Political expediency impels politicians to hide their benefit boosting

Orange County Register
Thursday, August 21, 2008
By Gary Galles
Pepperdine University economics professor

Pension spiking (e.g., retroactive increases in pension benefits or preretirement promotions that qualify workers for bigger pension benefits), has been a major trend in California governments since our dot-com boom of the 1990s. It has saddled state and local governments with serious fiscal problems ever since. For example. Orange County has a $2.7 billion pension deficit, and a 2005 review of California's biggest government agencies found pension, health care and workers' compensation commitments underfunded by more than $100 billion. Such liabilities forced the city of Vallejo recently to declare bankruptcy.

Still, the Fullerton City Council this month was secretly negotiating a 25 percent retroactive increase in pension benefits for its workers, until a council member turned whistle-blower to the Register's Opinion pages.

The Fullerton flap is the latest illustration of how government union power combines with politicians' short-term bias, given that re-election campaigns come before all the effects of their policies become apparent.

The logic for such a back-loaded compensation approach is obvious, despite the harm to taxpayers. Public employee unions are well-informed about their compensation packages, and do not hesitate to use their political clout to expand them. In contrast, taxpayers, many of whom assume their votes won't alter election outcomes, pay little attention (though Fullerton made it even harder to recognize the backroom deal with innocuous-sounding language about labor negotiations). But mushrooming budgets, which become scandals, can get their interest.

The political solution has been to generously reward the influential but dodge public scrutiny by deferring the big bills until workers' retirement. When those obligations come due, politicians will have moved on or be able to shrug and say "there's nothing we can do now."

That the pension obligation boom is a bonanza to public workers rather than a sensible policy is also revealed by the less-than-credible defenses offered once spiking is uncovered.

The first line of defense is that public employees are underpaid compared with private sector counterparts, so retirement benefits must be sweetened to compensate. That may have been true once, but those days are past for most government workers, many of whose salaries now exceed those in the private sector.

The second rationale is that increased health care and pension commitments, despite costing millions, are essentially "free." All it takes is assuming an implausibly large return on pension fund investments, and by the time the rosy scenario proves false, taxpayers are responsible for any shortfalls.

The third common claim is that pension boosts are essential for public agencies to attract and retain quality employees. Of course, those agencies have no problem finding workers, and few of their employees quit, clearly refuting that claim.

The pension spiking also violates the principle of pay for performance. Benefit boosts to existing workers, who are often virtually unfireable and who have revealed that they aren't going anywhere, make any added motivation minimal. And for older workers, the rich payouts are negotiated when they have only a few more years to work, so don't apply to most of their working lives. But it builds in large incentives for pension spiking.

As Fullerton's escapades illustrate, the public needs to understand the deferred-compensation disaster they face, and punish those responsible. Dramatically accelerating what taxpayers will be forced to pay in the future with little benefit to the public does not advance our general welfare. The laughably inadequate defenses that have been used to justify such government largesse also make that clear. If Californians don't wake up, politicians will only make it worse, and our ignorance will be anything but bliss.