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Blue Model Blues
California Pension Woes Take a Bite out of State Budget

Golden State taxpayers will contribute a half-billion dollars more this year to prop up the state’s underfunded pension fund, taking a bite out of a state budget that is already squeezed by education, healthcare and social programs, Pensions & Investments reports:

California will contribute $5.3 billion to CalPERS for the fiscal year starting July 1, up 11% from the current fiscal year, shows a proposed budget by Gov. Edmund G. Brown Jr.

The state contribution increase is $524 million, which includes $172 million as a result of the CalPERS board’s decision in December to reduce the $305.5 billion pension fund’s assumed rate of return to 7.375% from 7.5%, beginning in July.

The CalPERS board’s decision to reduce its expected rate of return was a long time coming. Like many other state pension funds, CalPERS has for decades used unrealistic accounting methods to diminish the real magnitude of its shortfall, which Stanford’s pension tracker has estimated to exceed a trillion dollars.

The board’s 0.125 percent rate cut does not come close to putting the pension fund on solid footing. But adopting a plausible rate of return overnight would be impossible: If CalPERS reduced its expected rate of return to, say, 5 percent, taxpayer contributions would need to increase by billions of dollars per year, possibly bankrupting local governments and creating a political crisis.

Nonetheless, as current public employees retire and the bills start coming due, CalPERS’ unsustainable and mismanaged pension scheme will be forced to keep coming to taxpayers for more. Californians can expect a progressively larger share of their budget to go to paying retirement benefits in the coming years, and a progressively smaller share to paying for public investments and services that its neediest citizens depend on.

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  • Andrew Allison

    Another possibility is that if CalPERS reduced its expected rate of return to, say 5%, the increase in the State’s contribution would result in reform. Maintaining the current unrealistic rate of return simply makes the hole bigger.

    • Genesis123

      It’s OK. they will find four remaining Republicans in CA and blame it on them.

    • Wayne Lusvardi

      Look, all the state has to do is eliminate the $15 billion per year that the non-partisan California Legislative Analyst says the state general fund uses for redundant and unnecessary energy efficiency programs. But Gov. Brown won’t do that because environmentalists are a bought and paid for political constituency.

    • Jim__L

      At that point, simply de-funding High Speed Rail could go a long way to plugging the budget hole.

      • Andrew Allison

        It wouldn’t even come close; it would just perpetuate the vote buying Ponzi scheme.

    • Fat_Man

      Don’t hold your breath. There will be no reform until there is a catastrophe.

      • Andrew Allison

        That’s exactly what CalPERS adopting a realistic rate of return would be.

        • Fat_Man

          Cause or effect.

          • Andrew Allison

            CalPERS adopting a realistic rate of return would be the catastrophe required — CA’s unfunded liability at the 4% rate of return used by private plans is over $1 trillion!

  • QET

    possibly bankrupting local governments and creating a political crisis

    Here is how local governments are going to go bankrupt: gradually, then suddenly.

    • Jim__L

      They’ve been doing the “gradual” bit for some time now.

  • seattleoutcast

    Californians can expect a progressively larger share of their budget to go to paying retirement benefits in the coming years, and a progressively smaller share to paying for public investments and services that its neediest citizens depend on.

    And yet they still vote for democrats.

    • LarryD

      Because Free Stuff! And Virtue! :s

  • slovokia

    “Californians can expect a progressively larger share of their budget to go to paying retirement benefits in the coming years, and a progressively smaller share to paying for public investments and services that its neediest citizens depend on.”

    This is the current definition of progressive politics – at least as implemented by the democratic party. All economic risk is transferred from the ruling class (those working in the government) onto the ruled. The ruled just need to shell out more funds from their 401k’s if the stock market goes down.

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