San Jose Mercury News, 1/26/14.
SACRAMENTO — Gov. Jerry Brown’s image as a responsible, penny-pinching steward of California’s finances has been cemented in recent weeks because of his renewed call to pay off California’s “wall of debt.
That’s a term Brown coined when he took office to describe the tens of billions of dollars California owed to public schools and special funds whose coffers were raided to help balance budgets in the past.
But look behind that $24.9 billion wall and you’ll see a $330 billion skyline of other liabilities threatening the state’s financial health. It includes $80 billion needed to cover teachers’ pensions and $64 billion to pay for state workers’ health care in retirement — two particularly troublesome liabilities because the state isn’t even making the minimum payments on them.
As a result — similar to the debt of a homeowner who fails to make regular mortgage payments — California’s liabilities keep growing. For example, the money needed to fully fund the California State Teachers’ Retirement System balloons by $22 million a day, or about $8 billion a year, financial analysts estimate.
“This is an enormous financial problem that no one is willing to stand up and take care of,” said Joe Nation, a public policy professor at Stanford University.
The governor acknowledged California’s unfunded liability burden Wednesday in his State of the State address, calling it “enormous and ever-growing.” In his proposed budget, he specifically calls for negotiations to resolve the teacher pension issue. But he includes no money for the upcoming fiscal year to pay down that liability.
“We can’t make a snap judgment on this,” said H.D. Palmer, spokesman for the state Department of Finance. “The prudent approach is coming up with a long-term plan that’s bought into by all stakeholders, and that will take time.”
Those stakeholders include the Legislature, school districts, CalSTRS and the teachers, whose unions Brown is expected to rely on for campaign donations and community outreach when, as is expected, he runs for reelection this fall.
Nonpartisan budget analysts, however, say the state shouldn’t waste any more time and should start setting aside money to pay down the CalSTRS debt. Indeed, analysts say, it might be smarter to put funds toward CalSTRS rather than accelerating the payments to retire the “wall of debt,” as Brown has chosen to do. That’s because the interest rates for pension liabilities are higher.
On the issue of retiree health care, the state hasn’t set aside money for future expenses, instead opting to directly pay the costs as they arise. But if the state started saving now for the future cost of coverage that’s been promised to state workers in retirement, that would trigger accounting changes. As a result, the state could reduce its long-term liabilities by $20 billion almost immediately, said Ryan Miller, a senior analyst in the state’s Legislative Analyst’s Office.
While teachers’ pensions and retiree health care have gotten the most attention, they’re not the only liabilities.
Almost $65 billion is needed to pay for deferred maintenance of state roadways, bridges and other infrastructure.
Nearly $9 billion is owed to the federal government for unemployment benefits that have been borrowed over the years.
The University of California pension and retiree health care plans are $25 billion underfunded.
California’s pension funds were not always woefully underfunded. In fact, in the late 1990s they were flush with cash.
The stock market was on fire and capital-gains taxes were soaring thanks to the dot-com boom, and many Californians seemed confident that the state would never again have a tough time economically, Stanford’s Nation said.
In Sacramento, Democrats controlled both houses of the Legislature in 1999, the same year a new Democratic governor, Gray Davis, took office after 16 years of Republican governors. The political alignment and “irrational exuberance” about California’s financial future led lawmakers and local officials to dramatically increase pension benefits at the same time the state, cities and counties were allowed to decrease contributions to the funds.
“All you can do is govern for your time,” Davis said in an interview last week. “The pensions were appropriate assuming we could afford it, but subsequent events, including the Great Recession, proved we could not afford it and must adjust.”
In the years after the dot-com bubble burst in late 2000 and early 2001, CalSTRS and the even-larger California Public Employees’ Retirement System lost tens of billions of dollars. And when the global financial crisis hit in 2008, they lost tens of billions more.
At CalPERS, even though the stock market eventually rebounded, investment returns since 1999 haven’t lived up to the predictions. That’s one of the reasons the unfunded liability for the pensions of state workers and judges is $48.6 billion.
Pension reform signed by Brown in 2011 reduced pension benefits for new workers, meaning most of the savings will be years away. Critics such as San Jose Mayor Chuck Reed, who hopes to get a pension measure on November’s statewide ballot, have said the reform didn’t go far enough.
The way out will likely require additional payments from the state, school districts, teachers and state workers, but figuring out who pays what will be tough, said Larry Gerston, a political science professor at San Jose State.
Labor leaders are the “bread and butter” of Brown’s campaign operation, Gerston said, so tussling with them over such a thorny issue in an election year would not be wise.
“Whatever you want to say about Jerry Brown, you can’t accuse him of being fiscally irresponsible,” he said. “Down the road, I expect we’ll see reform here.”
Link to original article: http://www.mercurynews.com/california/ci_24998205/californias-wall-debt-is-only-slice-its-liability