SACRAMENTO – A Sacramento Superior Court judge recently ruled that California must pay a lucrative $6.4 million pension to the heirs of a former state employee who made $22,000 a year. This shocking tale, though unique, is only one part of a complex public pension mess that needs cleaning up.

According to the Sacramento Bee, in January 1969, Clarence Alexander, a veteran business manager for the state Senate, became the secretary of the Senate. Just 11 months later, he retired and began to receive a pension payment based solely on the generous benefits of his promotion, not on his prior 21 years of service. His total pension was worth only $215,695 at first but appreciated dramatically over the years with double cost-of-living allowances and pay increases based on his successors’ salaries.

In 1995, officials determined that his monthly allowance should be $21,944.75 or $263,337 a year. Mr. Alexander and his wife Frances respectively lived 18 and 25 years longer than actuaries had expected. After decades of poor communication from the state and interest accumulation, Alexander’s heirs now look forward to a $6.4 million pension payout at the expense of California’s taxpayers. Worse, the Golden State’s governments face an unfunded pension liability of $63 billion, according to the Governor’s Post-Employment Benefits Commission.

At the California Public Employees Retirement system (CalPERS), in particular, costs are expanding. While its membership grew 20 percent in the past 10 years its total benefits owed increased 114 percent. And the state’s contribution rate to CalPERS for Highway Patrol workers jumped from 13.8 to 31.5 percent of payroll (or an average of 8.2 percent for all categories,  HP was the most) despite healthy investment gains. The source of these mushrooming costs is partly an aging workforce and large benefits hikes.”

Life expectancy for Californians is rising and baby boomers are soon retiring, which means more pension and health-care expenses for more years. CalPERS total benefits payments increased 105 percent in the past decade. And since 2000, benefits for the typical retiree with 20-25 years of service have grown almost eight percent a year whereas California’s inflation rate has averaged only three percent. To gain votes and campaign contributions, politicians yield to pressure from unions that always demand more benefits while ignoring costs to taxpayers.

For instance, state workers got a 3.5-percent raise in 2006 and, this year, gained a cost-of-living adjustment of two to four percent. The state employee union’s minor concession was a formula change to discourage pension spiking, which should have already been abolished.

The value of CalPERS’ investments fluctuates drastically from year to year with the market. It gained 11 percent in 2000 but lost 7 percent in 2001, a difference of $16.2 billion, which makes state and local government contribution rates hard to predict. Government officials often rearrange budgets and incur debt to scrape by. But they do not always plan wisely.

In 2000, when pensions were 138 percent funded, the state offered benefits increases and contribution holidays instead of saving for a market downturn. Californians should act now to reform this unstable system.

To control costs, the state should eliminate fraud, close loopholes, pay off debt, raise retirement ages, and scale back benefits for new employees. Any benefits hike should require voter approval by ballot, as done in San Francisco, to allow only reasonable benefits increases and diminish the influence of public-employee unions, which represent a minority even of state workers.

CalPERS should also transition to a defined contribution system in which employee and matching state contributions would grow in individual portfolios selected by the employees. When changing jobs, employees could take their pensions with them and governments would enjoy predictable contribution rates and budget stability. Without these changes, costs will soar and government obligations will become even harder to meet.  

The legislature recently passed two bills that should help curb pension spiking for state employees like Mr. Alexander. But that’s only one small step in cleaning up the public pension mess. Legislators should stop making unrealistic promises and sticking taxpayers with the costs. Californians must act quickly and carefully to stabilize government budgeting and fully fund public employee benefits.