A recent post at The Volcker Alliance examines a subject of great importance to the California Legislature this week as it searches for an extra $240 billion to pay for employee retirement costs.
State and local government retirement costs are already rising but as Warren Buffett wrote recently, those outlays are just beginning their climb. Over the next thirty years, California governments will spend more than $1 trillion on pensions and post-retirement health care costs — and that doesn’t include billions more needed to bail out the State Teachers’ Retirement System, known as “CalSTRS.” Despite an enviable investment record and the annual receipt of more than $5 billion in pension contributions, CalSTRS has developed a deficit for which it seeks an extra $240 billion in contributions over the next thirty years, starting with an extra $4.2 billion this year.
Everyone agrees CalSTRS needs the new money. Without it, school districts will be saddled with a $600 billion pension debt on the day CalSTRS expects to run dry in 2043 (financial economists forecast an earlier run-out date), forcing a giant shift in spending from classrooms to retirees. K-12 education in California will grind to a halt.
This is why CalSTRS will be a fiscal and educational apocalypse for the next generation unless our leaders act now. After Assembly Speaker John Perez promised action on CalSTRS this year, hearings commenced last month and a committee meets March 19 to consider funding options. But it’s a huge lift: $240 billion is a lot of money — just the first year installment of $4.2 billion is nearly 5% of the state’s general fund and 10% of state funding for school districts – and a successful bailout requires elimination of any risk that future legislatures won’t appropriate the money.
The teachers union is willing to increase employee pension contributions but even if employees put up half, that still leaves a hole averaging $4 billion per year. There’s not a lot of room in the state budget. Even though state taxes and revenues are up, state spending on higher education, welfare, courts and parks is down, already being crowded out by higher spending on health care, salaries, benefits and debt service. Likewise, there’s little room in school district budgets and a general tax increase is tough because Governor Brown and the Legislature already asked voters to approve one in 2012. Non-payment of the pensions is not an option because school districts are backed by the state, which cannot declare bankruptcy. (Put another way, when CalSTRS runs out of money, the only people in the state who won’t be adversely affected will be its members, who are owed their pensions unconditionally.)
This is where The Volcker Alliance post becomes relevant. Former Federal Reserve Board Chairman Paul Volcker established the Alliance “to address the challenge of effective execution of public policies and to rebuild public trust in government.” In the post, Volcker’s State/Local Program Director Bill Glasgall asks if there are “pension-funding windfalls sitting beneath city streets.” Citing a recent agreement by the city of Philadelphia to sell a city-owned utility and use some of the proceeds to shore up a public pension plan, Glasgall wonders “what other . . . assets may be sitting on the balance sheets of cities, counties and states that could be turned into cash to help close a pension gap of almost $3 trillion, and perhaps much more.”
Glasgall suggests consideration of assets that are not core to government operations. A perfect non-core asset would be of a financial nature, such as a sale of cash flows from a settlement reached with tobacco companies. (Unfortunately, California already sold that asset – Governor Davis sold it in 2003 to help finance one year’s operating deficit.)
According to Glasgall, another option being explored in some jurisdictions is a new tax dedicated to pensions. (While the 2012 California tax increase is helping to pay for higher retirement costs, it is not a dedicated tax.) Bloomington, Illinois is contemplating a utility tax on bills for electricity, natural gas, water and telecommunications and an amusement levy on cable bills, zoo entry fees and movie ticket costs. California could consider a severance tax on fossil fuel production, which could dedicate $2 billion per year to CalSTRS. Others have suggested following Colorado in levying marijuana taxes, which likewise could be dedicated to CalSTRS.
While everyone would prefer to see proceeds from asset sales or new taxes go to new assets or to improve prospects for working people, Californians need to view the bailout of CalSTRS as a rescue of the state’s educational infrastructure. Without the money, K-12 education in California will collapse in fewer than three decades. To avoid that outcome, Governor Brown and the State Legislature need to search far and wide for money.