While debt is sometimes necessary for major events like higher education, a car or a house, it can strangle financial freedom for individuals in a multitude of ways. Paying interest on a loan is one of the most painful of financial activities and limits the ability to save for other investments.
Debt is a natural and sometimes necessary part of life, but I’m no fan of it. Government officials shouldn’t be either.
And yet it seems that many in government treat debt as if it is an annoying acquaintance to be shunned and ignored, with the hope it goes away. When most people think of government debt, they think of the federal deficit, which is different than the national debt. The federal deficit is based on that fiscal year’s revenue and spending, but the national debt is ongoing. It is about $21 trillion and growing, with much of it held by foreign investors. This is one of the reasons why rising interest rates and the trade war with China holds many with concern, but that is a topic for another day.
Another debt that people think of in California is the state’s deficit.
While the state’s deficit was $27 billion when Gov. Jerry Brown took office in 2011, it has dropped substantially through a combination of frugality and a booming economy. An identified $35 billion wall of debt has since been whittled down to about $5 billion. A rainy-day fund established through 2014’s Proposition 2 is now maxed out at $13.8 billion, though many — myself included — contend it would take a quick economic drop to eat through that in short order.
And long-term liabilities remain. The state of California has $291 billion in long-term costs, debts and liabilities — largely related to retirement costs of state and UC employees. While the state has been aggressive in paying down these obligations and ensuring that future costs remain lower through capping pension benefits and asking for more worker participation, along with increasing the retirement age, this obligation remains now and for the foreseeable future.
This obligation has origins in retirement plans approved in 1999 in which public safety employees were granted 3 percent at 50, which meant a worker could collect 3 percent of their pay for each year worked at the age of 50. That means someone who started working at 20 years old could retire at 50 with 90 percent of their pay as a pension. As life spans extend, we are responsible for these pension payments for longer periods. This type of plan expanded to other government workers at the municipal level and, in the early 2000s, with the dot-com boom, it was believed that ever-growing stock market returns would allow for local government payments to remain low. As a reminder, the dot-com bust proved that was not to be the case.
In the aftermath, we were stuck with these obligations but, make no mistake, these are obligations that must be met. A promise is a promise, and there is nothing worse than changing a worker’s pension or health care agreements after retirement. It should also be said the eye-popping pensions we hear of are outliers, and most workers have modest retirement packages that are well-earned through their service to us.
Still, there was an amount of pension reform that took place during Brown’s tenure, and cities and counties also did their part in ensuring that newer hires did not match the previous agreements and add to the obligation. Yet the obligation remains. The California Public Employee Retirement System recently lowered its expected rate of return to 7 percent, which makes an abundance of sense since any stock picker knows an overall long-term market return of 8 percent is pretty good and retirement systems tend to gravitate toward safer, and lower yield, investments. But that meant that the money had to made up somehow, and it is in the hands of local government officials who must decide whether to pay more into the funds. With some cities and districts luckily contending with surplus revenue, some are deciding to make lump sum payments to get ahead. Others aren’t sure if it’s worth it. Still others are considering ways to make their budget forecasts work into the future through revenue generation ideas such as increased fees and new taxes. Many of those suggested new taxes are painted as ways to maintain a range of government services, but really they are needed because of pension obligations.
Debt is no way to manage your personal finances, and it is no way to manage our local government finances. In whatever form it takes, eliminating ongoing debt as quickly as possible is simply the best policy. The sooner it is done, and the most honestly, the better.
Jon Mays is the editor in chief of the Daily Journal. He can be reached at firstname.lastname@example.org. Follow Jon on Twitter @jonmays.