By Steve Frank | Watchdog Arena
California is a cautionary tale for taxpayers in the rest of the country.
The people of California are being burdened by an unsustainable, unfunded liability–a trillion dollar government pension system. At the end of the day under California law, the taxpayers will subsidize the shortfall in the budget.
Besides this debt, California has a debt of $340 billion–and that debt stands to be increased by some of the proposals within the state’s 2016 ballot measures. California is in economic collapse: while tax revenue increases, the policies to kill off the state are in place and beginning to take effect.
In 2012, the Federal Government mandated that, on January 1, 2014, all government pension plans must adopt the same stringent accounting methods used by private pension plans. This was to assure that the government pensions were as protected as those in the private sector. Prior to this, each government pension plan had its own definitions, assurances and accounting methods. When you looked at one plan you had to figure out the accounting system before determining the viability of the plan. Now, it is the same accounting system for all.
How did they get away with this? Reuters reported in 2013 that “Moody’s has proposed adjusting in 2014 how it gauges public pension liabilities, while the Governmental Accounting Standards Board next year will require municipal debt issuers to report unfunded pension liabilities on their financial statements.” CalPERS/CalSTRS and other government pension plans refused to report the unfunded liabilities!
That does not mean that the government pension system reports the real numbers to the public. In California CalPERS, the government employees plan, and CalSTRS, the teachers retirement plan, still report the “old way” to the public. So, we have to dig deeper to find the truth. In effect, California pensions systems are keeping two sets of books. One for California citizens, the other for the Federal government.
The Los Angeles Department of Water and Power plan has $11 billion in unfunded liabilities, liabilities which are shored up by the ability of the system to raise water rates. The University of California pension plan has an unfunded liability of $21 billion. Since the mid-2000’s, one third of every dollar in tuition increases goes not to education, but the pension system, to keep that money flowing to retired professors.
Currently the cities of Los Angeles and San Francisco allocate 23 percent of their budgets to their pension systems. A study released in 2012 by the Stanford Institute for Economic Policy Research found that, for the city of Los Angeles, “Pension costs increased from 8.5 percent of total city expenditures in 1999 to 13.7 percent in 2011.” For fiscal year 2011-12, estimated pension costs climbed to “15.4 percent of city expenditures.” By 2014-15, the city had hit 23 percent, just like San Francisco. That is a major blow for cities with massive pothole problems, deficits and social services expenditures.
The biggest problem for California is the CalPERS system. California Healthline wrote in May 2014 that “CalSTRS still has a $73.7 billion unfunded liability, while CalPERS includes $64.6 billion in liabilities.” That figure, however, is not even close to the truth.
CalPensions gave the real numbers for CalSTRS, writing “New government accounting rules will more than double the pension debt reported by CalSTRS, boosting an ‘unfunded liability’ that is now about $71 billion to a newly calculated ‘Net Pension Liability’ of $166.9 billion.”
Then we have the real numbers for CalPERS. State Budget Solutions did a national survey, and the results showed that “There are several ways to view the size of the issue at the state level. California carries the largest unfunded liability in total dollars at $754 billion, followed by Illinois at $331.6 billion and New York with $307.9 billion”
In total, government pension systems have $4.7 TRILLION in unfunded pension liabilities. As the stock market goes up, it is easier to finance this debt. When the market goes down, it is impossible to finance without either cutting benefits or taxpayers subsidies. California “proudly” carries one trillion of this debt.
How does this happen? One bill passed in Sacramento in 1999, with the support of Democrats and Republicans , that changed the financial equations for government pension systems. Since then, it has been a death spiral for pensions in California. This was SB 400.
The San Diego Union-Tribune said this of the bill in May 2007,
“Even in a state capital dominated by public employee unions, passage of such a massive pension spike would have been impossible had CalPERS put an honest price tag on its cost. Instead, the agency’s evaluation of how much of the spike would be borne by taxpayers assumed that CalPERS would enjoy record stock market returns forever and ever. Lawmakers were told the annual tab would range from $379 million to $466 million over the next decade.
Not even close. The stock market came back to earth, and the taxpayer tab skyrocketed. This fiscal year, taxpayers had to fork over $2.67 billion to cover the pension shortfall. Next year, the tab will hit a new record: $2.75 billion.”
Californians have tried to fix this mess. Governor Brown passed pension reform a couple of years ago. Today, the legislature has rolled back most of the reforms. San Jose and San Diego voters passed pension reform by almost a 70-30 margin.
Since the passage, however, the unions have gone to court and had the important parts of the reforms approved by voters, thrown out. Both cities are once again looking at bankruptcy due to pension costs and obligations.
This problem was caused by politics and politicians. It will be solved by the right kind of politicians, those that are fiscally responsible. Next to the national debt, this may be the most important financial issue facing Californians and all Americans. The pensions of millions are at stake.
This article was written by a contributor of Watchdog Arena, Franklin Center’s network of writers, bloggers, and citizen journalists.