NCPA - National Center for Policy Analysis

Public Pensions And California's Fiscal Future

August 30, 2010

California simply cannot solve its budgetary problems without addressing government employee compensation and benefits, says Arnold Schwarzenegger, governor of California.  

As former Speaker of the State Assembly and San Francisco Mayor Willie Brown pointed out earlier this year, roughly 80 cents of every government dollar in California goes to employee compensation and benefits.  Those costs have been rising fast.  Spending on California's state employees over the past decade rose at nearly three times the rate state revenues grew, says Schwarzenegger. 

Much bigger increases in employee costs are on the horizon.  Thanks to huge unfunded pension and retirement health care promises granted by past governments, and also to deceptive pension-fund accounting that understated liabilities and overstated future investment returns, California is now saddled with $550 billion of retirement debt, says Schwarzenegger: 

  • The cost of servicing that debt has grown at a rate of more than 15 percent annually over the last decade.
  • This year, retirement benefits -- more than $6 billion -- will exceed what the state is spending on higher education.
  • Next year, retirement costs will rise another 15 percent. In fact, they are destined to grow so much faster than state revenues that they threaten to suck up the money for every other program in the state budget.  

Employee costs will keep marching upwards because of pension promises, and they will never stop doing so until we get reform.  At the same time that government-employee costs have been climbing, the private-sector workers whose taxes pay for them have been hurting, says Schwarzenegger: 

  • Since 2007, one million private jobs have been lost in California and median incomes of workers in the state's private sector have stagnated for more than a decade.
  • To make matters worse, the retirement accounts of those workers in California have declined; the average 401(k) is down nationally nearly 20 percent since 2007.
  • Meanwhile, the defined benefit retirement plans of government employees -- for which private-sector workers are on the hook -- have risen in value.  

Few Californians in the private sector have $1 million in savings, but that's effectively the retirement account they guarantee to public employees who opt to retire at age 55 and are entitled to a monthly, inflation-protected check of $3,000 for the rest of their lives, says Schwarzenegger. 

Source: Arnold Schwarzenegger, "Public Pensions and Our Fiscal Future," Wall Street Journal, August 27, 2010. 

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