Posted by:
Jody Morales
- May 8, 2020 - 9:42 AM PDT
This newly released bulletin from David Crane of Govern for California (below) should be sent to all of our elected representatives – immediately. (email addresses attached)
Unless pension reform is addressed now, we will be paying off that $54 billion in General Fund deficits through service cuts and increased taxes, rates and fees for years or - more likely - decades. As David states below, neither borrowing the funds nor deferring contributions are the answer.
Instead, it's time to start repairing a deeply flawed system.
Yesterday the California Department of
Finance predicted $54 billion in General Fund deficits over the current and
next budget years (i.e., for the current fiscal year ending June 30
2020 and through the next fiscal year ending June 30 2021). While we will
wait for the Governor's Revised Budget Proposal on May 14 to express
detailed views, for now we would point out the following:
Absent
reform, >15 percent of every revised General Fund dollar
provided to schools will be diverted to pension and other
post-employment ("OPEB") costs at those schools.
Absent
reform, >15 percent of every other revised General Fund dollar will
be diverted to state and CSU pension and OPEB costs.
That's not all. Those figures, which amount
to ~$25 billion, don't include billions more in pension and OPEB spending at
UC, transit agencies and local governments and also don't account for
the full costs of retirement expenditures (because state pension funds use
unrealistic investment return assumptions when setting pension costs and
schools and most agencies and governments in California recognize only a
portion of OPEB costs).
The good news is that, just as a
former legislature and governor increased pension obligations in
1999 through legislation, the current legislature and governor can reduce pension
obligations.*
Among the steps to take are:
Eliminate automatic
pension increases.
Suspend cost-of-living (COLA) pension
increases until the funded ratio of pension funds exceeds 80 percent
using a reasonable discount rate.
Move active employees to hybrid pension plans while
preserving their accrued benefits to date.
Also, as described here the state should enact reforms to OPEB
obligations* at schools, the state, UC, CSU, transit agencies and local
governments. Together, pension and OPEB reforms could free up many billions
per year for classrooms and other programs.
Now is the time to act. Even
in good times, pension and OPEB spending is crowding out
other expenditures:
Absent reform to retirement spending, bad
times will worsen that crowd out and force the state unnecessarily to borrow
more money.
As a reminder, deferring pension contributions does not reduce pension obligations. Such deferrals are no
different than borrowing at a 7 percent rate. Likewise, supplemental pension
payments to pension funds (such as the extra $9 billion the state supplied to
CalPERS and CalSTRS over the last two fiscal years) do not reduce pension obligations but rather boost
pension assets in the hope pension funds can earn more than the 7
percent rate at which pension obligations grow. Also, pension assets do not
result in legal defeasance of pension obligations. Hence, the only option for reducing pension and OPEB
spending is to reduce pension and OPEB obligations.
Govern For California supports lawmakers who legislate in the general
interest.
*The state's pension and OPEB obligations exceed $1 trillion, >10x
the amount of general obligation bond obligations that — unlike pension
and OPEB obligations — were approved by voters. Note also that the
Federal Reserve Bank values the same obligations at ~$4 trillion. (The
difference is due to California employing a high discount rate when deriving
the present value of pension obligations.) Note also that the 1999
legislation referred to above confered a retroactive pension
increase but I am not suggesting the legislature and governor
retroactively reduce pension benefits. Employees should retain accrued
benefits.
