How California Walked to the Edge of a Cliff: Public Pensions Edition

Want to know how California ended up with a unfunded public pension liability of half a trillion dollars? Well, if you can stand it, the story is summarized very nicely in this piece out of the Inland Daily Bulletin, entitled "Pension Quagmire".

According to the article's author, James Rufus Koren, the root of the crisis lies in the California Legislature's largely-unanimous 1999 decision to award so-called "3-50" pensions to most state employees. These pensions allow workers to retire at age 50 with an annual benefit of 3% of their salary times every year of service. At the time, none other than CalPERS estimated that the increased pensions wouldn't cost the state more than $800 million a year through 2009. Needless to say, they were a bit off; California paid out $2.8 billion in 2009.

By itself, this was likely to go horribly wrong at some point. But it went wrong quickly, because local governments all over California hopped on the "3-50" bandwagon as fast as they could. By 2001, 165 local agencies had awarded these pensions to police or firefighters. These agencies heard the same rosy projections from CalPERS that had guided the Legislature; because the cost estimates were so low, unions pushed aggressively for these pensions. But the estimates were fatally flawed: they assumed that the stock market growth of the late 90s would persist more or less indefinitely. Yet agencies did not hesitate to keep giving away "3-50" pensions even after the markets started to go sideways in 2001 and 2002, because they were so common by then that it was viewed as a question of attracting and retaining good workers. And, as we noted a few weeks ago, this continued even through the economic implosion in 2008.

Koren doesn't explore the implications of this story, but we couldn't help noticing the feedback loop at work here. If you want to know why we have a spendthrift, irresponsible government, just ask yourself this: was there a feature of the political system that was supposed to prevent a $500 billion unfunded liability? The answer, of course, is "absolutely not". The employees and their unions wanted the most generous benefits they could get, the agencies wanted to get the best employees and to keep them happy, and CalPERS wanted to do whatever it could to help the employees out. And why not? It's not their money, after all.