Earlier this month Gov. Jerry Brown released his 2013-14 state budget plan to a round of political applause because it appears to be balanced. Of course, last week the nonpartisan Legislative Analyst's Office confirmed that the plan does not include any money to make full payments for teachers' pensions and state employee retiree health costs. With the state carrying about $180 billion in debt for retiree benefits, it is like celebrating a touchdown after reaching the 50-yard line.
As the LAO notes, "under the governor's multiyear plan, the state would still have no sizable reserve at the end of 2016-17 and would not have begun the process of addressing huge unfunded liabilities associated with the teachers' retirement system and state retiree health benefits. As such, the state faces daunting budget choices even in a much-improved fiscal environment."
Here are the numbers driving those daunting choices. CalSTRS' actuaries say their fund needs $4 billion more each year to be fully funded. The state controller's actuaries say we need to set aside an extra $3 billion each year to pay for state retiree health care promises. In addition, CalPERS needs an estimated $2 billion more each year to fully pay state pension debts in 30 years, and the UC system expects the state budget to pay its $13 billion pension debt.
Let's put this $9 billion a year in deferred retirement benefit payments into perspective. It is 50 percent more than the $6 billion in taxes raised by Proposition 30. It is $3.4 billion more than the budget would spend next year on the UC and CSU systems combined. It is 16 times the governor's proposed "wall of debt" repayments to other state funds. Indeed, making full payment of state retirement benefit costs would consume $36 billion of the $51 billion in new revenue the governor expects through 2016-17.
Where is this money going to come from? Government agencies must finish paying for the retirement benefits their employees have already earned. Yet the politicians are ignoring these mounting deficits, making no plans to pay them for at least the next four years. After coaxing voters to provide more taxes, they want to avoid the complaints about the belt-tightening cuts needed to keep these retirement commitments.
So, will the politicians start fully paying these costs in 2017? Very unlikely, as that is the year the Proposition 30 temporary taxes begin to expire, creating a new $7 billion baseline budget hole by 2019. Unless the public demands that its politicians recognize and pay these lurking public debts, they will grow exponentially, greatly increasing their ultimate cost to taxpayers. A recent study shows that every Californian would have to pay $3,635 more in taxes each of the next 30 years to fully pay our retirement debts, if we start now. That is why the LAO describes these choices as "daunting."
What is the path forward? The state budget should start fully paying the state's retirement costs. Passing the current bill for government employee retiree benefits to future budgets and future generations is horrible public policy. It is one thing to have unfunded liabilities grow after poor investment results; it is another to have exponentially increasing public debts because politicians lack the willingness and fortitude to pay them.
Before we spend money on new programs, we must finish paying for the public services we have already consumed. While most government agencies cannot pay their full debt payments right away, phasing those payments in during the next four years would be most prudent. Right now, the state plan is to pay nothing during the next four years, and compounding interest will make the government pension debts much higher in the years thereafter.
Of course the same folks celebrating California's fake balanced budget also celebrated last year's very modest pension reforms. In both cases, the brutal, unyielding pension math should sober all but the most impaired revelers. While we have "huge unfunded liabilities" for government retiree benefits, our biggest problem is politicians who take every opportunity to ignore those mounting liabilities and are satisfied by forwarding massive bills to future generations. A state budget that intentionally places unsustainable debts on our children and grandchildren is nothing to celebrate, on any yard line.