Sunday, November 22, 2009

The California Debt Crisis, Sinking in Quicksand

As California seemingly sinks deeper and deeper into debt we have to ask the question, “How did we get here and can we fix it?” What follows is a discussion on the symbiotic relationship between elected government officials and public employee unions.

On May 23, 2008 the City of Vallejo filed a case seeking bankruptcy protection under Chapter 9 of the United States Bankruptcy Code.[1] In its filing it disclosed that the cost of public safety salaries represented 74% of its $80 million budget.[2] The average fireman in Vallejo takes home $170,000 while City Manager Joseph Tanner’s total annual compensation is more than $400,000.[3] And the response is to cut services not salaries.

Not far behind is the city of Bakersfield with its “3 at 50” retirement benefit. In 2001 Bakersfield’s city council voted to allow police officers and firefighters retirement pay equal to 3 percent of their best year’s salary for every year they worked, to a maximum of 90 percent. Their retirement eligibility begins at age 50.[4]

In 1999, in the transition between governors Pete Wilson and Gray Davis, California SB 400 was passed. Sponsored by the California Public Employees Retirement System and proposed by the Senate Public Employees and Retirement Committee it cleared that committee by a vote of 4-0. It cleared the Senate Appropriations Committee 11-0 and passed on the Senate floor 35-0. In the Assembly it garnered only 7 nays to pass and become law on September 10, 1999 by a vote of 70 ayes to 7 nays. This bill established a new level of survivor benefits for state and school employee participants comparable with Social Security and made significant increases to the benefits of state and school employees. Among others it provided for retirement at age 50 and cost of living adjustments. Benefits were increased even more for “safety” employees, that is state police and firefighters.[5] It became a mammoth unfunded liability and the model for municipalities around the state.

Hit by the twin financial downturns caused by the dot-com bust and 9/11, Governor Gray Davis struggled with mounting deficits and a dysfunctional budgetary system. Finally, blamed for the electricity crisis that hit California, Davis was recalled in 2003. He was replaced by Arnold Schwarzenegger who ran on a campaign of fiscal responsibility. When the state legislature rejected his spending limit proposal a compromise was struck and Proposition 58 requiring a balanced budget appeared on the March 2004 primary ballot and was approved by the voters. Still the deficits persisted and the pessimistic forecasts became reality.

Spurned by the state legislature but emboldened by his election victory Schwarzenegger turned to the voters. In 2005 he backed four initiatives designed to restrain some of the leverage public unions held under current law. Proposition 74 extended the probationary period for new teachers from 2 years to 5 and made it easier to dismiss teachers with unsatisfactory performance. Proposition 75 prohibited public employee unions from using union dues for political purposes without the consent of the union members. Proposition 76 limited the growth of state spending to the growth in revenues and gave the Governor certain veto powers. Proposition 77 changed the way California draws boundaries for congressional and legislative districts giving the power to a panel of retired judges approved by the voters. Opposed by the California State Teachers Union and aggressively financed, all four initiatives went down to defeat.[6]

Public employee unions hold a unique position in society. Unlike unions in the private sector where demands are constrained by the ability of a business to finance wage and benefits packages or go out of business, municipalities are monopolies. Public unions are well financed. Unlike private unions where dues collection is a cost, public union dues are deducted from pay and the cost of administration and collection is paid for by taxpayers. Because of the monopolistic nature of public services (if the local policeman doesn’t show up you can’t call a competing police station) unions hold a gun to the head of the public that pays them. With the potential for disruption in services from municipal transportation to schools, firefighting services to police protection, voters put enormous pressure on their elected representatives to settle public sector labor disputes.

But the root of the problem is the ability of public unions to influence the outcome of elections. As noted above the unions are highly organized and well financed. When legislation is proposed the union and union members are well versed on the effect, often involved in writing the legislation as in SB 400. Union leaders lobby on behalf of their constituency, and unions are well represented at the ballot box. Often, legislation is targeted and very specific in its desired effect and misses the scrutiny of the public. Set against this specialized and skilled lobbying machine is the typical voter. So far in 2009 there have been 1,589 bills introduced in the California Assembly and 833 bills introduced in the Senate.[7] The time and energy to simply understand and track a mere handful of legislation is daunting. The prospect of over 2,000 pieces of legislation each year leads to what is called “rational ignorance”, a condition that occurs when the cost of educating oneself on an issue exceeds the potential benefit that the knowledge would provide.[8] And with this power in place the unions are in a position to elect their bosses, the very individuals the public relies on to manage the finances of government and negotiate union contracts. It is pretty easy to see who wins and who loses in this proposition.

And unions now have the strong backing of the White House. When Governor Schwarzenegger attempted to reduce wages for unionized home care workers President Obama threatened to withhold billions of dollars in federal stimulus funds if the salaries weren’t reinstated[9] placing the federal government squarely in the middle of the fiscal problems of the State.

On January 30, 2009 the newly inaugurated president signed three executive orders,[10] 13494, 13495 and 13496 strengthening the union’s position in any projects funded under ARRA (the American Recovery and Reinvestment Act) and overriding state labor rules.[11] According to The Kansas City Star, “President Barack Obama …issued an executive order backing the use of union labor for large-scale federal construction projects.

“The order encourages federal agencies to have construction contractors and subcontractors enter project labor agreements. Those agreements require contractors to negotiate with union officials, recognize union wages and benefits and generally abide by collective-bargaining agreements…”[12]

And on the same day as those executive orders were signed a group of union leaders was welcomed to the White House. “I do not view the labor movement as part of the problem. To me, it’s part of the solution,” Mr. Obama told the group.[13]

On November 18, 2009 the California Legislative Analyst’s Office released its report on California’s fiscal outlook projecting a deficit $20.728 billion[14] for fiscal year 2010.

There is an unsettled debate over whether higher taxes and regulation are causing wealthy individuals and businesses to leave the state. What is not open for debate is that the cost of staying is rising while the quality of services provided by local and state government is declining. The poor are disproportionally impacted and that is the exact opposite of the goal of the so-called socially responsible. When a county employee recently told me about how tough it is to cut benefits for the poor, as the county has been doing repeatedly while grappling with their budget issues I suggested, “Why don’t the county employees take a pay or benefits cut and ease the burden for the poor?” The answer was immediate and unequivocal, “Are you kidding? We wouldn’t do that!” No doubt.

The best analysis I have seen of the power of public sector unionism was published by the Cato Institute on September 28, 2009.[15] It ends:

“As keepers of the public purse, legislators and local council members have an obligation to protect taxpayers’ interests. By granting monopoly power over their governments’ supply of labor to labor unions, elected officials undermine their duty to taxpayers, since this puts unions in a privileged position to extract political goods in the form of high pay and benefits that are way above anything comparable in the private sector. Under such an arrangement, government, being itself a monopoly, leaves the citizens whose money it squanders with no options.”


  1. Thanks for this- Mute just posted a new article about the crisis at

    Crisis in California - Everything Touched by Capital Turns Toxic

  2. I'm interested in getting a pool of citizens together to create a proposal back to the State of California to turn this around..


  3. Hello,

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    I would hereby like to request an opportunity to write a guest post on your site, ofcourse free of charge. You can send me your preferred topic, if any, and I would be happy to write an article on it. I can show you some of my past work that have attracted good number of visitors.

    Anyways, you are doing a great job on with your blog and I'd like to talk to you in person, so I'd be happy if you could answer either way!

    Samantha Taylor.

  4. To Jed:

    If you are a California resident, you can get a pool of citizens together to vote for Meg Whitman for Governor in the November General Elections. She has a comprehensive plan in her policy magazine on page 26 to combat this issue. You can find out more on her website:

    This is a very serious issue that needs a serious leader to help inform the public.

    To Paul Tuttle,

    Thank you for writing this article: this was very clear, concise and to the point about the issues of Unfunded Liabilities. I appreciate you spending time on this issue.