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Reason Foundation

California Must Control State Pension and Benefit Costs

Currently facing an unfunded liability of over $48 billion for state retiree health and dental benefits

Adam Summers
June 22, 2009

California has been struggling with multi-billion-dollar deficits (and even deficits in the tens of billions of dollars) for many years. It is now facing a $24.3 billion deficit and another possible downgrade of its already worst-in-the-nation credit rating. With State Controller John Chiang recently estimating that California was "less than 50 days away from a meltdown of state government" and the White House putting the kibosh on a federal bailout, the state's fiscal picture is looking as bleak as ever.

But perhaps California can turn calamity into opportunity. Perhaps now, on the brink of financial collapse, state leaders can finally amass the will to make the necessary dramatic changes to the inordinate amount of money that it spends on its employees.

The urgency in plugging the significant budget shortfall should lead to a number of short-term spending cuts (see Reason's California Citizens' Budget study and the report of the California Performance Review Commission for an extensive list of recommendations), but California will not be able to maintain any semblance of fiscal responsibility and prevent another crisis next year or in the years that follow without addressing its biggest long-term costs: government employee compensation.

Perhaps a generation or two ago it could be argued that government employees required greater benefits than their private-sector counterparts because governments could not match salaries in the private sector. That clearly is not the case today. Now government workers typically earn not only significantly higher benefits than those in the private sector, they also receive higher wages. According to the most recent U.S. Bureau of Labor Statistics "Employer Costs for Employee Compensation" report, average state and local government employee compensation is approximately 44 percent higher than private-sector employee compensation ($39.51 an hour versus $27.46 an hour). This includes average wages that are nearly 34 percent higher and benefits that are almost 69 percent higher.

Even as the economy contracts, the trend has continued to be for higher and higher benefit levels for government employees. Thus, private sector workers are forced to pay more and more to compensate public sector workers, even as their own benefits are being cut. Moreover, as the Sacramento Bee reported in January, the state continued to advertise for thousands of job openings in spite of a budget deficit pegged at over $40 billion. Something is seriously wrong with this picture.

While pension benefits cannot be cut for current state workers, California can bring some fiscal sanity to its retirement systems by closing its existing defined-benefit plans to new workers and adopting a 401(k)-style defined-contribution system for them instead. Switching to a defined-contribution system would not necessarily cure all of the state's pension ills, however. Depending upon the size of the government's contribution rate, benefits could be the same, higher, or lower than they are now. Thus, the state should establish a contribution rate commensurate with those typically found in the private sector.

California could also help to control state workers' compensation by adopting a voter approval requirement for future government employee benefit increases. This has been done at the local level in San Francisco. Despite its liberal reputation, San Francisco has utilized such a provision successfully for more than a century. As a result, its pension system has fared much better more conservative areas like San Diego and Orange County - prompting those two jurisdictions to pass their own voter approval measures in 2006 and 2008, respectively. Since legislators have not been able to resist the unions' charms and restrain state employee compensation costs, it makes sense that the taxpayers act as a final check on decisions that will be significantly impacting their pocketbooks.

Finally, the state must put an end to its overly generous retiree health benefits. Chiang announced earlier this year that California is facing an unfunded liability of over $48 billion for state retiree health and dental benefits offered through the California Public Employees' Retirement System (CalPERS). Currently, the state pays 100 percent of the health care costs for retired state workers, and 90 percent of costs for spouses and dependents. It is only fair that the state start requiring retirees to pay a reasonable portion of these costs.

A government job does not need to offer a king's ransom in salary and benefits to lure workers. Sure, most government employees work hard, but so do the people in the private sector. It is those private sector workers who are ultimately footing the bill for those high salaries and lavish benefits at state jobs. California's taxpayers shouldn't have to make state employees richer and richer as they themselves are getting poorer and poorer.

Adam Summers is a policy analyst at Reason Foundation. His recent policy examining California's spending and budget problems is here.


Adam Summers is Senior Policy Analyst


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