ITS POLITICS! The High Cost of Keeping Promises
In the following op/ed piece published in yesterday's San Francisco Chronicle, Assemblyman Keith Richman urged the Legislature and Governor to consider California's $6 billion a year off-the-books retiree health care debt when making budget and infrastructure decisions. Although retirement promises to current workers and retirees must be kept, the cost of generous retirement benefits for public employees will limit infrastructure investments and cut education and public services for decades to come. A fiscally responsible solution includes negotiating a less expensive plan for new employees and setting aside the $2 billion a year needed to cover the future cost of current employees. One of the reasons 83 percent of Californians do not trust state and local government officials to do the right thing is politicians refuse to take fiscally responsible approaches to solving our long-term problems. A recent report on the huge cost of retiree healthcare is the latest evidence that the next generation of Californians will still be paying for this irresponsibility for decades to come in the form of slower services, congested roads, weaker law enforcement and struggling schools.
In a Feb. 17 report, the respected nonpartisan Legislative Analyst's Office estimated that California state and local governments may owe more than $150 billion in retiree health-care benefits that they have no money saved to pay for. Unlike public-employee-pension benefits that are pre-funded with regular payments into a trust fund, government retiree healthcare costs are paid directly from public agency budgets without setting aside additional money to cover future costs. While private-sector accounting rules already require these retiree health-care liabilities to be reported and regularly funded by companies, national accounting standards taking effect in budget year 2007-08 require state and local governments to simply report their retiree health-care liabilities and calculate how much would be required to pay them down in a fiscally prudent fashion.
The legislative analyst's report is the first public effort to develop a rough estimate on what experts have known for years will be a huge problem. The report calculates the state general fund cost to pre-fund retiree-health costs for current employees at $2 billion each year and another $4 billion a year for current retirees. That is $5 billion a year more than the $1 billion we already pay for at least 30 years to keep promises to employees that cannot, and should not, be broken. But California also faces two other major long-term fiscal challenges -- absorbing several billion in debt service to pay off planned infrastructure bonds and the growing cost of enhanced retiree-pension benefits that have increased from $170 million in 1999 to $2.7 billion this year, going to $3.5 billion in 2009. Looking over the dark fiscal horizon, we can see $9 billion in new costs for a state budget that already has a persistent $5 billion structural deficit.
With this fiscal time bomb ticking, you would think government leaders would be holding hearings, pinching pennies and making plans to minimize the fiscal damage. But rightfully cynical Californians could have predicted the politicians' spin control responses to the legislative analyst's report -- & quote; no news here, no real problem, we will study it. & quote; In addition to recommending a more precise estimate of the financial damage, the fiscally responsible legislative analyst recommends we at least start setting aside the extra $2 billion a year we know we owe for current employees. The more quickly we start to pre-fund these expenses, the less it will cost in the years ahead.
Indeed, the LAO estimates that in future years, the cost of irresponsibly paying only current costs will exceed the cost of starting the fiscally responsible pre-funding of benefits now. Although the state has a major retiree-benefit cost problem that will
take away some of the money needed to repair our roads, build our schools and develop the water and transportation systems needed to accommodate 10 million more California by 2025, cities, counties and school districts will also slash key services and critical investments of their own. For instance, the Los Angeles Unified School District has a $10 billion health-and-welfare-benefit deficit, and the plan to fix it would consume more than $2,100 of the $8,200 allocated for each student each year. With more than 25 percent of the budget needed to pay these benefits, LAUSD's priorities seem to be reading, writing and retiree health care. Other public agencies are closing fire stations, freezing police department payrolls, selling parks and closing libraries to pay their retiree benefits bills.
The list goes on and on, and this is just the early budget havoc being wrecked by the cost of retirement promises made to public employees and retirees. The planned statewide study may expose local liabilities exceeding $100 billion. Indecisive, fiscally irresponsible politicians must move past the instinct to do nothing and pass the buck onto future leaders. The Legislature and the governor must recognize the seriousness of the looming crisis, begin paying the additional $2 billion cost of current employees this year, develop a fiscally responsible program for new employees and calibrate infrastructure plans to match the fiscal reality of keeping the promises already made to employees and retirees for decades to come. Although cleaning up the public-employee retirement benefits mess is not as fun as investing in infrastructure, we can't afford to make new multibillion-dollar financial commitments until we come to grips with the ballooning cost of the old ones.
Keith Richman, a Republican, represents portions of Los Angeles and Ventura counties
in the state Assembly.