California Government Services Still Crowded Out By Pensions
Californians have been hearing a lot of good news recently about their state's finances. The credit rating has been trending up, revenue is in surplus and the days of issuing IOUs to manage multibillion-dollar deficits seem like a distant memory. But this comeback narrative is nowhere more misleading than with respect to local government services, which have yet to fully recover from the most-recent recession.
The cause is soaring retirement benefit costs, whose growth has outpaced that of revenue, thus crowding out space in local budgets for services. From 2008-12, California local governments' own-source revenue grew by 4 percent, while their pension spending went up 17 percent. Spending on libraries, parks, police and fire protection declined.
In extreme cases, such as in Stockton, San Bernardino and Vallejo, unsustainable retirement benefit spending has led to bankruptcy. But examples of the crowd-out problem may be found among all variety of California localities: cities, counties, transit agencies, school districts, inland, coastal, high-income and low-income.
Since personnel is local governments' main expense, crowd-out's impact on services is perhaps easiest to see in staffing levels. In December 2014, California local governments were still down 146,000 jobs from where they were when the recession began seven years prior. During the same period, California's private sector gained 310,000 jobs.
Municipalities have reacted to crowd-out in different ways, though the data suggest some general trends. Public safety positions have been cut less deeply than non-public safety. Education jobs were cut more than noneducation, though it's not clear from Bureau of Labor Statistics data how many of the layoffs were teachers. (Local school districts employ massive support staffs.)
Many conservatives may herald this news of shrinking city and county bureaucracies. True, in some cases, crowd-out has enabled local officials to implement privatization and other “right-sizing” initiatives. But if crowd-out shrinks the size of the government workforce, it doesn't make government any cheaper. Higher pension costs but fewer cops and library staff does not look like a great deal for taxpayers.
Aside from staffing, crowd-out's impact may also be measured with respect to infrastructure and library hours. Despite borrowing costs lower than at any point since the 1960s, the municipal bond market, through which state and local governments finance major capital improvements, declined from 2010-14.
Pension-related pressure has been felt even more keenly on basic street and sidewalk maintenance, which governments normally finance out of operating budgets. Were California cities such as San Jose and San Diego able to devote to roads what they're now spending on pension debt, they could eliminate all or most of their maintenance backlog within a few years.
In contrast with education and crime, where more spending may or may not lead directly to service improvements, fixing streets and keeping libraries open are mostly fiscal propositions. Advocates for quality-of-life services such as libraries and parks tend to be unaware of the public pension crisis. But cuts to public library hours in California cannot be simply be accounted for by lower local revenue.
The most resolute defenders of the status quo on public pensions are government unions, but it should be noted that crowd-out's not such a great deal for workers, either. The recent spike in pension spending has slowed growth in local workers' take-home pay, and that's not to say that they're getting richer benefits. The proximate cause of the cost increases is growth in pension debt. Having to fulfill benefit promises made to past generations of workers has left government employers less able to boost pay for current workers.
Crowd-out is a feature – not a bug – of defined-benefit pension systems. A pension means a promise to workers of a fixed payment throughout their retirement. That promise is financed through contributions by workers and employers, and investment return.
But the ultimate guarantee is provided by taxpayers, who must step in to address any shortfall when the stock market tanks. During every recent recession, California localities have seen their pension costs increase while their revenues declined.
Though it has been almost six years since the recession officially ended, the pension pain's not yet over for California localities. Both of the state's major retirement systems, CalPERS and CalSTRS, are phasing in major contribution increases. CalSTRS member teachers will, in effect, see their pension costs more than double by 2020.
Pension reform is best understood as a challenge of public administration. To make governments better-positioned to perform the functions we expect of them, more radical reform to public retirement benefit programs will be necessary. When the next recession hits, California can expect to see more municipal bankruptcies. But for the moment, the greater threat is less insolvency than mediocrity.
This piece originally appeared in Orange County Register
This piece originally appeared in Orange County Register