21 ms·

Schwarzenegger: Public Pensions and Our Fiscal Future

• robryan 16y ago
  Who's lending California this money now? It seems quiet a risky deal.
  • yummyfajitas 16y ago
    It's not that risky. The most likely outcome is simply that the fiscally responsible states will be forced to bail California out.
    • jswinghammer 16y ago
      Depends on who holds the bonds. If the majority of those people are well connected a bailout is likely. It won't come without concessions though. Bondholders will be forced to take a haircut on their investment. Seems crazy to me.
    • maxawaytoolong 16y ago
      Except aren't there only like 3 "fiscally responsible" states? I don't think Wyoming and North Dakota are going to be able to pull off such a bailout.
      • yummyfajitas 16y ago
        Perhaps I should have said "less fiscally irresponsible".
  • nlavezzo 16y ago
    Everyone who buys California state bonds (which are income tax exempt) is loaning the money. The interest rate California has had to pay to entice people to buy these increasingly riskier bonds, has increased accordingly as the state's financial condition has deteriorated. It is a risky deal, and buying CA state bonds to hold until maturity is basically a bet that the state will get bailed out by the federal government.
    • robryan 16y ago
      Yeah I knew it would be bonds, just seemed like a risky proposition. I guess any responsible economic action here isn't going to be popular so it's not going to happen? Hypothetically what would happen if the state decided to reform these pensions, slashing them right back to something they could realistically afford?
      • nlavezzo 16y ago
        I think responsible economic action is very popular with the population of California in general. Unfortunately, the general population of a given state doesn't get involved in local elections (what's the name of your local state delegate?) unless they work for the government they're voting in. Therefore even though the population in general might be howling for reform, the state delegates that have to push it through have no incentive to, since they know the great majority of people that actually know who they are and are going to vote in the next election, are against reform.
      • btilly 16y ago
        The fundamental problem is that a large amount of possible government action is hampered by a constitutional rule that says that 60% of the house has to agree on any budget. Structurally neither party has the power to get to 60% of the state legislature, voting for taxes is political suicide for Republicans, and voting to cut benefits is political suicide for Democrats. So we have permanent deadlock with no attempted solutions being politically viable. With your example, if California tried that before declaring bankruptcy, there would be court challenges that California would lose. Even if contracts going forward were amended, that wouldn't help the structural problems from what has already happened. Therefore California requires either bankruptcy or extraordinary assistance. And the Obama administration has indicated that no extraordinary assistance will be forthcoming. It is worth noting here that California is one of the few states that pays more into the federal government than we get out, and the amount extra we have paid in over the years is more than enough to rescue the state government.
        • ghshephard 16y ago
  • Eliezer 16y ago
    They're all betting they can sell those bonds on a liquid market a week before the market officially wakes up and realizes a disaster is coming.
  • korch 16y ago
    The Federal gov't won't ever let California outright default on its debt. Why? It is the largest economy inside the US, it serves critical national security purposes, and being the biggest state debtor it will take dozens of other broke states down with it. A default would trigger a copycat landslide in the dozen other states who are also crippled with massive debt. If half the states default, all the dike holes the Fed has been filling with fingers over the past 2 years will have been for nought. It just can't be allowed to happen, period. At least in plain sight. It's exactly like how the banks are keeping their 1+ years worth of "shadow" housing inventory off the market, so as to keep a floor on prices and prevent everyone from panicking and running for the exits at once. And just like how the Federal bailouts were passed through back channels(i.e. Maiden Lane I & II, reserve swaps with foreign central banks, etc), and arcane accounting tricks that no congress-critter can comprehend, and the biggest political smoke & mirrors America has ever seen, so too will it go for the bailing out involvent states. It won't be Obama handing Schwarzenegger an oversized $30 billion dollar check on TV like a grinning Ed McMahon. No, it'll be a thousand tiny accounting tricks to prop up California, and keep the markets in perpetual doubt about the overall fiscal status of California. Our entire Federal fiscal and monetary policy is a waiting game. They don't know what will happen, but the thinking is if we can all just hang on long enough for everyone to adjust to the economic new normal, then we can at least avoid an outright national collapse. Nobody on the planet can even know if this will work, but there are zero alternatives.
• jumby 16y ago
  i like how the 2nd graph is totally wrong: those numbers aren't in billions, but in millions. i guess no one understands how to read graphs anymore
  • crad 16y ago
    Where's the source of the 2nd graph being wrong? It's labeled as billions and the article mentions "This year, retirement benefits—more than $6 billion—will exceed what the state is spending on higher education." That statement is in agreement with the graph.
    • dminor 16y ago
      Yes, but the graph has it at $6,000 billion, i.e. $6 trillion.
      • crad 16y ago
        Ah yeah good catch...
    • deleted 16y ago
      [deleted]
  • deleted 16y ago
    [deleted]
  • alecco 16y ago
    (2008) WSJ Editor's Resignation Is Criticized By Committee http://online.wsj.com/article/SB120949530982953531.html http://online.wsj.com/article/SB120949530982953531.html
  • dminor 16y ago
    Not to mention the first graph would be far more useful if it displayed relative job losses rather than absolute.
    • noahlt 16y ago
• alecco 16y ago
  As a foreigner, this is like bizarre fiction. * Arnold Schwarzenegger, a former bodybuilder champion now politician * Governor of nearly bankrupt California * A state scammed out of 40 to 50bn by Enron and pals * AS career was supported by Enron (from Forbes) * Writing an opinion column on Fox owned WSJ against state pensions My sympathies to all californians. The world owes you so much.
  • alecco 16y ago
    Your down votes signal you read those facts and it upsets your beliefs. I didn't write this for people who agree with my point of view. I wrote this for you. Thank you.
    • LargeWu 16y ago
      You're probably getting downvoted because you seem to be implying, without real evidence, that California is bankrupt because Arnold was complicit in cheating California out of billions because of shady dealings with Enron. These are the sorts of allegations that one would typically see in a political forum populated by partisans and hacks. Downvoting is just HN's way of saying this sort of discussion belongs elsewhere.
      • alecco 16y ago
        While it didn't bankrupt California the economic impact is very relevant with regards of the sums required to pay state pensions. Also I assumed everybody knows it was Davis who allowed that to happen, well before Schwarzenegger was elected.
      • chadmalik 16y ago
        Actually if you followed the whole looting of California by Enron & friends, the final conclusion was Schwarzenegger taking office and refusing to pursue a serious lawsuit agains the perps and letting them off with token payments to the state. And yes the proof was and is very clear that the "crisis" was in fact looting. The energy traders who implemented it were taped per regulation and the leaked tapes were ugly. It was a crime and the perps got off. So YES, IN FACT, the governor is culpable for what happened, or to be very exact, refusing to pursue serious restitution.
• deleted 16y ago
  [deleted]
• mark_l_watson 16y ago
  About 25 years ago in California, Orange Country went bankrupt and public employees had to do "give backs" of (if I remember correctly) about 1/2 of their retirement funds and other concessions. I think that this will be the model for the future, but a state levels. It may not seem fair to change the rules on public employees, but effectively the rules have changed for private employees because the economy at federal, state, local, and personal levels will keep getting worse. When I was younger, I worked with techs working for the federal government and they received much lower salary, but a retirement. Now, they tend to make equivalent salaries and have more job security. I am as disgusted with unions lobbying Congress as I am with corporate lobbyists.
  • pragmatic 16y ago
    That was before federal workers earned twice as much as their private counterparts. "Federal civil servants earned average pay and benefits of $123,049 in 2009 while private workers made $61,051 in total compensation, according to the Bureau of Economic Analysis. The data are the latest available." http://abcnews.go.com/Politics/federal-workers-earning-double-private-counterparts/story?id=11394757 http://abcnews.go.com/Politics/federal-workers-earning-doubl...
    • CWuestefeld 16y ago
      I'm sympathetic to your point, but you can't really make this comparison, because it's apples-to-oranges. The set of jobs in each set is quite different. For example, there are few farmers in the government employ. However, we can still reach interesting conclusions from the data. For example, I would expect that regardless of the salary of the job, benefits such as healthcare insurance would be fairly constant for employees anywhere, and that in the private sector, healthcare is probably the single largest chunk of benefits. With this observation, we'd have to conclude that whatever salary you're making, the government is throwing in a pretty significant amount of extra value into their employee's benefits, whatever that employee's job might be.
      • ryanwaggoner 16y ago
• hammmatt 16y ago
  Can someone confirm that indeed 80 cents of every tax dollar goes to pensions?
  • philk 16y ago
    From the article: roughly 80 cents of every government dollar in California goes to employee compensation and benefits So that's salaries as well as pensions (and salaries will be making up the lions share of the 80%). To quote Felix Dennis "Overhead walks on two legs".
    • timepilot 16y ago
      and healthcare benefits, etc
    • 16s 16y ago
      Employees are the biggest expense for any business, not just governments.
      • larrywright 16y ago
        This is true, but not 80%. This number is way, way out of whack.
      • billswift 16y ago
        Usually the biggest single expense, but not usually more than half of the total expenses.
• maukdaddy 16y ago
  That first graph is insane, yet believable. Here in Chicago, there have been a few layoffs of city personnel, but mostly furlough days. City workers are forced to take 24 unpaid days this year. So our public/private graph probably looks the same. Comments reflect my personal views and not my employers, etc.
• pg 16y ago
  I have a feeling these graphs do more to explain the problems that Berkeley professor wrote about (http://blogs.berkeley.edu/2010/08/24/a-letter-to-my-students/ http://blogs.berkeley.edu/2010/08/24/a-letter-to-my-students...) than the explanations he proposed.
  • tomsaffell 16y ago
    He being the Berkley professor, if I read right. (I had to read it a few times to parse..)
  • donaldc 16y ago
    Since UCB gets state funding, this may make the professor and his pension a part of the very problem he (the professor) is complaining about.
    • callmeed 16y ago
      And makes it more laughable that he framed his letter as "an apology"
      • timr 16y ago
        Remember, this is one side of the debate. There's a lot more to the story than you're reading here, so perhaps you should hold off on the laughter. I generally agree with the governor, but I also tend to believe that the state has to make good on past obligations -- especially when real people have planned their lives around those obligations. The 55-year-old retiree with fat benefits is a political straw man, but reality is much less clear.
  • shin_lao 16y ago
    I was thinking exactly the same thing. In addition when you know an employee is going to cost you a lot of money in pension, the incentive to reduce the work force as much as possible is high. You end up in a situation where your budget is used to pay for the retired employees and you have nothing left for active employees. One of the reasons you are there is that it's pretty tempting for someone in command to offer a lot in pension. Under his command the budget remains clean and the employees are happy. That has got to ease elections! One way to avoid that would be to change the way the yearly budget is computed so that it includes "known future expenses" clearly.
• apphacker 16y ago
  Seems like he makes a convincing argument to me. Basically it boils down to: 1. California can't afford to pay promised pensions. 2. Public pensions are far more generous than similar private sector retirement options. I'd like to know: Are the facts as presented correct? Any errors or misleading statements? If not, then the governor's argument is very strong. A Republican attacking size of government is par for the course. He assails unions, also par for the course for a Republican. Is he also ignoring special pro-business,anti-tax interest groups that influence his side of the aisle (also par for the course). Having said that, seems to me that assuming his facts are straight that changes are needed. Personal bias: Except for first responders, my own perception of government employees is one of rude, under-skilled and self-entitled people who unlike private sector employees don't have to worry about: customer satisfaction, providing value, increasing sales or the company's profitability. In fact, just as an example anecdote, when I was in the military, my experience was that one had to spend as much of the allotted budget or else next year's budget would be smaller. So at the end of the year we ordered a bunch of useless shit we didn't need, created fake orders etc just so we could spend enough to match our budget. The focus wasn't on reducing spending. Seems like government employees fill up some allotted headcount by breathing air, and maybe get some work done sometimes. I realize that my personal bias is probably wrong, which is why it's called a 'bias.'
• pchristensen 16y ago
  If he forces through public pension reform, my opinion of Arnold as a politician would go way, way, up.
  • sliverstorm 16y ago
    When I was a kid and he was elected, I thought he would be a bit of a joke. A movie star elected governor by Hollywood- California really is crazy! My opinion has changed drastically since then, and I find myself proud to have him as our governor.
    • chollida1 16y ago
      > A movie star elected governor by Hollywood- California really is crazy! I guess you've never heard of Ronald Regan:) http://en.wikipedia.org/wiki/Ronald_Reagan http://en.wikipedia.org/wiki/Ronald_Reagan
      • sliverstorm 16y ago
        My mistake! I knew about Regan, but I didn't know he was a Cali guvner first.
• dantheman 16y ago
  He got that exactly right, unfortunately he didn't go far enough -- debt financed projects are also a huge problem. Look at the big dig & the mbta. People need to learn that you pay as you go, that's why 401ks are great the total cost of an employee is understood completely. Taking debt in someone else's name, which is what essentially all government debt is, is fundamentally immoral and shouldn't be allowed. It causes people to be reckless since they're not the ones paying for it.
  • DanielBMarkham 16y ago
    Interesting point about taking debt in someone else's name. Over the last year I've begun to wonder if people aren't going to start feeling like the deal is off. If granddad elected somebody who made so much of a debt obligation that my taxes can't fix the roads? Why does granddad get to leave me his debt? He's not even around anymore. How can dead people vote to make living people 100 years later poor? In some ways this was the exact same problem the colonies were having with Great Britain -- taxation without representation. One bunch of people making the rules and taxes, and another bunch of people having to live it. (And yes, I'm aware of the counter-argument that current voters can change the budget at will, but for all intents and purposes, practically speaking these things are our "legacy" code. We're stuck with them by default. It takes great upheaval to change even the smallest of things in these matters) I don't think we're there yet. But we're not far off.
    • CWuestefeld 16y ago
      In some ways this was the exact same problem the colonies were having with Great Britain -- taxation without representation. Interesting idea. The American Revolution dealt with geographical representation. You're making an argument for temporal representation as well. This seems worth some pondering...
    • patrickgzill 16y ago
      Lysander Spooner wrote about some of these ideas - that the Constitution was only in effect for those who were living at the time, and did those folks then mean for it to be binding on everyone else in perpetuity? -- as one example of his thinking. http://en.wikipedia.org/wiki/Lysander_Spooner http://en.wikipedia.org/wiki/Lysander_Spooner
• lionhearted 16y ago
  After this one gets to +250 can we have a politics moratorium for a while?
  • deleted 16y ago
    [deleted]
  • akmiller 16y ago
    What, you don't thing that a State (especially California, the startup capital of the world) in a serious budget crisis has anything to do with entrepreneurs that may be attempting to start their own businesses in such a climate?
    • _delirium 16y ago
      Although I've unfortunately added to it, I don't think on the whole HN discussions on the subject have been particularly enlightening, partly because, unlike with technical topics, HN posters don't generally have expertise or particularly unique insights into this area. We just have a mix of libertarian-leaning and social-democratic-leaning people arguing with each other (with a moderate majority for the libertarians).
      • deleted 16y ago
        [deleted]
      • lionhearted 16y ago
        > We just have a mix of libertarian-leaning and social-democratic-leaning people arguing with each other (with a moderate majority for the libertarians). Indeed, I decided I'm going to bow out of politics conversations. It's relevant tangentially, but it adds noise and friction. I'd rather connect cooperatively with like-minded people in entrepreneurship and technology, I don't want to get into arguments, build bad will, etc. with people here. Like Delirium says, at this point the argument quality isn't even particularly insightful.
  • jtg 16y ago
    This is a legitimate concern, but the subject of this article concerns issues that directly affect the interests of the HN community. It's clear to many of us that political grandstanding, personal drama, and he-said-she-said do not belong on HN. At the same time, many current and aspiring startup founders have embraced the cultural shift to learning about traditionally non-technical areas such as sales and marketing. And rightfully so; this is after the previous shift (or "great opening up") to learning about design and a good user experience. We've done all this because there's no escaping the cold, hard reality that the success of our companies depends on getting the word out and selling people on our ideas. Good code is not enough. The skyrocketing cost of public pensions in California affects the solvency of the state government. When the state government is desperate and must make ends meet, tax hikes are the first and most obvious options, and are always taken into consideration. When you're thinking about starting a company and setting up shop in Silicon Valley, the tax burden is a huge factor to take into account. As things stand today, the benefits of the personal network, concentration of talent, and the established tech ecosystem in Silicon Valley are still more than enough to outweigh the comparatively high tax burden for those who wish to start and operate a successful company. "Political" articles like this are of interest to us because they tell us about important future changes in the formula we use to calculate where we want to set up shop.
• btilly 16y ago
  The pension problem is scarier than he says. I wish that they merely projected rosy numbers. However they have also been accepting risk to try to make those numbers. When those risky investments fail, we'll suddenly have an even worse hole. Note that I say "when", not "if". I say that because significant investments were made in private equity funds during their spending spree a few years back. There is every reason to believe that those investments are going to blow up. It is worth noting that this is the second time that private equity went on a big spending spree. The previous time was in the late 80s, and the big investors were the savings & loans institutions. Google S&L crisis for more on how poorly that turned out. Then note that the recent spending spree was over an order of magnitude bigger.
• chadmalik 16y ago
  No mention of Prop 13 eh? PG&E etc. are able to pay insanely low property taxes, often creating shell companies so the property can be passed between owners, while regular working schmoes pay sky high property taxes. And what about Arnold's refusal to tax offshore drilling the same way red states like Alaska do? Yes there need to be cuts in spending but refusing to raise a single tax is simply absurd. Both things need to happen to balance the budget. The real problem is the need to have a 2/3 majority to pass a budget in the legislature. That is simply absurd.
  • jfarmer 16y ago
    The 2/3 requirement for raising taxes also comes from Prop. 13. Best proposition ever!
    • sabat 16y ago
      It was overkill, and selfish. I was in 5th grade when Prop 13 went through, and by 6th grade school programs had to be cut, school supplies were all but non-existent, and teachers were being fired. For the sake of what -- big corporations? Baby boomer tax rates? Tax cut we can afford, sure.
• furyg3 16y ago
  The "job losses" graph is basically trash, since there are far more private sector workers than public sector workers. Better would be to rate it by percentage. I'm slightly shocked that the WSJ would print it (the graph, not the article).
  • aresant 16y ago
    Here's the real data which is still striking, eg private is 2x the rate of public: Job losses June 2008 to June 2010 State government Statewide: -8,800 / -3.3% County government Statewide: -18,500 / -5.1% City government Statewide: -14,100 / -4.9% Private sector Statewide: -1,200,000 / -9.3% Via http://www.signonsandiego.com/news/2010/aug/23/government-jobs-disappear-posing-threat-upturn/ http://www.signonsandiego.com/news/2010/aug/23/government-jo...
    • nostromo 16y ago
      I dismissed the chart entirely as overtly biased -- but I wish he had just used these numbers because they make his point much better, and honestly.
    • furyg3 16y ago
      Indeed it's still a big difference, but it's not "off the charts!" as the graph would have you believe. Plus, it's fairly reasonable that there would be such a difference between private / public job loss rates. Employment rates in the operations department of most companies I've worked for are relatively flat during both boom and bust times, when the rates of the rest of the organisation fluctuate wildly. In boom times you need IT/HR/Facilities/Finance... and in bust times you do, too. Sales? R&D? Maybe not so much. I can imagine that most public services are more on the Ops side and less on the Sales side.
      • nkassis 16y ago
        I worked for a University in florida and the largest department was by far the Facilities one. Maintaining buildings, keeping them clean etc.. is very expensive. You can't cut those jobs and for each new building, you to add more of these people. The University tried to freeze hiring but a few new buildings were entering operation, they had to keep getting more janitors/grounds keepers etc.
• deleted 16y ago
  [deleted]
  • deleted 16y ago
    [deleted]
• WalterBright 16y ago
  I don't really understand the fairness of being able to retire at 55 with a full pension. The retirement age should be 70.
• aswanson 16y ago
  http://blogs.forbes.com/digitalrules/2010/06/01/the-millionaire-cop-next-door/ http://blogs.forbes.com/digitalrules/2010/06/01/the-milliona...
• erikstarck 16y ago
  "The problem with socialism is that eventually you run out of other people's money." -Margaret Thatcher
  • johnny22 16y ago
    maybe you'll run out of this quote some day too. try making one of your own.
• lowglow 16y ago
  Is anyone else reading this in his voice?
• mkramlich 16y ago
  I don't think any employer should take on the role of providing pensions, as a part of the employment relationship. There is a lot of reasonable argument in favor of the value of something like Social Security, as a sort of minimum social safety net. And such a thing probably makes the most sense being provided by the government. But I'd love to see the day where employers just give cash to their employees, and it's up to them to decide what to do with that cash. It would make for so much less paperwork and reduced overhead costs, and increased simplicity, for business owners and management. Less distortion, greater focus on their core business.
• ruang 16y ago
  Defined benefits should be outlawed. If mutual funds and hedge funds are not permitted to guarantee returns, then neither should pension funds.
• cce 16y ago
  Many people took positions in government when it wasn't anywhere near a high-paying job. I know an engineer friend who took a job with the government in 1994 for a 40% pay difference (45k vs 75k) -- how the lower wage was justified: (a) more job security, (b) an actual pension plan with ~28 years service. The two were viewed at that time as being equivalent: with the government compensation a bit less than working for a contracting firm. I know of teachers who choose their profession, not based on the yearly compensation, but based on the idea that "yea, so after 26 years of letting children beat down on me, I can retire and not have to worry so much". I'm sure police/firemen who agree to risk their life every day for 20-some odd years make similar calculations. It's a rational choice -- and a promise of compensation made. I simply don't understand how anyone could justify retroactive gutting of plans. Can we do retroactive taxation on those that went without the pension as part of their compensation plan? Elimination of pension going forward -- perhaps. I'm curious to see how recruitment of these positions works... likely, the Government won't be able to attract as good candidates as it might otherwise.