In his State of the State address, Gov. Jerry Brown said that “it would be unconscionable (for the Legislature) to tell the electors of this state that they have no right to decide whether it is better to (extend taxes) or to chop another $12 billion out of schools, public safety, our universities and our system of caring for the most vulnerable.” Surely most Californians would agree.
But taxes are just one side of the budget coin, the other being expenses. At the same time as they vote on taxes to help close the deficit, shouldn’t voters also have a say about costs that contribute to that deficit?
Voters now have some rights in that regard. The state can issue general obligation bonds only with their approval, and voters have determined by initiative that the state must prioritize spending on K-14 education.
But voters don’t get a say over the largest expenditure by governments, which is employee compensation and benefits. Instead, that spending is determined through negotiations between labor, largely represented by public employee unions, and management, represented by the Legislature and the governor.
In the private sector, labor-management negotiations are generally at arm’s length, with management representing shareholders, union leaders representing workers, and neither side exercising influence over the other. But not so in the public sector, where labor can and does exercise influence over management through political contributions and activities. The California Fair Political Practices Commission reports that public-employee labor unions are the largest contributors to political campaigns. As a result, the citizens bearing the costs really aren’t at the table.
Worse, politicians can incur debt for employee retirement benefits without voter approval. That debt – now the largest of what is owed by the state – is created when politicians promise retirement benefits but don’t fund them at all or fund them inadequately. The latter happens when public pension funds assume unrealistically high rates of return on investments. The more money assumed from investment earnings, the less money need be set aside by politicians when they make the retirement promises. Enabled by that fiction, politicians can promise retirement benefits for a fraction of their real cost – until the earnings don’t materialize. By then, those politicians are long gone and in their place is mountainous debt.
For example, the rate assumed by California’s pension funds is 30 percent higher than markets earned in the 20th century. It’s even 15 percent higher than super-investor Warren Buffett assumes for his pension funds. Over the long haul, those differences add up to hundreds of billions of dollars of assumed earnings that become debt.
As a result, this year the state will spend more ($7 billion) to service debt the voters did not approve than it will spend ($5.6 billion) to service debt the voters did approve. That $7 billion comes out of funding for higher education and social services. Unconscionable indeed.
State workers aren’t the villains in this drama. The average annual pension earned by a retiring state employee in 2010 is less than $40,000 – hardly extravagant. No, the villains are the politicians who benefit politically from promising but not funding retirement benefits and the public pension fund officials who hide how much is really needed to meet those promises.
Politicians should not be allowed to create debt without voter consent. And because of conflicts of interest, voters should have the final say over employee compensation and benefits.
David Crane was an adviser to Gov. Arnold Schwarzenegger and now lectures on public policy at Stanford University. He serves on the UC Board of Regents and the California High Speed Rail Authority.