The Outsized Power of California's Public Employees (w/ Steve Greenhut & Mike Green)
MIKE GREEN: Steve, you and I met for the first time about 10 years ago in the aftermath of the Global Financial Crisis in New York City. You came to the Manhattan Institute to speak about a book that you had written called, Plunder. Maybe you can tell us a little bit about Plunder, what it was about? STEVE GREENHUT: Sure. I call it the subtly titled book Plunder. It's about public employees and it's based on my reporting when I was at the Orange County Register, and covering the 34 cities there in the county, and I was looking at their finances, looking at local politics, looking at the pension crisis that was starting to evolve. The main takeaway that I had through my reporting was the outsized power of public employee unions, especially police and fire unions, who seemed to run amok in local city councils. They run amok a few blocks away here in the State Capitol, but there aren't many countervailing forces at the local level that come anywhere close to the power they have. As a result, they've gotten a level of pay and pensions and medical benefits that dwarf other public employees and certainly are way beyond what the average person receives. MIKE GREEN: Well, and this was definitely true in 2009 because we'd had the Global Financial Crisis, we'd experienced severe financial distress in the US equity markets, the pensions had underperformed, particularly over the prior decade relative to expectations. We've had a number of guests here in Sacramento talk about SB 400 and the expansion of the pension benefits that occurred during the dot-com cycle, but that's all been fixed now. STEVE GREENHUT: No, it hasn't been fixed. We haven't done anything about it. We, I shouldn't say we, the state government and the localities and now, the localities are suffering. Now you mentioned SB 400, which was really started the huge problem we have in California. That was passed in 1999. Overwhelmingly, the CalPERS, the California Public Employee Retirement System proposal, they said it wouldn't cost taxpayers a dime. They assumed by 2009 that the return on investments the stock market, the Dow Jones would be hitting 25,000 to not cost taxpayers a dime. I think it was under 9000 in 2009. They were right. It didn't cost taxpayers a dime, it costs taxpayers 10s of billions of dollars and that was the start of it. It was retroactive. The SB 400 gave retroactive benefit increases, 50% increases to California Highway Patrol, something called 3% of 50, you receive 3% of your final years pay times the number of years worked. If you worked 30 years, you get 90% of your final pay, plus the various pension spiking gimmicks that can push it even higher than that, and it's a guaranteed pension. They passed that and they did it retroactively. If I'm about to retire tomorrow, I get the 50% hike going all the way back to when I started 30 years ago. Then the goal was to have that copied throughout the state and most police and fire departments, not all but most of them across the state did the same thing. It just spread like wildfire, and what we got was a massive increase in the cost of pensions. It was supposed to be paid for by stock market returns, but what goes up must come down and then we had the financial crash. All of a sudden, we've got into these levels of unfunded pension liabilities, which just a fancy word for debt. The localities many of which supported this and lobbied for these benefits. Of course, a lot of the people working for the city got a lot of benefits, too, they just never-- they acted like, oh my gosh, I can't believe how this happened. Well, it happened because you gave away the store and then the stock market went down as it ultimately does every once in a while. MIKE GREEN: It feels inevitable that the stock market could go down and you're exposed to that type of risk, but we forget to a certain extent the dynamics that existed at that time period because the dot-com cycle had led to such an extraordinary windfall for California across geographies. Southern California had the Qualcomms, etc., of the world, Northern California in terms of Silicon Valley, had all sorts of exposures to different technology companies, Cisco, etc., that an IPO and made their employees tons of money. It was a very real question how could we attract and retain public employees in a very low unemployment environment in which the private sector was doing so extraordinarily well? Does that sound familiar, or was it just a wholesale giveaway the store? STEVE GREENHUT: I lean more towards the wholesale giveaway, trying to get people to work for the salaries that are offered, especially in public safety never been a problem. I remember when San Diego was hiring firefighters and they had to open up an arena because there were so many applicants. At one point, there were like 22,000 applicants for every firefighter job, that might be a suggestion that the compensation is out of whack. Currently for firefighters in California at the municipal level, it's a little lower at the state level, but at the municipal level, it's around $200,000 is the average compensation package for a California firefighter. Manhattan Beach, their average is top 300,000. There are a dozen cities where it's above 250,000. It's not hard to find people who will apply to those jobs, and it's ridiculous. That's the excuse they used and there are certainly some areas where there might have been some difficulty attracting people but certainly not in fire, and there are plenty of people. For the higher paid, higher pensioned jobs, there's no problem getting people. MIKE GREEN: That's easy for you to criticize, because when you were a reporter at the OC Register, so you were receiving $300,00, $400,000 a year in total compensation as well. STEVE GREENHUT: Every day, every day. MIKE GREEN: Every day? Daily compensation. That actually brings up an important point that I've talked about with other guests. The role of newspapers like the OC Register in terms of having local beat reporters focused on this information, how has that changed? STEVE GREENHUT: Well, there just aren't as many reporters. The whole newspaper industry has suffered. We've seen the result and without as much local coverage, you have fewer people-- I think the papers, a lot of the papers, the Register and others do a good job. They just don't have the number of employees and the number of people focusing on local content. Also, what you're seeing is a lot of the papers have become more regional and they have to do more content sharing its economies of scale. It makes perfect sense. We've seen what's happened in the journalism industry. It's changed a lot. A lot of the online journalism, there's good stuff everywhere, but there's also a lot that doesn't do in depth reporting. Things like pensions, you really need reporters to be looking at the numbers and city budgets. I don't think there's as much focus, there's a lot of opinions stuff out there, I just don't see as much focus on local budgets. MIKE GREEN: Well, there's also the underlying dynamic of when the news was distributed and as in 2008-2009, there was still quite significant debate about what the role of local news was. Warren Buffett famously invested heavily in community newspapers, which is now looking pretty much like a zero for the investment that he made. This idea that that channel control the information source for most people facilitated the awareness of that information. STEVE GREENHUT: Well, there are all sorts of ways to get information. There's some websites I go to that have good pension information. It's just sometimes you have to look at the numbers yourself. There's one site I like called, Transparent California. It will boggle your mind when you start looking at the pay and benefit packages that California public employees receive. You just see page after page of police sergeants with total compensation packages in the $300,000 to $600,000 range. Just look at it for yourself, and that's why we have a pension problem in California because we're paying public employees based on their political power and the deals they're able to get at the local level and in the State Capitol. You're talking about in '09, there's talk that well, we're in a new economy that's never going to go down again. MIKE GREEN: It's '99. STEVE GREENHUT: '99. Yeah. '99, I'm sorry. By 2009, we saw that isn't true. In the ensuing years when the economy has bounded back, what has the state legislature done? What have city councils done? They're back to the same thing. They're pretending that the stock market will continue to just perform and perform. It's a little bit ironic seeing California Democrats who they have fire in control of everything in the Capitol, wholly dependent on the Trump economy to keep their budget. We just had a record setting more than $220 billion budget and the governor's putting a few more billion towards pensions but throwing another $3 billion towards a pension hole, that's estimated anywhere from 350 billion to $1.5 trillion, depending on whose calculations you want to use and of course, defined benefit pensions are based on guesswork. CalPERS and CalSTRS use a rate of return, they expect a rate of return of 7%. It's reduced somewhat from what it was before, but those are pretty high rates of return. I know most people, if you could guarantee a 7% rate of return, a lot of people would just put their money there. It's a pretty aggressive rate of return still. If you go closer to the Treasury rate, then the unfunded liabilities are much higher than that, but here's the big question. It's been another decade of really well performing record stock market returns, and CalPERS and CalSTRS are only funded at around 70%, meaning they only have 70% of the funds needed to fulfill all the pension promises made to current retirees and current workers. What happens if the stock market does go down? I was in the press pool for a long time and Jerry Brown, I actually like in many ways, he would always-- at his budget and may revise, he would always have those charts and he'd have these charts and he points and it showed down years outnumbering up years. He would always warn of a recession. The recession is right around the corner, there's always a chance of recession. I think he's right. We don't have one. I don't want one, but at some point is more likely than not that we're going to have a recession. Then what happens to those unfunded pension liabilities? What happens to these cities that are begging the state for some relief? Cities are pushing and some of them 16% of their budget going to pensions. For police, typically 50% of the salary they get goes to pensions and the subsidies, it's up to 100%. MIKE GREEN: Well in in Vallejo, California, you had a statistic, I believe there was 85% of the budget for public employee salaries or public employee compensation was going to pay pension costs before they filed for bankruptcy? STEVE GREENHUT: I don't recall. 85% sounds high for just pensions. I would think that would be for total probably-- MIKE GREEN: I think it's 85% of their total public employee spending, so roughly half of the total amount was going to the pensions. STEVE GREENHUT: Well, what I can say is-- I don't have statistics in front of me-- is that the percentage of budget going to pensions and public employee compensation overall, is skyrocketing. In San Jose, it went up 350% in a decade before the city put a ballot measure to reduce pensions which was then overturned by the courts. Cities are in a jam. There's nothing they can really do and they're watching the curve go like this. What are they doing? They're cutting their workforce. A lot of cities, when they came to this CalPERS meeting in 2017-- MIKE GREEN: Just very quickly, CalPERS is California Public Employee Retirement. STEVE GREENHUT: Retirement system. Like Oroville, the city finance director in Oroville said we're talking about the B-word, the bankruptcy word, they're worried, they're watching. They said they reduced their workforce by a third. That's what we're seeing. We're seeing cutbacks. Assemblyman, former Assemblyman Joe Nation, Democrat from Bergen County, who now is at Stanford Economic Institute. He did a study a couple years ago about crowd out which is just a pension geek term for we're spending so much on pensions that were crowding out a park maintenance and everything else. I have a house in Stockton, I'm in Stockton a lot. It's a nice old city, and the infrastructure is crumbling. They don't have the money, so much of the money is going to pensions so even after bankruptcy, city officials chose not to abrogate the pensions, reduce the pensions even though the judge, Judge Klein, said that they could, instead they raise taxes. On the March ballot, 231 California cities have some-- and school districts have some tax, bond, school bond, parcel tax, transient, occupancy tax, some tax measure. None of them are going to be pitched as a pension tax. They're a public safety tax or a school facilities tax, but money is fungible. If you use all your money for public employee compensation, you got to find money elsewhere. They go to the taxpayer. Just like after Stockton had its workout plan approved by the bankruptcy judge, they went in and asked for a public safety tax and of course, local people in cities, they want to have safe streets, so they usually vote yes but that money is needed because of the pressure coming from pensions. MIKE GREEN: What can your average voter actually do? What can your voter do in the face of that? Because nobody wants to run the risk that those in charge of public safety say, well, you didn't fund the public safety tax, therefore you have none. STEVE GREENHUT: Well, it's the dilemma that we always get up at the legislature. They hold transportation funding hostage. In other words, they spend all the money on these ever increasing general fund budgets, they spend it on various and sundry programs of all sorts, and then they don't adequately fund road infrastructure. They certainly don't adequately fund water infrastructure. Then they put a bond on the ballot saying, hey, if you don't vote to raise you-- well, state bonds don't directly raise your property taxes, local bonds do but if you don't vote for this additional borrowing, you're going to have crummy roads and you're going to have inadequate water infrastructure systems. Then voters tend to vote yes. Then they still have crummy roads and crummy water infrastructure systems because then, especially if you look at some of the bonds, a lot of them go more to pork barrel projects and to things, but some of the spending helps. Yeah, it's the dilemma. I tend to vote no, I believe in enforcing trying to force the government to live within its budget. They're never going to do that. I don't think they're going to fix the pension problem until there actually is a recession and then everyone's going to be running around the Capitol and oh, my God, we didn't see this coming. It's the perfect storm. Yeah, there's so many perfect storms. No, it's a storm that you've seen coming for a decade. MIKE GREEN: It'll be the most beautiful storm. The biggest, most beautiful storm. It will be huge.