The Making of the California Debacle

Dan Walters in the Sacramento Bee has the ugly details:

A milestone on California's meandering journey toward fiscal insolvency occurred exactly a decade ago when the Legislature enacted a massive increase in state employee pensions on the expedient assumption that it would cost taxpayers nothing.

Although the new pensions would generate almost countless billions of dollars in extra income for retirees in the years ahead, the CalPERS board, dominated by union representatives, told legislators that taxpayers wouldn't have to bear the load because investment income, which was flowing into the pension trust fund from high-tech stocks, would continue indefinitely.

"They (CalPERS) anticipate that the state's contribution to CalPERS will remain below the 1998-99 fiscal year for at least the next decade," said a final Senate analysis of the 1999 legislation that expanded state pensions, allowing Highway Patrol officers, prison guards and other "safety" workers in some cases to get more than 100 percent of their salaries.

Wrong.

Within a few years, the dot-com bubble had burst, CalPERS had suffered major losses and the state's burden for pensions had pushed into the multibillion-dollar range, not counting the heavy impact on local governments that had cavalierly followed the state's lead on boosting pension benefits.

The situation was ripe for a backlash, such as an initiative measure that would rein in public pensions, but union-controlled CalPERS lowered the political heat by offering employers a "smoothing" policy that would protect them against immediate jolts, spreading out the increases over a number of years.

By and by, the economy improved, albeit through an unsustainable explosion in real estate development, and the pension issue dropped from the political radar screen. But now we're mired in the worst recession since the Great Depression, CalPERS' investments have dropped by nearly a third and the state is paying more than $3 billion a year into the pension fund, nearly 10 times what it paid a decade ago when CalPERS made its bogus assertion to lawmakers.

CalPERS is poised to hit the state for nearly another billion dollars a year in 2010-11 to cover its investment losses and the payout to baby boomer retirees who are enjoying the enhanced benefits enacted a decade ago, but is offering state and local governments another, more aggressive "smoothing" scheme to sharply reduce the immediate hit and spread out the investment losses over many years.

Last week, its board adopted the plan for local governments but after Gov. Arnold Schwarzenegger criticized it, postponed any action on the state's contribution. "By deferring pension contributions, CalPERS would not only be gambling that its investment earnings in this economy will grow faster than its pension obligations but would also be using our kids' money to do so because they will be the ones stuck footing the bill," said Schwarzenegger, who wants to overhaul pensions and medical care for retirees.

Here we go again.

It isn't going to get any better.