California, the U.S. state with the largest public-pension fund, faces liabilities that may exceed five times its annual tax revenue within two years unless lawmakers rein in benefits, according to a study.
To keep their promises to retirees, the California Public Employees Retirement System, the biggest plan, the California State Teachers Retirement System, the second-largest, and the University of California Retirement System may have combined liabilities of more than 5.5 times the state’s annual tax revenue by fiscal 2012, according to the study released today by the Milken Institute. Levies are forecast to reach about $89 billion in the year that began July 1.
Debts to government retirees including those in California, the biggest state by population, have grown into a national crisis as pension plans strive to meet obligations to more than 19 million active and retired firefighters, police officers, teachers and other state workers. Fewer than half the plans had assets to cover 80 percent of promised benefits in fiscal 2009, according to data compiled for last month’s Cities and Debt Briefing hosted by Bloomberg Link.
“California simply lacks the fiscal capacity to guarantee public-pension payments, particularly given the wave of state employees set to retire” in future years, said researchers Perry Wong and I-Ling Shen in the Milken report. “Structural shifts, coupled with the financial design and the accounting practices of state pension funds, all point to the fact that reform is imperative.”
Driven by Demographics
The state’s pension costs are being driven in part by demographics such as an aging workforce and longevity gains among retirees, as well as an increasing demand for government public services, the researchers said.
To reduce costs, the Milken report recommends that California require public workers to contribute more to their pension funds and to retire later. Governor Arnold Schwarzenegger and lawmakers this month agreed to similar changes in a contract with the state’s largest union.
The study also suggests California should move to a so- called risk-sharing retirement plan. It would guarantee a basic pension while asking employees to bear the investment risks for part of their future benefits, similar to a 401(K) plan.
Such a change would reduce taxpayer liability when public funds lose money on their investments. Calpers lost more than $60 billion during the credit crisis of 2008 and 2009. The average five-year return on pension assets was about 3 percent for the most recently completed fiscal year, below the 7 percent or 8 percent benchmarks many states use, according to consulting firm Wilshire Associates.
“It’s no secret that the state of California lacks the resources to make huge infusions into state pension funds,” Wong and Shen said in the report. “The state government is trapped in its own budget crisis, at least in the short run, and future expenditures for public services and programs are expected to rise simply to keep up with demographic trends in the short- to medium-term.”
Schwarzenegger and California lawmakers agreed to cut state spending by $7.5 billion in a budget accord signed into law on Oct. 8, ending a 100-day impasse on how to close a $19.1 billion deficit. The Republican governor’s pension changes were part of his plan to cover the gap.
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