California’s Debt Crisis Is Brewing Again | The American Spectator

It’s been 13 years since California’s debt crisis captured the public’s consciousness, as underfunded pensions and other employee liabilities shook up the state Capitol and local cities. The problem — at least on the pension front — ramped up 13 years before that when the Legislature granted a massive pension hike for California Highway Patrol officers. Per its design, other state and local agencies quickly followed suit, and taxpayer-backed debt soared.

Go figure, but boosting pensions for government employees by as much as 50 percent retroactively obliterated the funding levels of the state’s pension funds. It also sparked a wave of retirements, as there’s no point in continuing working if you can receive 90 percent or more of your latest earnings at age 50, complete with gold-plated healthcare plans. Those who wanted to keep working just signed up to work at another agency and effectively doubled their generous pay.

As a result, California municipalities have had to deal with pension “crowd out,” as soaring pension costs have consumed funding meant for other public services. Cities and counties now have to pay not only for their current workforce, but for their “shadow workforce” of retirees who are living it up — and in many cases driving up the cost of living elsewhere, as they’ve retired in once-affordable towns, mostly throughout the West. Spiraling pension debts have also created pressure for a never-ending wave of local tax increases.

In 2012, the state also faced large general fund deficits, which highlighted the pension problem. So Gov. Jerry Brown spearheaded a decent enough reform that pared back the most generous formulas, outlawed many pension-spiking gimmicks, and reduced some of the pressure. The state has also increased its funding to reduce the debt. Since then, lawmakers and Gov. Gavin Newsom have generally avoided any positive work on the matter. Why anger public-sector unions, which remain the most powerful interest groups in Sacramento?

But here we are again, with public debt rising to the fore. Before I go further, I acknowledge that while California’s Democrats totally own these debt problems, as they’ve had ironclad control of every branch of government, Republicans mostly supported the worst debt-generating measures given their support for police and fire. Few politicians at the national level can credibly speak to the debt issue now that federal debt has topped $38 trillion. That’s with a “t.”

Still, the latest news is sobering. A report this month from the Reason Foundation found that California had the highest total debt ($497 billion), the highest long-term debt ($299 billion), the second-highest net pension debt ($90 billion), the highest debt for other post-employment benefits ($82 billion), and the highest amount of outstanding bonds ($112 billion). That’s not a surprise given California’s large population, but the state still ranked toward the top of most of these categories on a per-capita basis. It ranked 10th in total debt per capita and 14th in pension debt per capita.

As Reason explained, “Unfunded public employee pension liabilities occur when governments allocate fewer assets than necessary to fulfill the retirement benefits promised to public workers and retirees.” The key takeaway is that, rankings aside, California still has a massive shortfall between its pension promises and its available resources.

“As California struggles to address its alarming budget deficit, big bills are coming due for retirement past benefits promised city, county and state workers,” wrote economics professor Francois Melese in a San Francisco Chronicle column in 2024. “Choking on unfunded pension and health care liabilities, cities like Carmel-by-the-Sea pay their pensioners more than active employees.” Things haven’t improved appreciably since then.

His long-term solution is a heresy that no California politician who wants to stay in office would dare to propose: “California should follow the lead of the federal government and private sector and shift from defined benefit programs to defined contribution, or 401(k)-type plans.” Melese added that California’s public-sector pensions are “nearly five times greater than comparable Social Security benefits.” So much for all of us being in it together.

After the stock market drop following President Donald Trump’s on-again, off-again tariff threats, the California Public Employees’ Retirement System (CalPERS), saw its funding levels drop to below 75 percent. The system then enjoyed soaring earnings and is now funded at 80 percent. That sounds like encouraging news, except that CalPERS still is heavily underfunded. It also reminds us of the degree to which taxpayers are dependent on a continuing stock market boom. If the market crashes, taxpayer-backed liabilities will increase and lead to declining public services. Californians pay a lot and don’t get much in return.

The bottom line: The pension underfunding problem hasn’t gone away, although never underestimate the ability of public officials to kick the can down the road. Some pension observers are mainly concerned about keeping those funding levels up, but the real solution is to bring public-employee compensation packages down to Earth, especially in the public-safety sector.

The Transparent California’s database found that 209 Los Angeles city employees earned from $500,000 a year in total compensation (per 2023 data) to more than $900,000. These crazy pay packages are endemic statewide. The list of city pension amounts will blow your mind. Perhaps there’s a connection between these lush payouts and the huge taxpayer liabilities. Of course, the California courts won’t allow any cuts to promised benefits even going forward.

Instead of getting serious about tackling the state’s pension debt, lawmakers have been trying to chip away at Brown’s modest reforms. And the end result will be more tax increases, which will continue to push employers to other states and just compound the problem over the long haul. Californians need to get agitated at this issue once again.

Steven Greenhut is Western region director for the R Street Institute. Write to him at [email protected].

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