The Wall Street Journal
MARCH 10, 2010
California’s College Dreamers
When will students figure out the politicians have sold them out?
Hundreds of University of California students rallied against a 32% tuition hike last week. Let’s hope their future employers get a better work product. With just a little research, the students could have discovered that compensation packages won from the state by unions were a big reason for the hike.
Last year, the state cut funding to the 10-campus system to $2.6 billion from $3.25 billion. To make up for the reduction in state funding, the UC Board of Regents increased tuition to $10,300, about triple 1999’s cost.
Understandably, students have gone wild. The UC system is supposed to offer low- and middle-income students a cheaper alternative to a private college education. Now a year at a UC school can cost students as much as at many private schools.
Who’s to blame? UC President Mark Yudof rightly notes he had no other means of closing the university’s budget gap. The university used $300 million in reserves last year and cut staff salaries by furloughing them between 11 and 26 days this year. Governor Arnold Schwarzenegger says “we’ve done everything we could, but the bottom line is it’s not enough. We need to put pressure on the legislature not only this year in a year of crisis, but in the future.”
The California legislature? Good luck with that. In 1999, the Democratic legislature ran a reckless gamble that makes Wall Street’s bankers look cautious. At the top of a bull market, they assumed their investment returns would grow at a 8.25% rate in perpetuity—equivalent to assuming that the Dow would reach 25,000 by 2009—and enacted a huge pension boon for public-safety and industrial unions.
The bill refigured the compensation formula for pension benefits of all public-safety employees who retired on or after January 1, 2000. It let firefighters retire at age 50 and receive 3% of their final year’s compensation times the number of years they worked. If a firefighter started working at the age of 20, he could retire at 50 and earn 90% of his final salary, in perpetuity. One San Ramon Valley fire chief’s yearly pension amounted to $284,000—more than his $221,000 annual salary.
In 2002, the state legislature further extended benefits to many nonsafety classifications, such as milk and billboard inspectors. More than 15,000 public employees have retired with annual pensions greater than $100,000. Who needs college when you can get a state job and make out like that?
In the last decade, government worker pension costs (not including health care) have risen to $3 billion from $150 million, a 2,000% jump, while state revenues have increased by 24%. Because the stock market didn’t grow the way the legislature predicted in 1999, the only way to cover the skyrocketing costs of these defined-benefit pension plans has been to cut other programs (and increase taxes).
This year alone $3 billion was diverted from other programs to fund pensions, including more than $800 million from the UC system. It is becoming clear that in the most strapped liberal states there’s a pecking order: Unions get the lifeboats, and everyone else gets thrown over the side. Sorry, kids.
Get ready for more. The governor’s office projects that over the next decade the annual taxpayer contributions to retiree pensions and health care will grow to $15 billion from $5.5 billion, and that’s assuming the stock market doubles every 10 years. With unfunded pension and health-care liabilities totaling more than $122 billion, California will continue chopping at higher-ed.
Mr. Schwarzenegger has routinely called for pension reform, but the Democratic legislature has tossed aside the Terminator like a paper doll. Last year, he proposed rescinding the lucrative pension pay-off for new employees, which he estimated would reduce pension pay-outs by $74 billion and health-care benefits by $19 billion through 2040. More recently, he called for doubling state worker contributions to their pensions to 10% from the current 5% of their pay. But these propositions have little traction in the legislature.
California has a governor’s race on, and the candidates are semi-mum on this catastrophe. Democratic candidate Jerry Brown has supported modifying public employee benefits but hasn’t offered specific proposals and opposes defined contribution plans. Republican Meg Whitman supports increasing the retirement age to 65 from 55 and asking employees to contribute more to their benefits, but she won’t support a reform ballot measure for fear it would drive up union turn-out in November.
Memo to marching students: The governor can’t save you. You guys need a new legislature. This one is selling you out. Organize an opposition and vote them out in November. Plan B is quit school and become a state billboard inspector.
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