Former S.F. Mayor, Willie Brown, suggested recently that anyone eating dinner in Oakland should order soup. Why? If the restaurant is held up, patrons can slip their jewelry into the soup to prevent theft.
Our embattled governor, Arnold Schwarzenegger, needs to find the legislative equivalent to soup on the menu as the state prison guards file a petition for his recall - a definite holdup of sorts.
Who are these ingrates? They were given a huge increase in pay toward the end of the former Gov. Gray Davis era. It was largely in the form of higher retirement benefits --- huge future costs which slipped under the radar because they didn't impact that era's budget. In return for $3 million in campaign contributions, Davis gave the union what it wanted, and he probably got what he deserved. Enough is enough.
Another former governor, Jerry Brown, had the fortitude years ago to say "no," and today's governor is just as committed to doing the right thing.
Vallejo's bankruptcy proceedings are nothing more than a microcosm of what is in store for the state. When we make one of those pension promises, like allowing employees to retire five years earlier, or bumping their percentage of retirement earnings by a few fractions of a percent for each year they worked, the additional cost is huge. We might as well be writing a check on the spot for hundreds of thousands of dollars to each of 35,000 prison guards when we announce an increase in retirement benefits.
Average base pay for guards is about $74,000. The retirement benefit is 3 percent of highest years of pay for every year on the job --- increased by a cost of living adjustment. This means that someone who works 30 years gets a retirement benefit of 90 percent (30 times 3 percent) of their average last few years of compensation. If their ending salary when they retire at age 50 is $100,000, they will be receiving about $250,000 a year about 30 years into retirement using a 3 percent inflation rate.
It's bad enough without inflation. The 30 years (from 50 to 80) times $100,000 a year is $3 million. The value of that future stream of payment promises measured today is not $3 million. Its value in today's dollars (its "Present Value") is really about $1,400,000. Why not the whole $3 million? Because we assume that we can earn 6 percent interest on whatever money we get to keep until we have to pay it out. Therefore, the total cost of the $3 million over time is reduced by the interest that we earn on the money we don't have to pay out until later. If we assume a greater earnings rate on what we don't have to pay out, the present value calculates out be less. Bumping the 6 percent rate assumption to an 8 percent return, for instance, reduces the present value by about $250,000.
This is basic Business 101. It governs the way most trained business people have to think. The governor, unlike most politicians, actually made a huge fortune in California real estate, according to a profile I recall from Forbers magazine. Unfortunately, not too many in Sacramento can slip the bounds of their dogma to confront reality.
Today's struggle to balance the budget has to be, in part, tied to the fact that some chickens are already coming home to roost. The increase in retirement benefits for all state employees, not to mention just prison guards, took place back in 1999. Almost 10 years later, we're beginning to have to fund these much higher costs that we could ignore back in the '90's when they were just present-value calculations. Now, they're becoming real big dollars.
So Arnold, like Jerry Brown before him, is simply saying. "You're paid enough." There's probably no voter not employed by the state, Democrat or Republican, who doesn't agree with him. We need to cut spending, so let's start with cutting future retirement benefits. Like a mirror image, no existing worker will feel any present value pain ("this will only hurt for a minute") any more than taxpayers did when we increased the benefits back in 1999. We also need to raise taxes, so let's go with the return of the auto license tax and the one-cent sales tax --- the more we spend on cars and "stuff", the more we pay in taxes. That seems simple, fair and progressive. As easy as duck soup for our embattled governor who doesn't deserve the treatment he's getting these days.