Gov. Gavin Newsom and California lawmakers continue to trot out their state’s “massive budget surplus” dog-and-pony show, ignoring the inconvenient

March 4, 2022
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Dear John,

Gov. Gavin Newsom and California lawmakers continue to trot out their state’s “massive budget surplus” dog-and-pony show ([link removed]) , ignoring the inconvenient truth that a budget surplus cannot independently exist alongside the fact that California is wildly in debt.

The latest California Policy Center analysis ([link removed]) shows that California state and local government debt now stands at nearly $1.6 trillion, or about half the state’s GDP. That’s $40,000 of debt per capita.

The total includes $145 billion in state long-term debt, $361 billion in total local debt, and $184 billion in cumulative OPEB (“Other Post Employment Benefits”) liabilities owed ([link removed]) by state and local agencies, mostly for health insurance, for current and future retirees. Add that to the Office of Legislative Analyst’s estimate that the state owes $67 billion ([link removed]) in deferred infrastructure maintenance — the sort of capital improvements the state has ignored in its race to spend money elsewhere.

But that still doesn’t include the fiscal elephant in the room: pension obligations. CPC estimates that state and local governments owe the state pension system a staggering $882 billion.

Support the California Policy Center. Donate Today. ([link removed])

California’s State Controller officially calculates the state’s unfunded pension liability at $298 billion. “But we believe that’s overly optimistic,” says study author Edward Ring.

In 2012, Moody’s Investors Service revised its method of valuing pension liabilities, adjusting the discount rate it uses when calculating the present value of projected future pension payments. Moody’s now recommends using the high-grade long-term corporate bond index discount rate, today pegged at 3.15 percent. In contrast, California’s pension systems use the annual-rate-of-return at which they expect their assets to appreciate. For CalPERS, California’s largest pension system, that rate is currently set at 6.8 percent.

The difference between CalPERS’ 6.8 percent and Moody’s 3.15 percent is $584 billion. Given the size of this difference and the dire consequences of getting the projections wrong, the controversy over which percentage to use is probably the most consequential public debate that California is not bothering to have.

So did CalPERS management use accounting “gimmicks” to enable financially unsustainable pensions? They did ([link removed]) , egged on by government union leaders, using optimistic projections that bet on the success of tech stocks — and the rest of California’s government pension systems quickly followed suit.

Yet even after a remarkable 10-year technology-driven bull market, the state’s pension systems acknowledge they’re only 71 percent funded today. And that number is based on tax revenues that are dependent on high-wage earners reaping windfalls during tech booms. But when the boom busts, tax revenues will plummet, tech-driven investment returns of the pension funds will falter, and state and local governments will face unprecedented budget deficits.

California taxpayers are in for a shock when those chickens finally come home to roost. In order to make legally required contributions to the pension system, California governments will boost taxes and cut services. California cities have already cut services — furloughing staff, closing on Fridays, closing parks, raising fees. In the not-too-distant future, California could face the far more extreme service level bankruptcy we’ve seen in Greece, Italy, Spain and Portugal.

For now, California continues to play the dangerous game of treating pension obligations like a money transfer: paying their obligations to retirees with the income from workers paying into the system today. That “solution” is not sustainable, especially when inflation is factored in.

So what can be done? To restore stability, pension reform must be a part of a broader package of essential policy shifts. The hard choices California’s lawmakers and pension boards must make will determine if government balance sheets can weather the storm of economic turbulence or if Californians will face a devastating financial crisis in the years ahead.

Read the full CPC analysis here ([link removed]) .

Support the California Policy Center. Donate Today. ([link removed])

Quote of the Week

“Freedom is amazing. All we need to do to see energy independence flourish in America is for the government to get out of the way.” — Jon Fleischman, Publisher of the FlashReport

More from CPC
* The battle over COVID-19 mandates in California schools is far from over ([link removed]) : Celeste Fiehler, Deputy Director of CPC’s Parent Union, dissects why Gov. Newsom punted mask decisions to school districts (to appease teachers’ unions) and why the fight over vaccine mandates in schools is heating up.
* National Review's Radio Free California Podcast: The Return of Kamala Harris ([link removed]) : CPC President Will Swaim and CPC board member David Bahnsen talk about Kamala Harris’s return to the forced-union campaign that made her famous, woke initiatives that have undermined national security, and more.
* Businesses and people are fleeing California. Why? ([link removed]) : CPC’s VP of Government Affairs Lance Christensen joins this Labor Relations Radio episode to discuss the reasons behind the California exodus.

CPC and allies in the news
* Ill-timed fossil fuel pension disinvestment bill threatens economy ([link removed]) : Reason Foundation’s Marc Joffe examines the new California Senate bill that would compel CalPERS and CalSTRS to divest from fossil fuel companies.
* Frisco Frolics ([link removed]) : Larry Sands, president of CA Teachers Empowerment Network, reviews the remarkably dysfunctional year for the San Francisco Unified school board.

Classroom headlines
* Poll: Californians' views of local public schools declined dramatically ([link removed])
* California to lift school COVID mask mandate after March 11 ([link removed])
* California legislators propose slate of COVID-19 vaccine laws ([link removed])
* Nearly three-quarters of Americans support school choice ([link removed])

Union news
* Chaos in one of California’s largest government unions ([link removed])
* When public unions control our California ([link removed])

Other things we’re reading
* CA lawmakers propose bill to punish doctors who speak against COVID 'Consensus' ([link removed])
* L.A. spending as much as $837,000 per unit of housing for homeless ([link removed])
* CA’s governor wants mental health courts for homeless people ([link removed])


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