly $200 billion short. (Stanford Report says... par 1). At the heart of the crisis is Legislature's 1999 decision to increase tax-guaranteed pensions for public safety workers and other public employees. Localities followed the state and gave nearly all public safety workers the right to retire at fifty, with ninety percent of their salaries. "The attitude was, 'Hey, we have a ton of money, let's give it away...’ There weren't a lot of deep thinkers there" (Saavedra and Joseph par 5). As is often the chase, the state was in the economic“bubble” mindset of the rest of the country, and its behavior was very similar. Calling for pension reform, Governor Arnold Schwarzenegger described the crux of the problem, charging that the pension debt had been understated to taxpayers and that the underfunded programs were "...crowding out vital programs and services” (Stanford Report Says...par 5), To quote Summers, the individual impact of the debt could be calculated at about $37,000 per California household (2). What the problem was and how to fix it became a matter of contention, depending upon who was doing the fixing and who would be most affected by the remedy. Some said the blame rested with the employee’s themselves and their demands. A report from the California Center for Public Police alleges “ the state’s tax-paid pensions have made defacto millionaires out of most of California’s employees by the time they reach their late 50s” [and that] public safety and other employees frequently pay less than half or none of their retirement benefits” (Saavedra par 2). Compounding public mistrust were charges that public officials were grossly misusing taxpayer dollars when Former City Manager Robert Rizzo, Mayor Oscar Hernandez and the other current and former city officials of Bell were rounded up and taken away in handcuffs, charged with numerous counts of illegally paying themselves huge salaries in what District Attorney Steve Cooley called a case of "corruption on steroids" (Whitaker, par 2). The incidents resulted in calls for more transparency in government, coupled with calls for pension reform which many taxpayers saw as similarly unethical, especially in light of the state’s dire budget debt. Public acclaim in Bell that someone had finally done something about the officials, which townspeople, largely lower income, had been complaining about for some time. A similar attitude was reinforcing the need for pension reform, as many citizens began to resent the fact that public employees were living larger than the average citizen, with citizens paying the bill. “Rizzo, who earned nearly $800,000 a year, was booked on 53 counts of misappropriation of public funds and conflict of interest” (Whitaker, par 7). While the latter statement can be seen as employees not paying their fair share of retirement benefits, the situation is not as simple as presented. Although California state workers are among the highest paid in the country, it is also true that contract decisions agreed to by the state were based on the same false sense of security about the economy that is now playing havoc with our national debt and the individual finances of American citizens. “The crisis was [also] caused by inaccurate actuarial assumptions on investment returns, the number of government employees in the future and how long retirees will live” (Saavedra par 5). Another interesting aspect of the problem involves the cities and localities themselves. According to a June 25, 2010 New York Times article by Roger Lowenstein “...for years, localities and states have been skimping on what they owe. Public pension funds are now massively short of the money to pay future claims.” California was no exception. One might say that poor budget management on the part of those running cities and communities were at major fault, a problem Schwartzennegr suggested, to a degree at least, lay in the laps of “progressives” who were too liberal in making contract promises and are now fighting reform. Fascinating comparisons have been made between California and Dubai concerning their current debt crisis. “... [Dubai] framed as a financial paradise for the wealthy and the celebrity set, built on real estate borrowing, unsustainable use of natural resources, and exploitation of a laboring class [which] wasn’t participating in the wealth creation” (Cruikshank par 2). Both Dubai and California can place a large part of the blame for their current debt crisis squarely on financial mis-management. California’s emphasis on the receivers of pension suggests scapegoating. Given causes and perhaps unfair emphasis on pensions versus all of the other factors contributing to the crisis, the fact remains that current pension set ups are hurting an already hobbled state budget, and calls for reform have met with partisan resistance. One plan, devised by Mayor Antonio Villagaigosa to limit pension payouts to new hires was met with disdain by union leaders, who insist it will leave new hires in a bad way upon retirement. Other localities are struggling to reset pension contracts to reasonable standards. On the state level Schwartzenegger, as one of his last official duties before leaving office, finally signed a state pension reform bill he believes will help the state significantly in balancing its budget. As signed, the bill rolls back SB 400, the 1999 bill that expanded pension payments; ends pension spiking: employee retirement rates will be based on the highest consecutive three year average salary as opposed to the single highest year, and perhaps most important, increases transparency in the state pension process. The later issue was a major concern, particularly for taxpayers. The reform will assure that taxpayers are aware of the financial implications connected with future pension legislation and specific information on investing practices including: the investment return it assumes for projecting contributions; the period of amortization; the differentiation with and comparison of market value of its assets and how it differs from its chosen actuarial value for those assets. The reform is “expected to save the California Public Employee Retirement System, (CalPERS) one-hundred billion over the next few decades” (California Passes...par 1). In conclusion, the new legislation and its reforms incorporated are reasonable given the state’s current fiscal problems. However, while stemming the tide of unreasonable benefits for state and local workers who rely on pensions, one must also question the leadership of the state and it’s irrational and incompetent decisions—the same decisions by leaders of government and business which now plague the U.S. economy. There are certainly some questions as to political charges that the state’s pension crisis stemmed from greed on the part of public employees, although some of the figures suggest excessive benefits and payments no doubt. Least we forget the Bell officials. However, the questions must be asked, who among us would balk at such a lucrative opportunity, and will getting a handle on pensions really solve California’s debt issues, or are their others pending that must now be addressed? Works Cited “California Passes Pension reform Laws” November 10, 2010. American City and County. Accessed November 12, 2010 on: Read More