Monday, March 03, 2014

My Future Is In Such Good Hands

Essentially, I'm screwed:
California’s next generation got some good news recently when Assembly Speaker John Perez called upon lawmakers to act this year to find a solution to the state’s largest fiscal issue -- the $80 billion unfunded liability of the teacher pension system.

Perez’s urgency was in contrast to the timeline proposed by Governor Jerry Brown, who in January acknowledged the severity of the crisis but suggested a solution be put off until next year.

Perez cited one pressing reason for immediate action: the teacher pension debt is growing by $22 million per day. But there’s another reason that politicians in California never discuss: If they don’t act, the obligation will end up costing more than twice as much as it would if they took immediate action. That’s because, in the absence of action, the teacher pension debt will be subject to the same rules as a zero-coupon bond...

That obligation functions exactly like a zero-coupon bond. In both cases, cash payouts are promised for the future, though insufficient provisions are made to meet that obligation. In both cases, the single, final payment is many times the debt.

Some money has been set aside for teacher pensions in California but not nearly enough, and the state is already short $80 billion. But that is merely the value of the liability today. Unless cash is set aside, the shortfall will continue to grow zero-coupon style -– until it reaches more than $600 billion when the debt comes due in 2043.

To put that sum in perspective, it is 13 times the amount California’s general fund will devote to K-12 education this fiscal year and 11 times the amount that general fund will spend on everything else. Even if general fund revenue rises at a healthy pace until 2043, $600 billion will be the equivalent of two to three times the state general fund's spending that year.

To prevent a fiscal apocalypse, last year the California State Teachers' Retirement System asked Brown and the State Legislature for a 30-year cash injection of $240 billion, starting with $4.2 billion a year. But so far Brown’s budgets haven’t set aside a penny. As a result, the teacher pension debt has grown more than $25 billion since he assumed office in 2011.
I keep hearing that "as California goes, so goes the nation".  You'd better hope not.


pseudotsuga said...

Ok, that settles it...I'm not going to apply for any teaching jobs in California. The risk is too high.

Auntie Ann said...

It also means that the exodus from the golden state will continue. As the taxes skyrocket to pay for all of this, everyone who can get out will...leaving a smaller tax base to make up the difference.

maxutils said...

Another reason not to have state taxes ... although, one could argue that it does promote a free market solution ... save for the fact that a distinct minority even vote.

Mike Thiac said...

Darren, 240 billion...isn't that the cost of Brown's high speed train from nowhere to nowhere that no one wants?

Anonymous said...

Mike: "$240 billion...isn't that the cost of Brown's high speed train from nowhere to nowhere that no one wants?"

Not yet. Californian's passed prop 1A in 2008 to fund high-speed rail with an projected cost of $33B. The expected cost increased to $68B by late 2011 (big surprise, that!) and in 2012 the expected cost was up to $91B. The current cost estimate is down to $68B because the new plan removes the 280 miles of rail from LA to San Diego and from Merced to Sacramento. In theory, those will be built later (and, obviously, push the cost up beyond $68B).

I would not be surprised by a total price tag of $240B by the time we are done with this, but that isn't the cost estimate yet.

And, of course, if we run out of money because of things like funding pensions, then we won't finish the thing at all. We won't be able to go from San Francisco to LA until 2029 (unless things slip), so we've got 15 years for something to go very wrong.

My guess is that this gets postponed indefinitely when we hit our next big recession ... the last two big state recessions (2001 with the dot-com bust and 2008) put the state budget into the red by $20B/year for a few years. Doing this again, combined with pension underfunding will punch a nice hole in the budget. With current maximum state marginal income tax rates of 13.3% (12.3% plus a 1% surcharge ...), I don't think there is a lot of room to raise rates. So where will the money come from to continue building this?

-Mark Roulo

Mike Thiac said...

Mark, thanks for the clarification...but I'd swear reading the final cost was something like 250B, state and fed. No matter what, I think it will be cut loose in a few years, like the "stimulus" for "shovel ready jobs"...a fortune pissed down a hole.

maxutils said...

Mark ... the problem is, we voted for it. Not me, of course, but there are apparently enough imbeciles in CA to support anything that sounds nice, as long as they have no idea where the money comes from ... so, now it's law ... we need to repeal it, or someone needs to head up a lawsuit to prevent it from proceeding past what the voters agreed to provide for funds, without additional legislation. I'm pretty sure that if that came to a vote, it would fail. But ... at least Dianne Feinstein's husband, Richard Blum has made tons of money on it ... no patronage there, I'm sure.