California is known the world over for it’s beaches, forests, and, increasingly, fiscal irresponsiblity. California Governor Jerry Brown was lauded for crafting a “balanced budget” over the summer. This “balance” was achieved by deliberately understating the debts state government faces and outright ignoring unfunded liablities. The state budget itself only admits to $30 billion in debts (“Wall of Debt”). This debt figure deliberately ignored billions owed to the federal government for unemployment insurance funds and unfunded liabilities.
The budget did acknowledge $38.5 billion in unfunded CalPERS liabilities and $63.8 billion in unfunded retiree health care liabilities, yet neither factored them into the “Wall of Debt” or did anything to address them. Similarly, it completely ignored the underfunding of CalSTRS, which, according to the Legislative Analyst’s Office, requires $4.5 billion in additional contributions a year, for thirty years, in order to remain solvent. The 2013-2014 budget does absolutely nothing to address any of this.
Recent research by the California Taxpayers Association (CalTax) demonstrates a fuller picture of California’s debt problem. According to CalTax, California state and local governments have a combined debt burden of $443 billion.
CalTax created the following graph illustrating the extent of the problem.
Under these figures, every Californian’s share of the debt burden is $11,600. To make matters worse, CalTax acknowledges that it may be understating the true extent of unfunded liabilities. CalTax appears to be using the liabilities that state and local governments in California themselves acknowledge. The tricky issue in estimating unfunded pension liabilities is the validity of the actuarial assumptions used by state and local government pension systems. Government pension systems in California tend to assume between 7.5% to 8% investment returns on pension funds over 30 years, assumptions widely derided as unrealistic and inconsistent with actual investment returns.
State Budget Solutions recently issued a report calculating pension liabilities using actual 15-year US Treasury bond returns (3.22%) as the basis for investment return assumptions. Using this figure instead of 7.5-8%, California’s unfunded state employee pension liabilities rise to $640 billion.
According to a report by the Stanford Institute for Economic Policy Research (SIEPR), Even using more generous investment return assumptions of 6.2%, California’s unfunded state employee pension liabilities rises to $290 billion.
Even the $41.22 billion that CalTax cites as the combined unfunded liability of local pension systems is potentially understated. A 2012 SIEPR report reviewed the pension funding status of the 24 pension systems independently operated by local governments. Like the state employee pension systems, local pension systems similarly assume unreasonably high long-term investment returns. Using a 5% discount rate, SIEPR calculated local government unfunded pension liabilities to be $135.7 billion.
Beyond the Potemkin budget and hollow proclamations that “California is back,” is a state with deep fiscal instability. Failing to address snowballing liabilities and accruing debt without a clear intent of addressing it, imperils systemwide stability.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.