◼ As Days Go By: Why Jerry Brown Must Act THIS Year On CalSTRS - Fox&Hounds Daily via Howard Jarvis Taxpayers Association
The #1 rule of defined benefit pension plan management is that plan sponsors should supply enough cash each year to fund the “annual required contribution” (ARC). Failure to pay the ARC produces pension deficits.
The #1 violator of that rule is California.
In 2013, the California teachers pension fund (CalSTRS) received only 44% of its ARC. The skipped contribution — $3.5 billion — was the largest skipped ARC in the country. California has been skipping ARC’s for so long that, on Valentine’s Day last year, CalSTRS asked Governor Jerry Brown and the State Legislature for a $240 billion cash injection over 30 years, starting with $4.5 billion this year. 329 days later, Governor Brown responded: Wait till next year.
CalSTRS’s debt has been the easiest can for Brown and the Legislature to kick down the road. It doesn’t need to be repaid until the fund runs out of money (CalSTRS says that happens in 30 years, financial economists say earlier), the press pays little attention because there are no current consequences, and the can is kicked at innocent people — the next generation — who don’t know they’re being assaulted.
But because the can grows every time it’s kicked, the consequences for that generation are devastating. Each kick attracts interest at 7.5 percent per annum and, more perniciously, that interest is paid invisibly because it’s added to the balance due, just like the accrued-interest mortgages that helped cause the financial crisis. As a result, $20 billion of new debt today becomes a $160 billion balance due when CalSTRS runs out of cash. That’s on top of CalSTRS’s existing debt, which is also invisibly accruing interest at 7.5 percent per annum.
If unaddressed, CalSTRS’s debt will grow to more than $600 billion by the time it runs out of money – i.e., when cans may be kicked no more – and sends the next generation into a crisis unlike any before seen in California. That generation would have to choose between making pension payments to retirees or providing K-12 education and other public services, setting the stage for an intergenerational war.
◼ Legislature Wakes Up to Pension Problem - Jon Coupal/HJTA
...Unfortunately, until now, Sacramento’s approach to these unfunded liabilities is probably why the phrase “kicking the can down the road” was coined. Even Governor Brown, who has espoused government frugality and responsibility -- while increasing state spending -- ignored the unfunded pension systems in his proposed state budget.
In fairness to Brown, two years ago, he proposed a fairly decent pension reform package. But by the time the Legislature got through with the governor’s plan, all that remained was some modest changes to address the worst of pension abuses including a few to prevent “pension spiking.”...
