Richard Spencer

February 17, 2009

A friend sent me this story from Forbes, which sheds quite a bit of light on the current budget breakdowns in California and elsewhere: 

Don’t let anyone tell you the American dream has faded. the truth is the U.S. is still minting lots of millionaires. Glenn Goss is one of them.

Goss retired four years ago, at 42, from a $90,000 job as a police commander in Delray Beach, Fla. He immediately began drawing a $65,000 annual pension that is guaranteed for life, is indexed to keep up with inflation and comes with full health benefits.

Goss promptly took a new job as police chief in nearby Highland Beach. One big lure: the benefits.

Given that the average man his age will live to 78, Goss is already worth nearly $2 million, based on the present value of his vested retirement benefits. Looked at another way, he is a $2 million liability to Florida taxpayers.

[snip]

The problem with this picture is not Glenn Goss. By all accounts he was a good cop. The problem is that there are millions of Glenn Gosses from Highland Beach to Honolulu. So many that they pose a vast, debilitating burden to state and local finances.

They’re creating a nasty social problem as well. America, in case you hadn’t noticed, is dividing into two nations. The 22.5-million-strong public sector (that includes retirees) is growing ever larger, and enjoying ever greater wages and benefits often guaranteed by state constitutions.

In private-sector America your job, assuming you still have one, hangs on the fate of the economy. If your employer ever offered a pension for life, like young officer Goss is receiving, odds are it has stopped doing so, or soon will. Those retirement accounts you scrimped and saved to assemble? Unless they are invested in Treasurys, they aren’t doing too well. In private-sector America the math leads to the grim prospect of working longer and living poorer.

In public-sector America things just get better and better. The common presumption is that public servants forgo high wages in exchange for safe jobs and benefits. The reality is they get all three. State and local government workers get paid an average of $25.30 an hour, which is 33% higher than the private sector’s $19, according to Bureau of Labor Statistics data. Throw in pensions and other benefits and the gap widens to 42%.

For New York City’s 281,000 employees, average compensation has risen 63% since 2000 to $107,000 a year. New Jersey teaching veterans receive $80,000 to $100,000 for ten months’ work. In California prison guards can sock away $300,000 a year with overtime pay.

Four in five public-sector workers have lifetime pensions, versus only one in five in the private sector. The difference shifts huge risks from government to private-sector workers.

Government-work cushiness is, of course, only possible if the states have productive economies from which they can take funds. And as we?re witnessing in California, American-style public employment was dependent on American-style ?economic growth,? that is, debt-financed consumption and unsustainable asset bubbles. The government of California could keep growing and growing as its coffers were replenished with funds from the successive dot-com and housing manias. After these bubbles have popped, the state is insolvent and paralyzed. And there ain?t gonna be any more bubbles, even if Bernanke sets interest rates at -80 percent. Moreover, the Municipal bond market, which also makes mass public employment possible, is, much like T-Bill market, a crash waiting to happen: news munis are being sold to finance the interest payments on the old munis. And sales taxes are down 12 percent nationwide.     

Government workers never get fired. But that doesn?t mean they?ll always get paid. Imagine for a moment cops, bureaucrats, teachers, and welfare recipients across the county getting IOUs instead of monthly checks and then told to go about business as usual. How long before you think there?d be violent civil unrest? 

Update:Mish is analyzing the state-budget catastrophe today, and quotes from a study that estimates,

[A]ll but a handful of states will face shortfalls in fiscal year 2010 and these deficits will end up totaling about $145 billion. If, as is widely expected, the economy does not begin to significantly recover until the end of calendar year 2009, state deficits are likely to be even larger in state fiscal year 2011 (which begins in July 2010 in most states). The deficits over the next two-and-a half years are likely to be in the $350 billion to $370 billion range.

Grab your candles. 

Update II: California just got a whole lot less cushy!