– May 7, 2018
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california fiscal crisis
Over the past few decades, the state’s cities have treated themselves to grandiose spending programs, lavish pension funds, and a tax system that would make any greedy politician jump for joy. (Flickr/Joel)

Californian cities find themselves in a fiscal quagmire. A report from the Mercury News depicts how several municipalities and school districts are on the brink of insolvency. Wide gaps, known as unfunded liabilities, exist in the state-administered public-employee pension system. Simply put, this system does not have enough in assets to fulfill the retirement obligations of employees.

The California Public Employee’s Retirement System (CalPERS) is desperately trying to increase mandatory contributions to fill this gap. Even this would likely fail due to the tsunami of pension costs befalling California’s 482 cities.

Major Californian cities such as San Bernardino, Stockton, and Vallejo have experienced bankruptcies over the past few years due to fast-rising pension costs. Even larger ones such as San Diego, which has seen pension costs rise from $191 million to $228 million from 2015 to 2017, could also fall victim to bankruptcy if they don’t adequately address these exploding costs.

Los Angeles is not exempt from these harsh fiscal realities. Pension costs there have ballooned to $1.1 billion from $435 million in 2005. If Los Angeles doesn’t get its act together, it could face service insolvency—only able to afford to pay for employees and bond obligations, but not basic services such as street and sidewalk maintenance.

These municipal cases are just a microcosm of California’s overall fiscal problems and serve as harbingers of even bigger upheavals to come. Tough choices lie ahead given that most Californian cities have cornered themselves. However, the two that stand out are:

(1) raising taxes, which requires a referendum;

(2) negotiating reductions of pension benefits.

Naturally, municipal elites will pursue the former, but voters can only tolerate so many tax hikes, and the pressure to leave has grown too great. The latter option, while politically tough—given the weight of unions in electioneering—is the most reasonable way of bringing back fiscal normalcy to cities in the Golden State. (Defined-contribution pensions, as opposed to defined benefits, can also avoid a repeat of this problem.)

How Californian municipalities reached such a troublesome spot is no mere coincidence. Public-sector unions have been the main culprit behind California’s unsustainable pension system. Their modus operandi is to hold taxpayers hostage every year to extract as much government largess and benefits as possible.

California’s fiscal problems at the local level are only the tip of iceberg. Over the past few decades, Sacramento has treated itself to grandiose spending programs, lavish public-sector-union pension funds, and a tax system that would make any greedy politician jump for joy.

The state’s anti-growth route to economic policymaking has come with considerable costs. Estimates from Internal Revenue Service tax-filing data indicate that 6 million Californians left between 2007 and 2016. Among their new destinations, Californians have opted for states with less taxation such as Arizona and Texas.

Thankfully, the farsighted US federal system fosters competition among states and provides over-taxed and over-regulated residents the opportunity to vote with their feet. Nevertheless, Californians and their debt-ridden municipalities alike will need to take a long, hard look at themselves. All meaningful change should start locally, and municipalities can lead the charge by pursuing policies proven to spur economic growth—lowering taxes and making politically unpopular spending cuts.

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José Niño

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