Thanks to a doubling of the stock market and a tax increase, state revenues are higher than ever, yet services for citizens keep declining. That’s because Gov. Jerry Brown and the Legislature still haven’t addressed core fiscal issues. As the new Legislature convenes this week, three fiscal issues should be on the agenda.
▪ Stop issuing debt obligations without disclosure or voter approval.
The state issued about $10 billion of long-term debt obligations over the last four years without voter approval. Known as “OPEB” (Other Post-Employment Benefit) obligations, these liabilities consist of promises to state employees to cover post-retirement health care costs. They are also issued without disclosure in the budget, allowing the state to paint a false fiscal picture.
Should the reader have any doubt that OPEB debt has real consequences, take a look at Detroit – for which OPEB constituted the largest single obligation in its bankruptcy filing. Then take note that California is in an even worse position than Detroit because, unlike cities, states cannot use bankruptcy to discharge or reduce such obligations. That means Californians must pay for this debt via higher taxes, reduced services or both.
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The state has stealthily issued more than $65 billion of OPEB obligations, with more on the way. That practice should stop. All such obligations should be prefunded or disclosed and presented to voters for approval.
▪ Fix the CalSTRS fix.
During the last session, Brown and the Legislature took a step in bailing out the state teachers’ pension system, known as CalSTRS. However, their solution dropped a bomb into the state’s K-12 education system by allocating 71 percent of the cost to school districts. School districts already devote 80 percent of their budgets to employee compensation and benefits. Adding on the lion’s share of the bailout cost will cripple the state’s K-12 infrastructure.
While I admire Brown’s desire to move government closer to the people, that philosophy should not apply to past debts. When that happens, “the past devours the future,” as Thomas Piketty explained in his book “Capital in the Twenty-First Century.” Also, as Brown himself has noted, fiscal problems such as the CalSTRS deficit were caused in part by centralization of power in Sacramento after actions the state took under Brown’s direction in 1978 in response to Proposition 13.
The CalSTRS fix also imposed two other penalties on schoolchildren by back-ending the cost over 30 years, forcing families not yet formed to pay most of the cost and disguising the bailout’s true cost by basing estimates on CalSTRS’s inflated assumption of future investment earnings. Under a more likely investment return scenario, the fix will cost much more than the $240 billion CalSTRS estimates.
Bailout costs will start hitting districts soon, offsetting much of the benefit to education from the Proposition 30 tax increase and the Local Control Funding Formula. As Rhode Island governor-elect Gina Raimondo said recently: “You can’t have well-funded and flourishing public schools and public buses and an underfunded pension system. It’s just not possible.” California’s schoolchildren need a highly functioning education infrastructure. Our leaders should restructure the fix to impose less of the cost on them.
▪ Change pension fund governance.
Pension promises made by the state are owed unconditionally by the state. That means pensioners get paid whether or not pension funds have enough money to pay them. That also means that pension funds really exist to protect taxpayers from having to reach deeper into their pockets to meet unfunded pension promises. But that’s not the way California’s pension funds are governed.
Instead, it’s “heads, beneficiaries win; tails, taxpayers lose” because pension boards represent the interests of pension beneficiaries even though taxpayers have all the risk. For example, when pension plans do better than assumed, their boards look for ways to improve benefits for retirees rather than set aside money to protect taxpayers from inevitable years when investment returns will fall short. Pension boards also encourage deceptive accounting that disguises the true cost of pension promises until it’s too late, allowing governments to underfund pension promises and create big problems for taxpayers down the road.
So long as taxpayers are unconditionally on the hook for pension benefits, they should govern the pension funds that manage funds set aside to meet those promises. If pension beneficiaries want to control those funds, they should not be allowed to hold taxpayers responsible for pension deficits. The governor and Legislature should work to put pension assets under taxpayer control or remove taxpayer liability for pension deficiencies.
David Crane, a former CalSTRS board member, is a lecturer at Stanford University and president of Govern for California.