The Marin Post

The Voice of the Community

Blog Post

Govern For California

Paying off $54 billion in CA deficits through service cuts and increased taxes and fees

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.


Dear Legislators and GFC Supporters,

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.

David Crane
Govern For California

*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.