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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