In the distant horizon, a giant wave is building. There are some who recognized the swell and raised the alarm. There are others who deny the possibility of such a wave. Most remain blissfully unaware. The wave is building and when it reaches our shores, it will hit with the force of a tsunami.
The wave is propelled by government spending and crested with unfunded pension obligations. The Pew Center on the States wrote in The Trillion Dollar Gap (February 2010), “A $1 trillion gap exists between the $3.35 trillion in pension, health care and other retirement benefits states have promised their current and retired workers as of fiscal year 2008 and the $2.35 trillion they have on hand to pay for them.”
Like any tsunami, the wave began long ago and very far out to sea. Thirty years ago the vast majority of union workers were in the private sector. Public employees in unions reached parity with private sector members by 2009. This was aided in part by campaign contributions from the unions to elect Democratic Party candidates and generous pay packages and retirement plans passed by those same politicians in return.
By 2010, the general public received a series of shocks. The first shock was the jobless recovery of the Great Recession that cost 8 million jobs. Most of the job losses occurred in the private sector yet the majority of the $800 billion Stimulus Bill went to “save and create” public sector employment. The second shock was learning that civil servants earned twice that of private workers. According to the Bureau of Economic Analysis, Federal workers received average pay and benefits of $123,049 while private workers made $61,051 in total compensation. The third shock was revelation of incredible retirement plans doled out by politicians since 1999. In 2002, California passed SB 183 that allowed police and safety workers to retire after 30 years on the job with 3% of salary for each year of service, or 90% of their last year’s pay. During the Great Recession, fireman began retiring with $150,000 pensions at age 52 despite a life expectancy approaching 80. In Orange County CA, lifeguards, deemed safety workers, retired with $147,000 annual pensions. The Orange County sheriff, recently convicted of witness tampering, will receive $215,000 annually while in jail. Bob Citron, the Treasurer of Orange County who pushed the county into bankruptcy in the 1990s, receives a pension of $150,000 per year. A tsunami of anger and resentment is building.
As the wave approaches, economists issue thick reports with ominous names like “The Gathering Storm” (Reason Foundation) advising us that the pension obligations we have created are unsustainable. They report cities and states cannot economically allow workers to retire at 52 when they have a life expectancy of 26 years of retirement. They simply cannot pay for these pensions with existing revenue. Services will go down and taxes will go up to pay for these generous pension obligations. Orange County’s CEO, Thomas G. Mauk, predicted that pension requirements in 2014 will take 84% of the county’s law enforcement payroll. It is already 50% today. To exacerbate the problem, The Great Recession forced most states into budget deficits as their revenues decline. For FY2010, every state except Montana and North Dakota has projected a budget deficit. (RedState 3/21/2010).
California once again leads the nation with a $26 billion budget deficit plus an unfunded pension obligation of $500 billion. Its current financial structure is clearly unsustainable. It has an operational structure that in ungovernable with often duplicative agencies, some collecting less in tax revenue than the agencies spend on collection. Wikipedia lists 500 existing public agencies for the State of California. California can no longer afford such a luxury. It must deconstruct these bloated inefficient government agencies, and rid itself of their chairman, staff, offices, cars, pensions and the overhead that such excess represents. A $26 billion dollar deficit is not something that can be corrected with a wage freeze or job furloughs. Bold leadership can lead California to deconstruct its 500 agencies down to 100 functional organizations. California is a classic example of what must change in the coming Great Deconstruction.
One Orange County city has already taken bold steps to correct its $10 million deficit. It may be a model for other cities and states across the country. Internally, it has decided it will not replace any city worker that dies, retires, moves or quits. The city will simply out source the employment to an outside service company and eliminate healthcare requirements and unsustainable pensions. Building inspectors will be out sourced as will city plan checkers, librarians and meter maids. Only essential services like top executives and cops will remain on the city payroll. The city staff will eventually decrease from 220 to approximately 35 personnel. This is the essence of deconstruction.
At the state and local level, the Great Deconstruction has already begun albeit delayed by an infusion of federal stimulus dollars and grants in 2009 and 2010. The federal government must deconstruct as well. It must happen, if only because the revenue is no longer there to sustain all of these often well-intentioned programs. The federal government will not be immune from fiscal reality.
In this sense, the election in November will be a referendum on the very sustainability of our system of government. One party will continue to borrow and spend in order to maintain the 500 agencies in California and the abundance of federal programs. They have not said how long they will be able to borrow money to sustain their system. The other party will try to simply turn off the spigot - now. Either way, one day the money will run out and the inevitable deconstruction will occur.
The Great Deconstruction is a series written exclusively for New Geography. Future articles will address the impact of The Great Deconstruction at the national, state, county and local levels.
Robert J. Cristiano PhD is the Real Estate Professional in Residence at Chapman University in Orange County, CA and Director of Special Projects at the Hoag Center for Real Estate & Finance. He has been a successful real estate developer in Newport Beach California for twenty-nine years.
Other works in The Great Deconstruction series for New Geography
An Awakening: The Beginning of the Great Deconstruction – June 12, 2010
The Great Deconstruction :An American History Post 2010 – June 1, 2010
The Great Deconstruction – First in a New Series - April 11, 2010
Deconstruction: The Fate of America? – March 2010