Liberal award-winning economist Paul Krugman and the front pages of the New York Times just crow about the “California miracle” and “California renaissance” that Governor Jerry Brown and the liberal Democrats in control in Sacramento have ushered into the state, by raising taxes to sky high levels, the highest state sales, income, and gas taxes at the pump, to achieve a modest “surplus” of a few billion dollars in the state budget.
Liberals in the national media love this narrative of California getting to a “surplus” because they are so desperate to find success in their job and wealth killing high tax policies. They seem to ignore that under the same policies, the state maintains the third highest unemployment rate in the nation, and now for the second year in a row according to the Census Bureau, California is the poorest state in the nation.
But setting California’s high poverty and unemployment rates aside, the reality is there is no surplus in the California state budget. Rather, California is playing a deceptive game with how it presents its finances to the public, because the accounting does not include disclosure of the massive debt obligations to the state’s two public employee pension funds: CalPERS, which is the retirement fund for state employees; and Cal STRS, which is the pension plan for teachers in the state. As a result of unreasonably generous defined benefits plans, bad investments, and unsound investment revenue forecasts, these pension funds are underfunded by over $100 billion each, and California’s so-called “surplus” of less than $5 billion hardly cracks these looming, monster debt obligations of the state.
If just the CalSTRS obligations were properly included in the state’s annual financial accounting, California would not have a budget surplus, rather, the budget disclosures would reveal a state deeply in debt. This is because California is legally obligated to fund the pension plan. For every dollar of pay, the state must contribute 5% of teacher salary to the CalSTRS pension fund, even though the teachers do not work for the state. Local school districts contribute 8 1/4% of pay, and the teacher employee contributes 8% of pay to the pension fund. But even with those three sources of funds coming into the pension fund, CalSTRS staff reported last week that the agency’s “net pension liability” is now a whopping $166.9 billion. This net pension liability greatly exceeds generally accepted levels of pension liabilities for financial health of the fund, because of the generous defined benefit payments the plan will be required to make in future. As a result of the new calculations, school districts, and the state, will likely be asked to increase their contributions to the plan to reduce the liability to lower levels. In doing so, local agencies will be forced to cut programs and seek more taxpayer revenue, as well as the state. Taxpayers will be tapped yet again to pay for bad public employee pension decisions made by liberal Democrats.
It is true that some part of the $166.9 billion “net pension liability” of CalSTRS, if not all of it, should be attributed to California’s books of account. If California has a legal obligation to fund the CalSTRS pension system, shouldn’t any debt obligations to the system show up on California’s annual financial statements? Of course they should, and right-thinking members of the Legislature ought to push for more transparency and disclosure of such obligations. Doing so would of course erase the so-called state “surplus” but it would also offer a more accurate picture of California’s finances, which is not happening under the current rules.
And it is equally clear that public employee defined benefits packages are no longer tolerable financially in California, as liberal Democrats have pushed the benefits so far beyond the reasonable that public institutions, including local governments, are facing drastic reductions in local services and even bankruptcy to keep pace with their expensive pension debt obligations. Yes, our public employee system needs reform across the board. But one important reform that needs more discussion, is California stopping the charade of having a “surplus,” and rightfully placing all its own obligations on its public books of account, including public employee pension debt.
James V. Lacy is publisher of California Political Review and author of “Taxifornia: Liberals Laboratory to Bankrupt America,” a Politico.com top seller available at Amazon.com.
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