California’s recovery from The Great Recession has taken longer that Governor Jerry Brown imagined.
Yet the slowness of the recovery hasn’t stopped Governor Brown from spending like the proverbial drunk sailor on big dollar items such as high-speed rail (for which Senator Diane Feinstein’s husband was award a near-billion dollar contract). But as an economist friend of mine in California said “What do you expect when the Democrats have a super majority in California’s governing bodies?” And now Governor Brown is asking President Trump for financial assistance in building the high speed train (and pay off Senator Feinstein’s husband).
When you spend like a wild man on government projects and combating poverty, something has to give. And one of the somethings is the California state pension program for teachers and public employees. Even big spender Jerry Brown has “suddenly” realized that CalPERS was only 65% funded as of June 30, 2016 (CalPERS reported that the state plans’ unfunded liability totals $59.5 billion and is 65 percent funded, meaning that CalPERS only has 65 percent of the funding required to make pension payments to state retirees).
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So what does a state do when they realize that they have woefully over-promised retirement benefits to state employees? Double the amount of taxpayer contributions to CalPERS, of course!
Absent additional action to address these growing liabilities, paying off retirement liabilities will require an increasing percentage of the state budget. For example, the state’s contributions to CalPERS are on track to nearly double from $5.8 billion ($3.4 billion General Fund) in 2017‑18 to $9.2 billion ($5.3 billion General Fund) in 2023‑24. In response, the May Revision proposes a $6 billion supplemental payment to CalPERS through a loan from the Surplus Money Investment Fund.
This was inevitable since CalPERS massively overpaid management and advisors have produced terrible returns versus lofty expectations of returns of 7.5%.
The May Revision includes a one?time $6 billion supplemental payment to the California Public Employees Retirement System (CalPERS) in 2017?18. This action effectively doubles the state’s annual payment and will mitigate the impact of increasing pension contributions due to the state’s large unfunded liabilities and the CalPERS Board’s recent action to lower its assumed investment rate of return from 7.5 percent to 7 percent.
Seriously, with all the stimulus thrown at the economy by The Fed since 2008, CalPERS can’t even generate 7.5?
But yes, lowering the rate to more reassonable 6% requires substantial taxpayer bailout. And you know that Governor Brown will come to Washington DC begging for a Federal bailout.
Note to Governor Brown. If you declaring open borders AND promisng heathcare and other taxpayers benefits to undocumented imigrants, you might have to cool it on state pensions, high-speed rail, etc. Economics is the study of scarcity for which Governor Brown apparently now realizes is a reality.
On a side note, a friend of mine was Governor Schwartzenegger’s budget director. He sent me the California budget for several years along with “a noted economist’s” GDP forecast. Of course, the GDP forecast was ludicrous. Hence, here we sit today.
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