Despite Surplus Claims, CA Can’t Fund Pensions

Democratic California Gov. Gavin Newsom talks with reporters in Larkspur, Calif., on June 5, 2018. Justin Sullivan/Getty Images

California has long struggled with budget problems, which have persisted regardless of who’s in charge of governing the state. But when Gov. Gavin Newsom took over, he promised the Golden State had already been pulled “back from the brink of fiscal insolvency.”

Newsom claimed (pdf) the state was “finally tearing down the remaining wall of budgetary debt, paying down pension obligations, and building up the most robust and prudent budget reserve in state history.”

The state’s legislative analyst’s office estimated California had a robust $20.6 billion surplus, while cautioning that market volatility could still affect revenue for the governor’s $209 billion state budget.

Currently, California has only $100.1 billion in assets to pay $369.9 billion worth of bills, according to a report from non-partisan Truth in Accounting (TIA). When debt related to capital assets are taken into account, the organization explained, the state has $102 billion worth of unfunded pension benefits plus over $107 billion in unfunded retiree health care.

Unfortunately, the state “defers recognizing losses incurred when the net pension liability increases,” the report added. This leaves California with $58.4 billion in hidden debt, which was not mentioned by the Newsom administration.

With 76 percent of the more than 4.6 million members of pension plans relying on the state of California, according to the Public Policy Institute of California, and Newsom promising to use some of the surplus to pay down pension liabilities, the Golden State may still have to find creative ways to make sure pensions are fully covered.

Accounting Expert: CA Remains Broke

In an interview with The Epoch Times, Sheila A. Weinberg, the founder and CEO of TIA, said that while the organization doesn’t advocate for any tax or spending policy, it is clear that the Golden State is in the red.

Currently, California needs “$270 billion to pay its bills, including unfunded pensions and retiree health care promises,” Weinberg said.

“While claiming balanced budgets, past governors and legislatures chose to push current costs into the future. Unless pension and retirees’ health care benefits are renegotiated, each taxpayer will be burdened with paying $22,000 in taxes in the future without receiving any services or benefits.”

Despite this, Weinberg added, Newsom continues to defend his budget, “while the state is drowning in debt,” she said.

“Unfortunately, when elected officials claim their government has a surplus many people believe the government has extra cash available to spend. The reality is, while the state is projecting it will take in more money than it spends this year, the state still has hundreds of billions of dollars of unfunded pension and retiree health care liabilities and state bonds.”

“Touting a surplus is similar to me claiming I have a surplus because I think I will earn more than I spend next year, but not mentioning I have huge amounts of credit card debt,” she added.

The California Public Employees Retirement System (CalPERS) was under fire recently for cutting back on retirees’ pension checks, according to the Sacramento Bee. After being initially challenged in court, the agency was dropped from the suit, leaving the town of Loyalton to pay the difference.

While the case doesn’t necessarily prove the fund is already having trouble paying retirees, it could be just one of many other suits potentially filed against the agency in the future due to unfunded pensions.

Are Bad Investment Strategies to Blame?

According to a June 16 Wall Street Journal report, California could have better prepared for its pension liabilities if the state had made better investment decisions.

Currently, the state’s public pension fund relies on investments in socially conscious causes. But because of ongoing budgetary concerns, the fund is facing a crisis, and officials are considering breaking with their restrictive investment strategy.

If CalPERS decides to pivot away from current investments, it may be looking at tobacco companies and even gun manufacturers for a better return, prompting progressive advocates to bemoan the state for the decision.

If the change depends on board member Jason Perez, then perhaps California taxpayers may get somewhat of a break.

Last year, Perez made a pledge to stop limiting the fund’s sources based on politics. However, it’s expected the fund’s investments would have to yield much greater returns if the state is willing to keep its promises to state workers.

According to WSJ, the fund, which is worth about $365 billion, is still $139 billion short of meeting its obligations. If CalPERS can’t find a way to cover this gap, the rest of the bill is up to taxpayers.

With the state now extending MediCal benefits to illegal immigrants, the already overly-taxed California state is expected to eventually raise taxes even further to cover the debt.