Insolvency: America's states, counties, cities and municipalities are in deep trouble, owing literally trillions in public employee pensions that they can't pay off. Nowhere is that more apparent than in California, the nation's poster boy for fiscal irresponsibility.
In an excellent piece in the Los Angeles Times, Jack Dolan describes how California's then-Gov. Gray Davis in 1999, "with the stroke of a pen ... signed legislation that gave prison guards, park rangers, Cal state (California State University System) professors and other state employees the kind of retirement security normally reserved for the wealthy."
Dolan notes that, as a result, more than 200,000 public workers were made eligible to retire at 55. In the case of the state's famous Highway Patrol, officers could retire at 50 with up to 90% of their highest pay. California's public employee unions, which through lobbying and campaign spending effectively gained a stranglehold on the state government, were simply too powerful to defeat.
Of course, citizens were told that the lavish new benefits wouldn't cost a dime; they'd pay for themselves with stellar returns on their investments. Remember, this was 1999, the year the worst market crash since 1929 began.
Elsewhere in IBD today, economist Arthur Laffer and analyst John Burke, writing for the Pacific Research Institute, also detail California's pension woes, showing that the state's deluxe pay and benefit packages are far higher than competing states — they use Texas, the closest state in size and wealth to California, as an example. The point is, California's unions extracted enormous pension and benefit packages, without delivering superior services. Laffer and Burke warn of "massive tax hikes" and cuts in services as taxes soar. Not a pretty picture.
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But while California remains the Big Enchilada of public pension irresponsibility and, we would argue, fiscal fraud, it's not alone.
All across America, bold pension promises were made, premised on outsize returns in the stock market. When those returns didn't occur and as spending on pensions soared, many pension funds became insolvent.
Today, state and local pensions are nearly $2 trillion in the red, an amount that's expected to grow in coming years.
To cover their benefits, pension funds need returns of 7.5% or more. Unfortunately, as Elizabeth Campbell of Bloomberg News recently noted, "public plans had a median increase of 1% for the year ended June 30, the smallest advance since 2009." Without significant gains in coming years, future taxpayers will be left holding the bag for bankrupt pensions — denied decent retirements themselves, but told that they still must pay for the overly generous benefits of earlier generations.
This is a recipe for political crisis, and the risk of an inter-generational political war is very real.