Pension Iceberg Will Sink State Budget
June 30, 2011 - By admin
By WAYNE LUSVARDI
Imagine you’re a passenger on the ill-fated RMS Titanic luxury liner on its 1912 maiden voyage. But the Titanic had no warning of an iceberg lurking below the ocean surface — unlike the Pirate Ship California that can detect with modern sonar a huge iceberg of pension debt looming ahead that could sink the state government.
And imagine that you’ve been enticed to go on the maiden voyage of the Pirate Ship California based on the promise of a $4 billion prize at the ship’s casino, only to find that the ship is sinking even as the band plays on. The new-new-new California budget just passed by the governor and the Legislature is living out a Hollywood movie something like the above.
All the recent political and media drama surrounding the legislature having their salaries cut off until a balanced budget was approved is just postponing the inevitable. A recent article in the New York Times reports that the State General Fund has had to contribute $3.6 billion to help Cal-PERS meet unfunded pension obligations this year and expects to pay $3.5 billion next year.
$28 Billion Pension Payments
Citing several independent studies, the Times reports that California will need to begin designating an additional $28 billion of its $86 billion General Fund budget to meet pension shortfalls in the near future. Needless to say, this will likely capsize the Pirate Ship California and the rest of its fleet of local government pirate ships.
But Captain Hook Jerry Brown and his First Mate Darrell Steinberg in the sail house of the Pirate Ship California are nonetheless celebrating the plugging of a $4 billion gap in the 2012 state budget by wishing it away. If the fictional $4 billion does not magically appear, reportedly public school funding will have to be cut back in January 2012 — while the $3.6 billion in constitutionally mandated pension subsidies would continue. Pirates have no conscience in stealing from children.
12.5 Percent Return?
In 2008, the Cal-PERS pension fund lost $100 billion. CalPERS proudly states that it has plugged $70 billion of that loss already. But it is doing so by gambling that 12.5 percent annual rate of returns will continue indefinitely, when a 10-year Treasury-Bill is only paying about 3.0 percent and the Consumer Price Index is running at 3.6 percent.
How long can CalPERS keep asking the state General Fund to plug a hole in the hull of its boat with proceeds from the ship’s casino that are more than four times what you can earn on the safe rate on a T-Bill?
The idiom of rearranging the deck chairs on the Titanic is often used to describe something pointless or insignificant that will soon be overtaken by events, or that contributes nothing to the solution of a current problem.
The band on the Pirate Ship California is playing on as the ship starts to list to one side. And Cal-PERS continues to play the roulette wheel on the ship, hoping to stop it from continuing to take on water. A nearby rescue boat has offered a pump and way to permanently fix the leak on the ship. But Captain Hook ignores the offer.
Reversing the protocol for who first can get into lifeboats called for when a ship is about to sink on the open sea, the governor and Legislature shout: “Pensioners first! Women and children last!”