By Tom Cushing
The State of the State of the StateUploaded: Jan 24, 2014
It was a pleasure to read brother blogger Tim Hunt's reluctant review of Governor Brown's State of the State speech earlier this week. To summarize, a Democrat super-majority in Sacramento has not unleashed the predicted deluge of red ink upon us all ? the apoCALypse has been postponed. Indeed, the budget is better-than-balanced, as state revenues from our uneven recovery have grown faster than had been previously projected. And the Governor's vigilant corgi growls at those who would raid the community till.
Still, Tim's article had the grudging tone of someone who suspects we got lucky THIS time -- I thought I could hear his teeth grinding, faintly in the background, as I read it. It is certainly true, to borrow the President's recent metaphor, that we are swept along in a tide of history, and Incumbents deserve neither as much credit nor blame for outcomes as they typically receive. That said, the citizenry had agreed to be taxed to meet our obligations, important social programs were curtailed and the Dems have been reasonable stewards of spending. Surpluses(!) are projected for several years to come. I do share Tim's concern about wasteful future spending on the train-to-nowhere-fast, which appears to take up about half of total transportation improvement budgets over the next five years.
As Tim notes, however, there is a $100B pension obligation out there ? an amount that nearly equals the full year's state spending. So, how are we supposed to think about that large number? (As you might guess) I have a few thoughts on the subject.
First, by nature it is not a bill due tomorrow, but an actuarial estimate of the difference between the assets and likely earnings of the CalPERS pension fund, and the payments due to be made from that fund, off into the indefinite future. The $100B number represents that gap, known ominously as the CalPERS' unfunded liability. It is sort of like the difference between your own retirement nest egg, and what it eventually needs to be, to sustain your daily golfing habit in your dotage.
Second, as 'money is the mother's milk of politics,' the sheer size of that mammoth state pension fund draws politicians from all over the map. You can find articles and data from all across the visible political spectrum ? and beyond. Wall Streeters who'd like to convert public pensions to 401k's (and profit handsomely on handling them) will warn you darkly of the coming systemic collapse, whereas soothing, public unioneers include CA's version of Officer Barbrady ("Nothing to see here, folks ? move along.") Finding objective analysis and reliable data ? well, that's another story. It is never more important to consider the source of your information.
Third, the size of the funding gap depends almost entirely on the guess you make about what CalPERS' investments will earn in the future. Its performance over the past decade has bounced between large losses and handsome gains. The number above assumes a 7.5% average return that is the national standard in these state reports ? substantially higher than the tempestuous decade average. If, however, you want to scare the children and pets, you can more-than-halve that return percentage down to 3.2% ? then the underfunding balloons to more than $600B.
Fourth, we can look both backwards at history, and sideways at other states to try to gain perspective on our current situation. The official liability is about 72% covered. That number has varied recently between the 50% range after Wall Street tanked in 2001, and 130% in the early 1990s. CalPERS was then so well funded that Governor Pete Wilson tried to raid its kitty to offset his budget deficit. The current funding trend is upward, such that sustained investment success could even eliminate the gap, much as it did for several previously-looted Teamster pension plans in the late 1980s. Pension reform legislation passed in late 2012 has also not yet had the financial impact projected for it, over time, as its effects kick-in to the total numbers.
Regarding other states' pension funds, we find ourselves somewhere in the middle of the pack on most performance measures: percentage funded, per capita underfunding and the gap as a % of the state's economy. Illinois may be in some trouble; booming, empty North Dakota is not.
My own conclusion, other than that my head hurts from shoveling my way through the pile of organics that have been written about this topic, is that I will not lose sleep over this one. If the financial sky falls, the fund will be in deep trouble ? but if that happens, I will have my own more serious problems to occupy my idle pre-dawn hours. Otherwise, more fine-tuning may be called-for. Of greater concern is the unemployment insurance loan owed to the feds on behalf of the 8.3% of California workers still seeking employment. That's a hard and growing number, and a governance problem that can't solve itself at current rates of collection. Stay tuned on that one.