California Pensions Forcing Cities Into Bankruptcy

Los Angeles police discuss their day's assignments around the Staples Center on July 6. i i

Los Angeles police discuss their day's assignments around the Staples Center on July 6. Police officer are just one group that benefit from California's generous pension system, which could cause several cities to go broke if it's not amended. John Moore/Getty Images hide caption

itoggle caption John Moore/Getty Images
Los Angeles police discuss their day's assignments around the Staples Center on July 6.

Los Angeles police discuss their day's assignments around the Staples Center on July 6. Police officer are just one group that benefit from California's generous pension system, which could cause several cities to go broke if it's not amended.

John Moore/Getty Images

One of the lessons from the bankruptcy of General Motors was not to promise goods if you can't deliver them. For GM, the goods were generous pensions to retired employees. California has made similar promises: Retired government employees receive the most generous pensions in the country.

And these rising pension costs loom as the next big budget buster in the Golden State.

In 1999, it was the best of times, and hardly anyone seemed to foresee the worst of times. With the state's economy riding high, California shared the wealth with its public retirees. It passed a law lowering the retirement age, making it possible for those with more than 30 years of service to retire with annual pensions approaching their top salary year.

A decade later, with the state's economy in shambles, these very pensions are in the crosshairs of many concerned Californians.

"We have the most extravagant benefits in the nation," says Keith Richman, a former Republican state assemblyman who now runs an advocacy group called the California Foundation for Fiscal Responsibility.

Generous Pensions Not Sustainable

At his office in Burbank, Calif., Richman navigates to his group's Web site, where he's posted a list of retired public employees in California who receive six-figure pensions. Number one is Bruce Malkenhorst, a retired city manager near Los Angeles who collects a half-million dollars a year. Next on the list is Joaquin Fuster, who gets $296,000. And James Stahl, who was with the Los Angeles County Sanitation District, receives $265,000.

There are more than 5,000 Californians on this list. These six-figure pensions make up only one percent of retired public workers, but many others still have a sweet deal. Take cops and firefighters, for example: If they retire, say, after 30 years of service, they make 90 percent of their top salary each year — guaranteed — until they die.

Still, most retirees are more like 89-year-old Max Turchen, who eats lunch at his neighborhood deli in Los Angeles. Turchen worked for the state as a welfare agent for 28 years. His pension is around $36,000 a year. Not much, but more than the state can afford. Ten years ago, California spent $160 million on its retirees. This fiscal year it expects to spend $3.4 billion. Hardly anybody thinks this is sustainable, including Turchen.

"I can't argue too much about it, because it's true: Things are costing more and the cost has to be borne by the people who receive the benefits, too," Turchen says.

City Bankruptcies Inevitable

The agency that manages California's pension system is called CalPERS. It is the largest pension fund in the country. Its investment portfolio is so immense that changes to it cause ripple effects throughout the stock market. Just a couple of years ago, CalPERS' asset value was worth $250 billion. It lost a third of that in this recession. Now, for the hundreds of cities, counties, and school districts that use CalPERS to manage their pension funds, this loss means they'll have to dip further into their own budgets to pay the promised pensions.

"It is a difficult proposition to come up with money when the markets go down, not to mention when we have the most historic downturn since the Great Depression," says Pat Macht, spokeswoman for CalPERS.

Already, one California city has declared bankruptcy due in large part to its pension payouts. Others are in the brink, forced to make painful cuts. In Long Beach, pension obligations make up 10 percent of the city's budget.

"So I'm having a problem paying for all the employees we have, right here, right now, all the community services we're providing right now," Lori Ann Farrell, the city's chief financial officer. "I really don't know how we'll pay for these pension costs."

Richman of The California Foundation for Fiscal Responsibility says more city bankruptcies are inevitable.

"Those cities and counties are going to die from a thousand cuts in services," he says. "Our competitiveness in the global economy, our quality of life as citizens of the state of California are all going to suffer."

Numerous attempts in Sacramento to cut back pension obligations over the years have failed. So Richman is preparing a ballot initiative that would raise the retirement age and lower pensions for all future public employees in the state.

Rob Schmitz reports for member station KQED in Northern California.

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