During the best of times, municipal leaders made generous promises to their employee unions in exchange for labor peace, political contributions, or both. During the worst of times, those promises work havoc on city budgets.
First came Vallejo. Just over four years ago, Vallejo filed for Chapter 9 bankruptcy protection. Its story should have been a wake-up call for other California cities, and for their public employee unions. Unfortunately, it was not.
Other California cities continued in the profligate Vallejo mold, loading their books with huge, unfunded liabilities and ballooning their operating costs. The inevitable has happened.
In June, the city of Stockton filed for what is now the largest municipal bankruptcy case in the country. Four days later, Mammoth Lakes in Mono County also filed for Chapter 9 protection. Then in August, the city of San Bernardino filed for bankruptcy. No doubt other local government entities are similarly staring into this fiscal abyss.
The problem is enormous, and enormously widespread. California and its cities, counties and other municipal agencies have spent decades amassing crushing debt in the form of unfunded pension liabilities and generous retirement benefits. But the financial models behind these promises are economically unsustainable.
One study by Stanford University valued the total unfunded municipal and county liability at about half a trillion dollars. This is money that contractually needs to be paid out over the coming decades before a single dollar is spent on education, or public safety, or infrastructure improvement, or any of the host of other important things we ask government to do for us.
It need not be this way. Prior to the growth of public sector employee unions, government employees received lower wages than their private sector counterparts in exchange for civil service protections. Public sector pensions were even considered gifts of public funds.
Slowly, however, that original deal has been abandoned. Increasingly, public sector wages are on par with private pay for equivalent jobs, pensions have skyrocketed to half a trillion dollars and counting, and, of course, the civil service protections remain in place.
Just try firing a public employee without that employee’s union pitching a fit. Even worse, in Sacramento this year the Legislature could not bring itself to pass a simple bill by Sen. Alex Padilla giving the Los Angeles Unified School District increased procedural rights to fire teachers who engage in sex, drug or child abuse offenses.
Really?
Even that was too far for the employee unions?
Governments in other states are fighting back.
Last year, Central Falls, a small Rhode Island city, filed for bankruptcy. One of the primary benefits of bankruptcy, of course, is the ability of debtors to renegotiate or disaffirm existing contracts. Central Falls used this power of the bankruptcy court to actually renegotiate its pension contracts for existing retirees.
Later, when Providence, the largest city in Rhode Island, was weighing whether it would file bankruptcy—and with the Central Falls experience fresh in mind—public employee union representatives willingly came to the table and agreed to a set of decisions cutting back on existing pensions and benefits. Providence thereby managed to avoid having to file for Chapter 9.
Unfortunately, unions in this state have preferred to stand firm on existing, unsustainable benefits, forcing cities and counties to hack away at police, fire and other critical services.
Sadly, our experience with pension reform in California is entirely of the failed kind, rather than the successful kind seen in Providence.
California’s public employee unions control Sacramento and kill even modest reform, as the California Teachers Association did with Sen. Padilla’s common-sense LAUSD bill.
One of my own bills, capping public employee pensions at $100,000, never even got a vote. The ruling party in Sacramento used a procedural trick to put it into a special committee considering pensions, a committee which has since produced absolutely nothing.
At least my pension reform bill is in good company.
The Democrats also would not give a vote on modest pension reform the governor himself proposed almost a year ago.
In short, California continues down an unsustainable path, the same one that has led so many cities to financial ruin.
