California Takes Huge Leap Toward Default

MARCH 15, 2011

BY CHRISS STREET

California taxpayers just took a huge punch in the nose from the same actuaries who provided the cover for state politicians to spike public employee retirement benefits. The latest shocker comes from California State Controller John Chiang, who just unveiled a new actuarial report
that shows California faces another unfunded debt of $59.9 billion to pay for retiree health and dental benefits over the next 30 years.

Controller Chiang highlighted that the unfunded liability grew during the 2010 fiscal year by $8.1 billion; an amount equal to almost 25 percent of this year’s entire California kindergarten through high school education budget.

Actuaries have aided and abetted the explosion in under-funding of pension and healthcare liabilities for public employee pension plans over the last 10 years. With most public employee pension plans fully funded in 2000, a preposterous actuary study gave assurances that the technology stock market bubble of the 1990s would continue its high returns and never burst.

California Gov. Gray Davis and the Legislature used the study, paid for by employees who are eligible for retirement benefits, to justify 40 percent retroactive increases in lifetime pension payments and enhancements of retiree healthcare. During 2008 and 2009, a bogus California actuary study claiming the retiree healthcare plan was over-funded was used to justify waiving mandatory employee contribution increases to cover accelerating healthcare insurance premium increases.

The bulk of this new increase in retiree costs came as the result of the California Public Employees’ Retirement System (CalPERS) actuaries “discovering” after the fact that employees with their new pensions payments spiked and healthcare enhanced are retiring earlier, retirees are living longer, and healthcare costs are increasing faster than the crony projections by the actuary. The new actuary calculations now estimate the total un-funded California retiree costs are about $340 billion.

Unlike the state pension plan, which has a prayer of large investment returns reducing its unfunded liabilities, California retiree health benefits are covered on a “pay-as-you-go” basis. This means that actuary “error” that resulted in the new massive un-funding will start coming out of the state budgets immediately. California state retiree benefits have risen from 4 percent of the state budget to 11 percent in just 10 years; and both pension and healthcare systems are still irresponsibly under-funded. The vicious impacts of this sky-rocketing cost of retiree healthcare may result in a 10 percent teacher layoff and an equal increase in class sizes next year.

Before this latest bombshell hit, California already had a $28 billion budget deficit through the middle of 2012, and the state needed to borrow $15 billion by August, just to continue to make payroll. California already has the lowest credit rating of any state in the nation and a $60 billion surprise will not go unnoticed by the credit agencies who were already preparing to downgrade California’s rating.

Over the last 10 years, the actuaries have hidden the true breadth of California’s unfunded retiree costs. Taxpayers should be extremely suspicious as to why the actuaries came clean now. Perhaps the timing of the CalPERS actuary’s announcement is tied to their insider fear that California is on the verge of default.

Chriss Street was the treasurer-tax collector of Orange County from 2006-2010.