As Crane explained, financial markets are a lagging indicator because
debt is so senior that there's virtually no chance the state will
default on it. He makes that point most compellingly in the testimony
linked above. Basically, the state first pays Prop. 98 dollars
(mandating that 40 percent of the state's general fund goes to k-14 education), then debt service and pension obligations. There's
plenty of money to cover the debt service, in other words. That means
that all the cuts will have to come out of human services, parks and
recreation and other budgets and that even a blip in the markets won't mean too much since investors know they will be paid.
So while, as I argued, the financial markets might send some warning signs through downgrading, etc., Crane's point is a broader one -- the markets aren't too worried about it, at least not enough to force the kind of substantive reforms needed to solve the problem. Significant cuts are coming down the pike unless pension and health care costs for public employees are controlled. "Services will be cut," he told me, "because this debt will be paid off."
He pins the nation's pension debt at nearly $3.5 trillion and that
doesn't include retiree health benefits. That money will come from state
and local governments, despite efforts by unions to resist even the
modest reductions in their gold-plated guaranteed pension plans. The
party is almost over, although one would never know it by the power that the unions have in Sacramento.
What to do?
The government needs to reform pensions for new hires to keep the problem from growing, which is what reformers have focused on with only limited success. He agrees that at some point government agencies are going to have to do what private companies have done -- make good on existing pensions for current employees up to the day of reform, but then to start them on a new lower benefit plan. Right now, unions and Democratic officials claim that the courts won't allow any such thing. They say that once a benefit increase is approved that it is a binding contract for the next 30 years -- through the entire career of the employees who receive the enhanced benefits. Crane says that case law is not clear on that matter.
Indeed, unless benefits are changed for current employees, programs
will be cut and dramatically so. This is the sensible answer. If a
government employee is receiving a "3 percent at 50″ pension benefit,
then she should have her pension plan reduced to a lower defined-benefit
plan or preferably to a defined-contribution plan like those received
by those people working in the private sector. Nothing should change
retroactively (unlike their benefits, which often went up retroactively). The
employee should be made whole up until today, but tomorrow he should be
on a lower-tier plan.
Crane loves the idea floated by Rep. Devin Nunes and other members of Congress to require truth in accounting by local government regarding their pension debts. "It's a brilliant tactic," he said. Crane believes that once the truth comes out about the real debt that reform will come. He believes that eventually the federal government might have to bail out states from their pension debts but that the feds will impose severe conditions for them. He thinks that other states will wrestle with this before California, which is innovative in many areas of life but certainly not in the area of governmental reform!
Crane used to think that government officials were ignorant about pension debt, but he has learned that "some people understand it very well" -- in other words, some officials have been quite clever at manipulating the system to their benefit. This will have to end soon. But, bottom line, he says that sufficient reform won't come from the downgrading of debt or other discipline from financial markets.
That's bad news, I suppose, but the good news is that reform has to come sometime soon.
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