The Contract on California

California’s state and local government workers, who enjoy pensions that average at least five-times what a social security recipient can hope to receive, love to claim they have a “contract” that makes reducing these pension benefits impossible.

They certainly do have a contract – sort of like the contract an underworld boss might order on a troublesome associate. Except in this example the underworld bosses are the public employee unions, the troublesome associates are the taxpayers, and the “contract” requires the taxpayer to cover public employee pension fund returns. That is, whenever these government worker retirement funds fail to achieve their projected returns, the taxpayer covers the difference with higher taxes. Nice deal for Wall Street brokerages, who get to manage all the money with no risk. Nice deal for California’s state and local government workers, who enjoy retirements that are, on average, five times better than social security. Really, really bad deal for the taxpayer.

Spokespersons for the government unions and the government worker pension funds have long stated that “the market has just been beat up a bit lately,” and “investment professionals assure us there is no cause for concern.” But the sobering truth is starting to emerge, and according to “contract,” taxpayers are going to get hit hard.

On December 20th the CalSTRS CEO, Jack Ehnes, in a rather convoluted acknowledgement on the “Ask Jack” section of CalSTRS website, admitted that funding to CalSTRS would have to increase by $3.8 billion per year for the next 30 years. Here is what he wrote:

“Recent media reports have suggested that to solve the unfunded liability the state will have to increase CalSTRS funding by $3.8 billion a year for 30 years for a total of more than $114 billion.

Although this is an accurate statement based on current projections, achieving adequate funding can occur several ways that would be phased in over time. The CalSTRS $56 billion funding shortfall can be managed, but it will require gradual and predictable increases in contributions.”

Despite the supposedly reassuring phrase “achieving adequate funding can occur several ways that would be phased in over time,” the fact that even the CalSTRS CEO is himself acknowledging this degree of funding shortfall should belie any thoughts that the number is overstated.

Putting aside for the moment the probability that this $3.8 billion per year is nowhere near the actual additional amount that will be necessary to adequately fund CalSTRS, how much does this latest salvo – pursuant to the contract on California taxpayers – cost per household?

First remember that of 12 million households in California, 47% of them pay no taxes. Also remember that at least another 10% of these households have a state or local government worker living in them. This means that 57% of California’s households are exempt from the contract on California, leaving 43%, or 5.2 million households to cover these new payments.

Second, remember that similar shortfalls exist within all government worker pension funds in California, and CalSTRS only covers teachers, which at most only comprise about 40% of California’s state and local government workforce. This means the $3.8 billion per year CalSTRS shortfall, applied to all state and local government worker pension funds, would expand to $9.5 billion per year.

Anyone who thinks CalPERS or the LA County pension fund, or any other local government worker pension funds in California are in any better financial shape than CalSTRS is welcome to dismiss this logic. Otherwise, according to their own spokespersons, we now are looking for another $9.5 billion per year of additional taxes to keep our unionized government worker pension funds in California solvent.

This equates to nearly $2,000 per year in additional taxes on those 5.2 million households in California who actually pay taxes. That’s just additional taxes, that’s just for pensions, and that is based on what is almost certainly the minimum amount it is going to take to establish financially sound pensions for California’s state and local government workers.

When it comes to pensions, if nothing else, the unionized government worker’s “contract on California” must make everyone who crows about the inviolability of contracts quite proud.

13 comments to The Contract on California

  • oz

    Ed-

    I think I know what statistic you might be attempting to reference, but
    before I guess, I’ll ask you to clarify.

    What exactly do you mean by “47% of households in CA pay no taxes?”

    Thanks.

    R/
    Oz

  • oz

    Ed-

    Did you actually read the first article you just posted?

    Or just the headline?

    That headline refers only to Federal INCOME tax, which has little or nothing to
    do with the funding of CALPERS.

    The bulk of the household tax money you are referencing is indeed
    paid for by everyone, not just 53% (100%-47%) of Californians.

    Have we really gone this far and you do not even know basic tax structure?

    What am I missing? Or more accurately, do you see what you are missing?

    R/
    Oz

  • Rex The Wonder Dog!

    ALL house holds in CA pay taxes. The sales tax is by far the biggest and most regressive.

  • Rex The Wonder Dog!

    One thing is for sure, government employees are grossly over paid and even more grossly over compensated with benefits.

    And there is no way Jerry Clown is going to get a sales tax increase. It is DOA. Poor and middle class working folks -if they even have a job, CA has a 22% U-6 UE rate- are simply not falling for the whoppers Jerry is spinning and are NOT footing the bill for the $10 million pensions of 50 year old HS educated ff’s, cops and prison guards. Just will not happen. Ask San Diego how their sales/pension tax increase proposal went-Prop D. Down in flames by a 3-1 landslide. 4-1 if you don’t count public employees.

    San Diego is going to switch all new employees to a 401K when their June 2012 pension ballot reform is approved

  • Charles

    “First remember that of 12 million households in California, 47% of them pay no taxes. Also remember that at least another 10% of these households have a state or local government worker living in them. This means that 57% of California‚Äôs households are exempt from the contract on California, leaving 43%, or 5.2 million households to cover these new payments.”

    So you think the 10% with a gov’t worker in the home pay no taxes? When their money is taken it isn’t a real cost.

  • Editor

    Charles – welcome back – and thank you for asking for clarification on this. The point of saying that government workers don’t pay taxes is not to suggest that people who work for the government don’t shop and pay sales taxes, or own property and pay property taxes, or earn income and pay income tax. The point is that from a macroeconomic perspective, if a class of workers derives 100% of their income from taxes collected by government, then pay a percentage of that income back to the government in the form of taxes, the net effect is they do not pay taxes.

  • Charles

    Huh?

    How about a contractor’s employee on a State Highway project. 100% of his salary and benefits come from State and Federal taxes. So the net effect is he doesn’t pay taxes either?

  • Charles

    Please answer. If the source of income is taxes then the recipient in net effect does not not pay taxes? I assume that includes the armed forces.

  • Charles

    “at least another 10% of these households have a state or local government worker living in them.” “the net effect is they do not pay taxes.”

    They don’t? What about the other workers in the households? They don’t pay taxes either?!

    I think you are carrying “net effect” to an unbelievable level. Then you are saying if a person working for Detroit gets free cars because his wages are paid by the car makers.

  • Charles

    Please respond, I am losing my faith in your objectivity.

  • Charles

    I am still waiting. Perhaps you are on vacation

  • Charles

    ??? Please explain???