Wednesday, August 24, 2011

California Has Almost $1 Trillion In Unfunded Pension Liabilities


Hardly surprising.

Chris Street, former Orange County, California Treasurer points out that last years report by the Stanford University for Public Policy report on the three largest California public retiree plans (CalPERS, CalSTRS, and UCRS) concluded that those California retirement plans had an unfunded liability of over $500 billion.

As the report pointed out, a big part of the problem is the pension plan’s figuring on future annual investment returns of 7.75% which is totally unrealistic. Just how unrealistic can be calculated by what's happening as a bunch of local governments get wind of this and want to bail out of the plans..which are only offering to credit them with 3.8% expected return. If these state retirement plans base their figures on the same 3.8% rate they are only willing to credit when participants want to leave, the unfunded mandate increases to a whopping $884 billion shortfall!

The main culprits, of course, are the public employee unions aided and abetted by their political allies, the Democrats. These pensions are legislatively mandated to pay out at fixed rates no matter what happened to the investments they're based on, so the unions figured that it was a win-win crapshoot using public money.

They invested in the riskiest derivatives, figuring that if things worked out well their war chests would swell and give them increased leverage for bargaining with politicians for increased benefits and pay through campaign contributions. If things didn't go so well, the benefits still had to be paid by state law.

None of California's options to deal with this are good ones. Based on the last budget fiasco, the sort of massive cuts in spending that would make a difference wouldn't pass the legislature, and Governor Brown probably wouldn't sign them if they did. The state can either request that the employees covered by the three plans ante up with higher contributions, or pass new legislation weaseling out of their commitments. Both are politically toxic for the Democrat-dominated state government, and the second option would almost certainly be challenged in court.

Another option is to raise taxes massively in what's already one of the highest taxed states in the country to cover the shortfall. Governor Brown and the Democrats in the legislature would love this, but doing it would exacerbate the state's already poor economic climate, result in even more people and businesses leaving and worsen the problem at the other end.

Or they can go to Barack Obama for a bail out from Washington, getting in line with a number of other Blue states that have exactly the same problem.

Not good.

To me, it's a matter of supreme irony that the man who started this mess back in the 1970's by giving public employee unions the right to collective bargaining is now the governor again and was elected by a comfortable majority.

Not only did Governor Brown steer the ship of state into the iceberg when he was captain the last time, but the passengers on the Titanic just gave him the wheel again.

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