Could Hawaii go bankrupt? That was the topic of a free live webinar on Thursday, May 14, sponsored by the Grassroot Institute of Hawaii.
As a technical matter, the answer currently is, “No.” But as a practical matter, Hawaii’s economy has tanked and local tax revenues are plummeting, leaving the state and counties in danger of being unable to meet their unfunded liabilities — starting with its public pension and health-benefits systems.
Is it too late to do anything about it? What can we expect if Hawaii’s public pension and health-benefits systems go belly up? California columnist Steven Greenhut addressed those questions during our free, live webinar on Thursday, May 14, sponsored by the Grassroot Institute of Hawaii.
Greenhut, an authority on state public pensions systems, is author of the 2009 book “Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives And Bankrupting the Nation.” He also is a resident senior fellow at R Street, a policy research organization based in New York; a columnist at the Orange County Register; and a former columnist with the San Diego Union-Tribune.
In a recent column for the Orange County Register, Greenhut said that during the last recession, the unfunded liabilities of California’s public pension system “obliterated local budgets as pension costs grew exponentially and led to service cutbacks and even bankruptcy.” Now, with the coronavirus recession/depression in full swing, “Economic reality has intruded again.”
After his presentation, Greenhut fielded questions from the audience, with Keli’i Akina, institute president, moderating.
A complete transcript of the webinar is below.
Keli’i Akina: Aloha, everyone, and welcome to the Grassroot Institute of Hawaii. This is our ongoing seminar series and we’re delighted that you’ve joined us. We have about 130 people registered for today’s conference and we’re live-streaming on Facebook as well. There’s a broad audience, and we invite your questions. Simply send them to us, and later on when our speaker is done, we’re going to give him time for questions and answers.
Well, right now as we sit here today, our state Legislature is meeting, trying to deal with a big hole that has been punched in the state budget. It could be up to $1.5 billion that they need to find, and we hope that they don’t find it simply by borrowing it from the future. It raises a question, a very interesting one that we’re going to address today. Could Hawaii go bankrupt?
Admittedly, that’s a strange question because as you know states don’t go bankrupt, counties and municipalities do, and it would take an act of Congress to get a state to be able to go bankrupt. What we’re really talking about is metaphorical. We’re asking the question, “Could a state default on its obligations? Could a state become insolvent?” Actually, there are some people who are asking this question before the pandemic of the coronavirus, but it certainly has been exacerbated by what has taken place in terms of state revenues in dealing with the coronavirus and the expenses that are to come.
Today, I’m very pleased because a friend of mine is going to join us, Steven Greenhut. He’s an authority on state public pension systems and he’s the author of the 2009 book you may have seen called “Plunder! How Public Employee Unions are Raiding Treasuries, Controlling our Lives and Bankrupting the Nation.” Some of you have heard of Steven Greenhut because he’s a senior fellow at R Street Institute, which is another policy research organization based in New York. He’s a columnist at the Orange County Register and a former columnist with the San Diego Union-Tribune.
Steven, thanks for joining us. You’re all the way out near Sacramento now, is that right?
Steven Greenhut: That’s right. Well, thanks for having me. I appreciate it.
Akina: Well, you’ve been observing quite a bit up there in California and across the nation, in terms of how states are dealing with the budget crisis. Are we in a condition now where we’re actually observing counties and municipalities preparing for the specter of going bankrupt?
Greenhut: Well, I think municipalities could. They’ve been in a lot of trouble in California, certainly before we even reach the COVID-19 crisis. Some of us have been warning about financial mismanagement and overspending for many years. Of course, you guys in Hawaii and most other states are a rounding error on our budget, but we seem to specialize in doing everything wrong, or at least it’s such a large state with such large numbers that I think what you see in California certainly could filter down to other states.
I’ve been covering local governments and covering the state government and all sorts of long-standing problems, most of them related to employee compensation and pensions in particular.
Akina: Right, and that’s an area in which you are quite a national expert. I’m going to give you your time now, about 15 minutes, and then we’ll circle around with questions and answers from our audience. Go ahead.
Greenhut: Okay, thanks. I’ll just give a quick survey here, what I’ve been seeing. Some of us, quite a few people in the journalism world and in the think-tank policy world who’ve been pointing to problems in California and elsewhere for many years, solutions aren’t that difficult, at least they aren’t from an actuary standpoint or from a mass standpoint, but they’re very politically difficult.
When times are good, governments ignore such warnings and say that people are Chicken Littles, and then all of a sudden, we have a crunch and, “Oh my God, it’s a perfect storm.” How many perfect storms do we get there? Whenever there’s a problem — and that’s what we’re seeing now.
Gov. Jerry Brown, who was a lot more fiscally responsible than our current governor, would always — when he released his budget and his budget revision, and today’s May budget revise day in Sacramento — he would always warn about recessions. “There’s always a recession around the corner.” He would hold up charts showing that the recession years often outnumber the up years, and yet legislators and governors like to spend money. When times are good, they spend money and they kick the can down the road.
Quite a few of us in the pension reform movement have felt like we’re crying in the wilderness. The whole issue, this whole idea of state bankruptcy, of course, as Keli’i, you had pointed out, states really can’t go bankrupt, but Mitch McConnell stirred the pot recently. I’ll just quote from him. “I would certainly be in favor of allowing states to use the bankruptcy route,” he said on Hugh Hewitt’s conservative talk program. “There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations.”
It’s probably not going to happen; that solution isn’t going to happen. States aren’t allowed to go bankrupt. Federal bankruptcy code has never allowed it, and the Constitution seems to prohibit it, but it’s really centering on that whole issue of whether the federal government should bail out states.
We’ve got states like California that spend wildly. There’s a website called Transparent California that lists the pensions and the names of the pension holders, and the compensation for every employee in the state pension systems. And it’s crazy stuff. You have page after page of police sergeants with $300,000, $400,000 compensation packages. We have the average compensation for a firefighter in the state, total compensation is well over $200,000 at this point.
So, should someone in Georgia bail out California’s profligate spending? You know my answer: I’d say no. There are plenty of options. States, I don’t think, are in that kind of financial situation that would cause them to go insolvent, but the municipalities certainly have long been heading towards that sort of situation.
Speaking of bailouts, California and four other Western states, not Hawaii, are seeking a $1 trillion bailout from the federal government. I assume the Trump administration will say, “Yeah, we’ll get back to you on that one.” Hawaii was wise enough not to join that coalition.
Here in California, I write about pensions and budgets. We’re looking at a $54 billion deficit now. You folks are looking at somewhere between $1 billion and $1.5 billion. Our pension liabilities and the retiree healthcare liabilities combined here range from $300 billion to $1.2 trillion. It all depends on a million different ways that you could account for that. But Hawaii’s situation is troubling enough.
I was looking at a variety of reports and a good, excellent report by Joe Kent at Grassroot. Before this crisis hit, your unfunded liabilities were $13.4 billion, with about 25 years needed to get them to full funding — and that was before the problems hit. That’s slightly above a 50% funding ratio. I was just reading a piece from my friend Dan Borenstein over the San Jose Mercury News, and he was pointing out that once pension funds get below 50% funding level, it becomes something of a death spiral. It becomes impossible to catch up because the rates of return that they have to receive, the pension funds have to receive, become too steep, and that encourages pension funds to take riskier and riskier investments.
Right now, Hawaii, like California and most states, expects a 7% rate of return. After at least the first and the initial last stock market fall recently, I guess in April, California Public Employee Retirement System lost $69 billion and had a negative rate of return for the year. We were only 70% funded before the crisis hit. You folks were only 50% funded. Your numbers are smaller than ours by a lot, but the percentage problem is pretty serious.
I was reading that the unions in Hawaii want to delay the state payments to the pension fund so as to protect public employee salaries. There was a plan by the governor to reduce salaries by 20% through furloughs, mainly. That’s shortsighted. The other thing I was reading was that Hawaii Legislature is thinking about pension bonds, which is a little like taking out a loan to pay your mortgage. That’s not how you dig out of a problem. I’ve seen a lot of localities here in California do pension obligation bonds. Sometimes they get a better interest rate and are able to gain the difference, but it’s just taking out debt to pay off debt. It’s generally a financially irresponsible route to take.
Most folks who follow the system know this, but I’ll repeat it for those who maybe don’t. In the private sector, most of us get 401(k) plans, which are defined contribution plans. The employer makes a defined — a set — contribution. The employee makes that or the employer sometimes matches that or gives a percentage. If the stock market and the investments go up, the employee does well. If it goes down, the employee does less well. But the employer knows the percentage of money that they’re going to be on the hook for.
In the public sector, they’re almost entirely defined benefit plans, which are — the benefit is set in stone based on a formula. Our public safety employees in California get 3% at 50, which means — most of them do — they retire with 90% of their final three years’ salary averaged. That’s before various pension-spiking gimmicks kick in, and they’re guaranteed that for the rest of their lives and for the rest of their spouse’s life. That’s a senior obligation to the state, and nothing can be done about it. That promise is made. It can’t be reduced. In many cases with a lot of these, there are 80,000 members of the $100,000 pension club. That’s basically making public employees millionaires, because you would need several million dollars in the bank to guarantee a $100,000 or more pension for the rest of your life and the rest of your spouse’s life.
One city manager I was talking to said basically, he pays for two workforces. They’re the police who are actually on the force, and then the police that are retired. In some cases, it’s about the same size. That’s the problem. One of the solutions has been to reduce benefits going forward.
I worked for a newspaper group that actually had a very small defined benefit pension, which is rare in the private sector anymore. They stopped it. They said, “Steve, you’re good through today. Starting tomorrow you’ll be getting a lower rate.” In that case, it was zero, but they reduced the pension going forward. But they didn’t take anything away from me. They make good on all the accruals up to today.
That’s not allowed in California in the public sector, because there’s something called the California Rule, which is not even a rule. It’s a series of court decisions going back to the 1950s, which had declared that public employees cannot have any future benefits reduced unless they’re given something of equal or greater value.
Hawaii doesn’t have that problem, or it shouldn’t. This was from Joe’s study from 2018, where he reviewed the Hawaii Constitution, which protects accruals. But it doesn’t necessarily protect the full level of benefit going forward. That, for the longest time, has been the easy solution — just to reduce benefits going forward.
A lot of governments have reduced benefits for new hires, but then, of course, it takes 20 or 30 years before that starts making a difference. They need to be able to reduce benefits going forward for current employees. For a current employee, you’re not taking anything away from them. You’re just saying, “Well, starting tomorrow, you’re going to be accruing at a lower rate.”
Cities in California that have tried to do that. San Jose had an initiative that passed with 70% of the vote in that overwhelmingly Democratic city. San Diego had a similar one that — well, it wasn’t on the California Rule, but it was a reduction in pensionable benefits. The courts tossed out the San Jose one, and a California public agency threw out the San Diego one for a variety of different reasons.
What we’re facing, I think, Hawaii faces a similar thing: Legislatures that don’t want to deal with this problem in Democratic-oriented states. I’ve seen Republicans at the local level who haven’t been much better. But in California, certainly, the Democrats won’t even discuss it. The courts have made it impossible for localities to change the pension formulas going forward, and it doesn’t leave a lot of options. And that’s how we get to the bankruptcy idea.
One of our state senators, John Moorlach, who predicted the Orange County bankruptcy, has actually suggested that localities think about friendly Chapter 9 bankruptcies, where they just plan bankruptcies as a way to get out of some of these pension obligations that they can’t afford. They’re consuming larger and larger portions of the budget.
That’s what we’re seeing in Hawaii also, and now with the downturn, it’s just going to make these problems more pronounced.
I was in Hawaii a couple of years ago with Grassroot, and I remember looking at the salaries and the benefits packages there. They are generous, certainly, compared to the incomes of people in the surrounding communities, but they’re nowhere near where we’ve gotten to in California, and yet, you still have a significant problem.
There are any number of ways of reducing the formulas. Any actuary or any of us could sit down, and in a short period, come up with a variety of different proposals on what to do. We’d shift to a defined contribution plan, cap the pensions at, say, $100,000. Here in California, that might make sense. There are different hybrid plans that could be considered for risk-sharing pension plans. There are a variety of things, but the key thing is the benefit has to be lower than it is now, and unless you can fix that problem …
I don’t think states are going to be facing bankruptcies. They’re going to be facing cutbacks. There’s nothing you can do when you run out of money. I remember there’s a mayor in Pennsylvania, I think it was Wilkes-Barre (but I could have the city wrong), where they ran out of money and they cut public employee pensions. And the public employee unions went to court and won. And the mayor said, “Great, you won, but I still don’t have any money to pay you.”
I think that’s where we could be headed in various states and, of course, the worst-managed states like California are going to get there first. They’re just going to be running out of money, and they’re going to have to start trimming things back.
The only time I’ve ever seen any sensible decisions in state government here budget-wise has been during difficult times, and the only time we had pension reform here was in 2012 when the state had like a $30 billion budget and they had to deal with the issue. That’s where we’re getting. States, including Hawaii, are going to have to deal with the issue.
The biggest concern I have when I look at Hawaii’s numbers is that the funding rate of the pension system is so low, and if you get to too low of a percentage, if you’re 50% or lower, it starts becoming extremely difficult to ever catch up without massive infusions from the state. I don’t think it’s realistic to expect massive infusions from the federal government. I don’t think it’s fair, either.
We’re in a time of printing money, it seems, where they’re all sorts of bailouts, but the size of the budgetary problems are so large for the states that I don’t think the federal government can just paper over everyone’s problems. I think we’re heading into somewhat of a brave new world. Anyway, that’s my general thoughts. I was hoping we can take questions or have a discussion.
Akina: Thank you very much, Steven. I appreciate that very much. That was a good introduction. At this time, we’d like to ask all of our participants to get involved by sharing your comments or asking your questions. As people are getting ready to do that, and Joe will moderate it, let me ask you this, Steven: You cited our paper which indicated that we have $13.5 billion of unfunded liabilities in the employee retirement system. But in addition to that, we’ve got the other post-employee benefits, which is predominantly health benefits, bringing that total to $26.5 billion of unfunded liabilities. Have you seen some states handle their problem and dig themselves out of this hole, or what could you recommend to the Hawaii situation?
Greenhut: The unfunded retiree healthcare, and that was in 2018, so we’ll have to see what the numbers are now, but they’re going to be much worse than that. One article I was reading was pointing out how the funding levels of the retiree healthcare are even lower, and typically, retiree healthcare isn’t pre-funded to the same degree as pension. Pensions tend to be pre-funded, governments will invest the money and set that aside and try to get a rate of return. In many cases, in California certainly, those are not pre-funded. The unfunded liabilities can be much higher for retiree medical.
The answer is to cut them back. It depends per state, but they don’t have the same vesting protections as pensions. When Stockton went bankrupt, they were able to cut their healthcare. They had what one city council member called a “Lamborghini-style” healthcare plan. You work for the city for two months, and you and your family could have lifetime healthcare. They just cut that, and it doesn’t have the same level of protection, certainly in that case, as a pension where a pension is a senior obligation and a vested benefit.
Akina: I see that we’re starting to collect questions, and I’ll give you a few more minutes to get your questions in for Steven. Let me ask one more before we go to the Q&A.
Steven, you mentioned that some politicians are looking for bankruptcy solutions for states, and you even cited one as calling for a friendly Chapter 9 bankruptcy. But realistically, if such a thing were to happen, what would be the truly unfriendly consequences, and who would be paying the bill in the long run?
Greenhut: They were calling for it for municipalities, and it’s not unreasonable given that every other option has been taken off the table. The California Supreme Court right now has a second bite at the apple in terms of the California Rule. They had a chance a few months ago — or it was last year? They had a case where public employee unions had sued over the reduction of what’s known as “airtime” in the 2013 reform law, and that’s where you buy future pension benefits at a greatly reduced rate. The union said, “No, that violates the California Rule,” and a lot of people, including the former Gov. Brown, wanted the state Supreme Court to use that case to reform the California Rule. Instead, they just punted. They said, “Well, this doesn’t relate to the California Rule.”
Now it’s back again, with a different case, over a different pension-spiking issue. If the state Supreme Court changes the California Rule, and I’d like to think that Supreme Court justices are aware of the financial situation surrounding us, it’s probably less likely that municipalities will have to do that. But a number of municipalities have been talking about bankruptcy as these compensation packages start consuming their entire budget.
Other cities like one Orange County City, Placentia, started their own fire department as a way to get out from underneath the pension. Different things like that are better than bankruptcy, but if you have a municipal bankruptcy, that’s where public employees really do face a risk. But I tend to blame their unions for refusing to accept any sort of reasonable changes over the years. They have fought tooth and nail against everything.
I heard from one retiree in one municipality that did go bankrupt who took an actual haircut, and that’s going to be more likely if the unions don’t become more reasonable and the lawmakers don’t become more reasonable when coming up with — it’s easier to take reform plans. But they have to reform something because the trajectory of costs is just consuming budgets.
Akina: Thank you very much. We’ll go to our audience questions and answers now. To moderate that, Joe Kent.
Kent: Okay, and I hope I can inject a few of my own questions. I’ve got a lot of questions as well. We have a question from Lori who asks: “How are Hawaii pensions currently funded?”
Greenhut: How are they funded?
Kent: Yes. Is it taxpayers, do employees fund it, is it from the government? How are they funded?
Greenhut: All public employee pensions, they’re funded through — the agency contributes a portion of employees’ salary, and in many cases, the employee contributes a portion. In some cases, the agency also picks up the employees’ share. Usually, it’s some sort of combination. Then the pension fund invests the money, and they get a rate of return on the investment. That’s how they pay for the benefits.
The unfunded liability is the gap between the amount of money they have and the amount of money they’re going to need to make good on all the pension promises that they make. It’s a lot of guesswork. The public employee pension funds are guessing at a rate of return, so they need to hit, say, 7% to stay on track. If it’s a bad year, then the unfunded liability gets greater. If it’s a good year, it reduces. That’s really what it’s all about. There’s always this debate over what rate of return to predict. The pension funds, if they have a lower rate of return, they’re going to be able to be more closely matching what they’re getting in the stock market.
Kent: Also, when you say the agency pays, some of that is the taxpayers paying, right?
Greenhut: Oh, yes, that’s the taxpayers paying because the agency is funded by the taxpayers. I know in California every year, the state general fund pitches in a certain portion of money to shore up the pension fund, then the taxpayer pays again. I mean, it’s all taxpayer money.
Kent: Another question from an anonymous person. He says: “What does Hawaii need to do now to prevent the funding ratio from falling below the 50% threshold?”
Greenhut: They’re going to have to start looking at paring back benefit formulas going forward. It’s just that simple, and I think you can do it. Joe, based on what I read from you, is that it doesn’t seem to be an impediment to reducing those formulas going forward. You have to, of course, by the state Constitution, pay up everything that was promised up to this point. You have to look at the numbers after this whole coronavirus shutdown shakeout. We don’t know how bad it’s going to be yet, but something’s going to have to be done.
Kent: We looked at the Constitution in Hawaii, and it says that you can’t cut pension benefits basically for years that have already been worked. But for years that haven’t been worked yet, in other words, years going forward, those benefits potentially could be cut constitutionally. Anyways, we have a report on that, if you want to learn more about it, by the way, on our website at grassrootinstitute.org. On that question, what about health benefits? We have the pension benefit system, and we have the health benefits system, which is health benefits for public employees. Could those be cut?
Greenhut: I have to research to see what the restrictions would be in Hawaii. It’s my understanding that they should be able to be cut because they’re not a vested benefit to the same degree that pensions are.
‘m not sure what the latest court rulings or challenges are on that, but the problem is the same for all of these benefits that are exceedingly generous. I think if we look at benefits that public employees receive compared to what people typically receive in the private sector, they’re just so much more generous, and they have to be pared back and start more closely reflecting what other people are receiving. The trajectory is so bad because the benefits are so generous. It’s really that simple.
Kent: Another question from an anonymous person. “I’m retired for five years and get a state pension but it is not large, about $30,000 per year. I still pay a mortgage, and I need my full pension along with my social security to survive. Are you saying the state may reduce my pension because they have to because they may run out of money?”
Greenhut: I don’t know what Hawaii’s going to do. I would assume that they’re extremely mindful of what the public employee unions have to say and are probably not going to cut pensions easily. The reforms that I’ve been talking about have nothing to do with cutting the pensions of people who’ve already earned them. If you’re receiving a pension, and a lot of people even in the public employee realm, even though they tend to be more generous than what people receive in the private sector, the average public-employee retiree is not getting a fortune. In California, and certainly, to some degree in Hawaii, public-safety officials are receiving extremely generous, and some of them are exceedingly generous, pensions.
We’re not talking about cutting pensions for people who already have — that could happen in a bankruptcy. Some of us have been warning for years that we shouldn’t get to the point of municipal bankruptcy, that we need to make reforms so that the pension systems are sustainable, and the unions have resisted every one of those efforts.
Going forward doesn’t mean cutting the pensions of people already receiving it, it means reducing the accruals for people who are still working. If I’m working, I get the total accrual that I’ve been promised up till today. But starting tomorrow, you might get a new type of pension system that isn’t quite as costly or favorable as the one now. That should not affect people who are already receiving a pension.
Kent: Steve, in a way, it almost doesn’t matter if a state can go bankrupt or not, if there’s no money. I mean, the pain is going to either hit — it’s got to go somewhere, either into more taxes or more debt or into cuts. Maybe not to benefits, but to something else like public services or something. Isn’t that right that default can happen in a number of ways regardless of whether you go bankrupt?
Greenhut: Absolutely. There’s only so much money. It’s a scarce resource; we would all like to have everything we would like to have. When there’s less money coming into local or state coffers, then things have to change. What I’ve seen at the municipal level and in my reporting — and it’s mostly been in California just because that’s where I’m reporting on — what’s happening (is) called “service crowd out.” That’s just what the academics call cutting services.
Cities and counties are paying so much for the pensions, they’re paying so much for the shadow workforce, the retirees who are not cleaning the streets or patrolling the streets, that they don’t have any money. So what are they doing? They’re cutting the number of new positions and they’re shutting down services. I have a house in Stockton, which went bankrupt. It was impossible to get tree-trimming or any sort of services, and that destroys a community. When a city doesn’t do the basic functions, it really harms a community. And the reason they can’t do that, the reason they can’t have the level of service we would like, is because they’re paying so much in benefits to retirees whose unions successfully negotiate ridiculous packages.
What happens is the unions help elect officials to the City Council or the County Board of Supervisors, and then they get these ridiculous packages. Even with all of that, and even with all the harm it’s done to citizens, no one’s calling for current retirees to take a bath. We’re calling for cuts to new hires, which is already being done, and to people who are already working. Starting tomorrow, they might have to get a slightly lower pension formula to maintain this sustainability and to maintain the service level that — one city manager said in a newspaper, he said, “As cities, we’ve become pension providers that provide a few public services on the side.”
That’s really awful. I mean, it’s really unethical. The reason we pay taxes, the whole purpose of it, of government, is to provide services to patrol the streets and fight fires and maintain parks. All that stuff is getting obliterated because we’re paying the people who used to work for the city such extremely large amounts of money. And that’s the result of the political power that they have through their public employee unions. That’s not right.
The only way, though, that I see that public employees are going lose money is if their unions continue to refuse to reform anything, budgets continue (to fall), stock market continues to fall — and all these returns are based on stock-market returns — then as you say “we’re out of money,” then cities have to go bankrupt. That’s where the problem is.
I think unions and lawmakers, including those who are allied with the unions, need to see the writing on the wall and institute some reforms that get the cost down.
Akina: Steven, I’ve got a question for you. It comes from Mark Maniscalco. Is it likely that states will default on their bonds?
Greenhut: I don’t think so. I’m not an expert on bonds, but I can’t see that they’ll do that. The big fear I have is that they’re going to keep raising taxes. That seems to be the go-to answer for everything, is to just keep raising taxes. I expect more tax-raising and more seeking of bailouts. I think that defaulting on bonds, that gets into bankruptcy territory. I don’t think we’re going to see much of that. But when municipalities go bankrupt, they do give the bondholders a haircut. That’s what happened in Stockton, Vallejo, San Bernardino, Detroit.
Kent: Robert Hastings says, “I believe Congress passed a requirement that private pensions be adequately funded on a current basis several years ago. If that same requirement were applied to public pensions, will this force state and local governments to make tough choices in balancing their budget?
Greenhut: I like that idea. I’m extremely cynical, having reported on government, and I never underestimate their ability to undermine the intent of a law that might restrain them, or to kick the can down the road. My fear would be that they would say, “Well, we’ve got no choice but to raise taxes. We have to fully fund the pension.” I don’t know. But I like the concept, I’d have to look into how it might play out or what the loopholes might be, but they should be forced to fully fund their pensions.
California’s public employee retirement system: It was back in 1999, and this was the start of our state’s problems. Their pensions were funded at 101%, so they were fully funded. If they just left well enough alone, they’d be in probably perfectly good shape right now. Instead, the Legislature by an almost unanimous vote, including many Republicans, voted to institute the “3% of 50” retirement formula, which was essentially a 50% increase for the California Highway Patrol, and they did it retroactively.
If you were an officer who was going to retire tomorrow, you got up to a 50% pension increase going back to the day you started 30 years ago. That started the spiraling effect. CalPERS (California Public Employees Retirement System) said it wouldn’t cause taxpayers a dime. They were right. It didn’t cost a dime. It probably cost hundreds of billions of dollars after the stock market crashed. They had the stock market crash, and then the localities have been trying to dig out.
Anytime there’s plenty of money, anytime the pension funds are fully funded, legislators get really eager to increase the benefits. The unions say, “Look, you’ve got all this money just sitting in the bank, it’s time for raises. It’s time for a benefit increase.” I don’t know what to do about that. I’d elect legislators who are fiscally responsible, but that’s what happens. Then they get into these situations, “Oh my God, it’s a recession, who could have seen that coming?” Well, here, the Democratic governor, for the last eight years has been saying, “Look, a recession is going to come, we’ve got to do something about it.” So they put a little money in the rainy day fund, they pre-fund pensions a little bit. We passed a law for CalSTRS, the teachers retirement system, that would pay off their unfunded pension liability, but it paid virtually nothing for a few years, and then after everybody was out of the office, that’s when the big payments would go in. That’s how politicians deal with free funding and things like that. I’m too cynical to think that any law, per se, would work, but I’m game for listening.
Kent: Another question from Lori. She asks, “Are you saying that retired state employees have more protection than a retired county employee since you’re saying that counties can go bankrupt?”
Greenhut: That’s a good question. I hadn’t really thought of it that way, but I would think that makes sense. Counties and cities can go bankrupt, states can’t go bankrupt.
Kent: In Hawaii, though, the county retirees and the state retirees are all in the state retiree system, and I’d think the Constitution would still say that you can’t cut benefits going into the past. If a county went bankrupt, my thinking is that the budget and the debt would be on the table.
Greenhut: Well, the city of Stockton, their employees were in the CalPERS, the state system, (but) it’s the city or the county that owes the money. That’s my understanding of it. That may be so, but the state employee is more susceptible to state and whatever state changes. That makes sense to me, but I frankly have never thought of it that way before. But it’s clever, it’s something to think about.
Kent: Lori also asks, “Are pensions paid by certain taxes, or does it just come from the general fund?” In Hawaii, it does just come from the general fund and contributions from the employees as well. I think actually about 50% of the general fund just goes to what’s known as a fixed cost for pensions and benefits and debt, and the rest is used for public services. Any comment there?
Greenhut: They’re funded in various ways. Usually, it’s the agency, which is a taxpayer agency, and the employee, who receives their money from the taxpayer agency, pays for the investment. In California, the teachers are paid also from … it’s a state obligation, and then the general fund pays a certain portion.
Kent: Another question. Mark White asks, “Are there any pension revisions that unions in other states have accepted?”
Greenhut: That is a good question. I know some states have much better-funded pension systems. I know that they’re in — I think maybe it’s Kentucky, but I have to do some research. There are states that have defined contribution plans, and some states have options of a defined contribution plan. In California, our officials fight even giving that option in many cases.
Kent: Can you explain the difference between a defined contribution and a defined benefit?
Greenhut: Oh, sure. A defined benefit is (when) the public employee is guaranteed a pension based on a formula, really come hell or high water. You get 3% of 50, or 2.7% at 55. A 3% of 50 is 3% of your pay times the number of years worked. If you work for 30 years, you get 90% of your final year’s pay forever, and it’s a senior obligation of the state, and that’s what the pension is going to be. Even in downturns, the state has to come up with the money.
A defined contribution, which is what I get at my private employer, and most private employers (offer), (is) 401(k). I have a certain percentage of my money deducted each month. I pick the retirement account that it’s going to go in, and in some cases, the employer will match or contribute a percentage, and the main difference is, obviously: If you get a defined benefit, you as an employee are going to get a much greater benefit, most likely, at the end of the time you’re retired. Define benefit, you don’t own it. So, when you die or your wife dies, that’s that.
I own my 401(k), so my heirs would get that. The main purpose from a public accounting standpoint is that the public agency knows what its commitment is going to be with a defined contribution. They know they’re going to give X percentage to X number of employees, and if the market goes down, it really is on the employee. I haven’t been looking at my 401(k) since the stock market has started its free-fall, which is probably good for my blood pressure not to have a look. But if you’re a public employee, it doesn’t matter. It could just drop, and you’re guaranteed that pension based on the formula that you got when you signed up for it.
Kent: Another question: “Does Hawaii still have the high three pension spiking system?” In Hawaii, by the way, I think we do still have it. It was stopped in 2012 for new employees going forward, but all the employees that were hired before 2012 can still do that. Can you explain how pension spiking works?
Greenhut: I don’t know that system, but pension spiking is a way to artificially inflate your final year’s pay so that you get a permanent increase.
Kent: Hawaii is the highest three years.
Greenhut: Yes. California used to do the highest last year. Before the 2012 pension reform, PEPRA, Pension Reform Act. What would happen: In one case I read about in The Sacramento Bee, a Sacramento state employee wanted to spike her pension, artificially inflate it. So she moved to the Bay Area and slept on a couch for a year because it’s much more expensive in the Bay Area, obviously, so you got a 15% or 20% salary bump for being in the Bay Area. She bumped her salary by 15% or 20%, whatever it was, and then the final calculation was based on that bumped salary.
After the Pension Reform Act, we average the final three years. But it’s the same thing. There are all sorts of different gimmicks. Some agencies would allow the use of vacation time or special pay, hazard pay or all sorts of different things like that, that you just bundle into the last year’s pay. There are all sorts of other game playing. We had dropped programs, defined retirement option plans, where let’s say you’re 50 years old and you don’t want to retire really. You don’t want to actually retire, you’d like to keep working. I’m 59, so I wouldn’t want to have been retired at 50. Your agency still wants you to stay, they don’t want you to retire.
But the pension formula is so generous in Public Safety that essentially, you would be working for free, because you’re guaranteed almost your entire salary beginning at age 50, forever. Then it was a double-dipping plan. You would keep working, and you would bundle that, or you would get your final pay when you stopped actually working. There are all sorts of gimmicks like that that add a lot of expense to the bottom line of agencies. They also seem somewhat unfair. They’re just ridiculous. Nobody’s against them having a decent pension, but these things get —
Kent: Martha Staff says Hawaii basically cut its main industry, tourism, over the pandemic, so we’re going to collect a lot less taxes this year. How can the state get a handle on that situation with the huge tax drop?
Greenhut: I wish I knew, everyone wishes they knew, because that’s why we’re getting into these massive deficit situations. What’s going to happen is the states are going to first start begging the federal government for bailout money. Then they’re going to start talking about furloughs and some reductions in cost. I’m cynical, so I think they’re going to look at ways to raise taxes. If the money’s not there, they’re going to either have to get a bailout or get the money somehow, so cutting services or raising taxes.
Kent: Joel Van Brunt asks: “Do any public unions have defined contribution plans instead of defined benefit plans?” In Hawaii, all public unions have defined-benefit plans, but maybe in other states, they don’t.
Greenhut: I think there may be some as options. In California, basically, although all the public employee unions have defined-benefit plans, I know there are a few of them — I think the university systems — that you can opt into a defined contribution. But yes, I have to research which ones have them, but it’s overwhelmingly defined-benefit plans in the public sector, that’s just what it is.
Kent: Few last questions here, Gail Cotham asks: “Is it true that benefits are higher than in the private sector because pay for state workers is lower?” I see. In other words, the state and government workers get lower pay but higher benefits Is that true?
Greenhut: Well that was the old deal, right? Years ago, that was the deal. It was true, where in general, a public employee would trade-off, would get a lower salary in exchange for a better benefit package. But from what I’ve seen, and I did a bunch of research on California, their compensation levels now are generally higher. You have to look carefully at who you’re comparing to, but they generally have better pay throughout many categories in the public sector now than in the private sector, although in some of the higher categories, you certainly make more money in the private sector.
That deal isn’t really true anymore, and also, the public employee pensions are so much higher than in the private sector, and the job security is much higher, and the vacation time tends to be much higher. They’re supposed to be — And I have nothing against public employees. My dad was a teacher, my wife used to work for a public library. — but they are supposed to be our public servants, and I think it’s gotten out of hand largely because of union political power. Yes, there’s some truth to that, but it’s not particularly true anymore.
Kent: Okay. Well, our final question here, I guess two questions. One is: “Can you cite any examples, like a municipal or state budget, that were improved by relaxing regulations and promoting a free economy?” We’ll ask that first.
Greenhut: Whether there any examples of reducing —
Kent: Oh, I’m sorry, yes, reducing regulations to promote a free economy. Are there any examples of that working?
Greenhut: Let’s see. I’m a big believer in reducing regulation and cutting taxes and letting free people thrive. I know the city of Anaheim, when I was covering it — this was a number of years ago — they started the “freedom friendly agenda,” where they really reduced a bunch of regulations and cut business taxes and made it easier to get business permits. They deregulated land use, and they saw quite a bit of an astounding amount of growth in the city.
I think the history of our country shows that lower regulations, in general — I’m not arguing against all regulations — but lower regulations spur economic growth. I have seen cities that have been able to get out from under some of their pension liabilities. I had mentioned Placentia in Orange County, California, where they’ve been able to reduce, save tons of money. They predict $28 million in savings over 10 years just in creating their own fire department. That money can be used for infrastructure and important things.
Kent: Also, I visited Sandy Springs, Georgia, and its surrounding counties who have all hired private contractors and private companies to run most of the government services, and I think they have zero unfunded liabilities for pensions and everything. That’s an example.
Greenhut: Yes, years ago, I worked at a military base, but I worked for a private contractor, and they had three private contractors who ran the entire base, and every five years they would put it out to bid, and the contractors would compete for it. I didn’t do any analysis, but I’d like to think it was more efficient than just having the bureaucracy run things.
Kent: Last question here: “How do we take a stand on the taxes we pay to ensure that we continue to get the services that had been promised?”
Greenhut: (As) someone who’s reported on City Council or county governments, less so in state government, but if you show up at your locals, and you politely speak out and contact your city officials. I mean, I’m not naive. I don’t think city officials are as responsive as they ought to be. But there’s something to be said for civic engagement. And also a plug for the Grassroot Institute, there’s something to be said for supporting organizations that keep track of budget issues and pension issues and provide you the information. That’s all we can do as citizens, right?
Akina: Steven Greenhut, I want to thank you very much for being with us today. You’re at the R Street Institute, and you did a great job. Much mahalo from Grassroot Institute.
Greenhut: Thank you. I appreciate it. I had fun.