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New study says Californian’s are on the hook for $500 billion in pension funds

California is broke, really broke. The governor has called for billion dollar budgetary cuts ahead of the New Year as revenues to Sacramento coffers were much lower than predicted. According to a new Stanford University report, the Golden States’ three largest public unions, the California Public Employees’ Retirement System (CalPERS), California State Teachers’ Retirement System (CalSTRS), and the University of California Retirement Plan (UCRP) have been promised $500 billion in pension funds.

The Stanford report concludes these union contracts promised public sector employees more than the state can afford.

The report outlines that public employee pension systems usually strive for 100 percent funding over the long term. However, these pension programs promised much more than they can deliver. Meaning, the taxpayer is on the hook for the difference.

“The combined unfunded liability for CalPERS, CalSTRS, and UCRP under the 6.2 percent discount rate is $290.6 billion, equal to more than three state General Fund budgets,” the report disclosed. “That figure represents an unfunded amount per household of nearly $24,000. Using a low-risk, or risk-free, discount rate, the combined unfunded liability for these three systems reaches $497.9 billion, or 17 percent more than that calculated in 2010.”

Stanford economic forecasters warn that state contributions to pension accounts made by the taxpayers will increase substantially over the next few years.

“Assuming a 6.2 percent discount rate and other minor demographic changes, current state spending on pensions is likely to increase from $4.8 billion in 2011-2012 to $14.6 billion, or the equivalent of 17.3 percent of current General Fund expenditures,” the report points out. The increased spending on pensions will eventually cut into other state non-pension spending, like education and social services.

The Stanford University pension report also explains that California state legislators need to act urgently. They contend each day that passes will cost Californians’ $3.4 million per day.

Possible solutions to the pension crisis include tax increases or reforms to the public employee pension contracts. “Revenue increases are unlikely to be approved absent pension reforms. Required pension system reforms include benefit reductions, such as prospective reductions for current employees, greater cost sharing, and governance reforms, particularly changes in the pension system accounting methods and assumptions,” the report concluded.

The report also took a look at Governor Jerry Brown’s suggestions to solve the impending pension shortfall, but only found minor positive elements. “Governor Brown’s proposal provides only modest additional cost savings. For example, Governor Brown’s proposal appears likely to reduce CalPERS state spending by more than $300 million in the first year and $6.2 billion over 10 years. At a 6.2 percent discount rate, the state’s combined annual shortfall for both CalPERS and CalSTRS is about $100 billion over the same period.”

It is necessary to note that California faces the largest budget deficit crisis in the nation. Many states like Illinois and New Jersey will keep a close eye on the Golden State and evaluate how California handles its public sector union pension shortfalls.

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© Copyright 2011 Kimberly Dvorak All Rights Reserved.

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