The bailout requires school districts, the state government and teachers to steadily increase their annual contributions to CalSTRS in coming years. The $5.9 billion in 2014 funding for CalSTRS’ future unfunded liabilities ramps up to nearly $11 billion in fiscal 2020-21, with school districts providing 70 percent of the extra funds, 20 percent coming from the state general fund and 10 percent from teachers.

The report is only the latest from the LAO to raise concerns about how the bailout is being implemented. But it offers a particularly serious warning: Even though the 2014 law sharply increases the amount of money that must be set aside for long-term pension costs, it may not reduce long-term state liabilities:

Over the long term, if investments consistently underperform assumptions — or if CalSTRS reduces its investment return assumption — the state’s share of the unfunded liability could increase substantially and state contributions could be several billion dollars higher by the 2040s. As implemented, districts would be largely insulated from large unfunded liabilities under these bad investment scenarios. While there are pros and cons to the implementation — both from the perspective of the state and districts — we are unsure that these are the outcomes the Legislature intended when it passed the CalSTRS funding plan into law.

The concern about low returns has been an increasing focus both of pension systems and financial rating firms. Early last year, when Standard & Poor’s raised California’s credit rating because of its improved revenue picture and relatively tight budgets, it also warned that “the state teachers’ retirement system (CalSTRS) is in need of a long-term funding strategy.”

Life expectancy increase may balloon liabilities

Another factor has CalSTRS officials worried, as Ed Mendel reported this week on calpensions.org:

Last week, the CalSTRS board was told that the life spans of retirees have been increasing faster than anticipated. Two years ago CalPERS increased employer rates to cover longer life spans expected for its retirees.

 

Rick Reed, CalSTRS chief actuary, said the same mortality table has been used for persons age 20 and age 60. A weighted average tends to estimate a life span that is too long for the 60-year-old and too short for the 20-year-old.

 

With new computer technology, Reed said, it’s possible to have a mortality table for each individual for each year. For a person age 20, there would be 70 mortality tables by age 90.

Such technology will also make it easier to track the unpward arc in unfunded liabilities because retirees are living longer.

The double whammy of low investment returns and increased life expectancy has already had a harsh impact on San Francisco. The Chronicle reported in December that these factors had badly undercut hopes that Proposition C, a 2011 pension reform approved by voters, would deliver big savings:

Numbers crunchers say the pension payout for retired government workers could grow to $380 million a year from the city’s general fund by 2019. That’s $113 million more than was projected just last year. … Of the $99 million deficit that the city will have to eliminate by the start of the fiscal year July 1, $42 million is attributable to more going out in pensions than the city is taking in from the fund’s investments. …

Retirees are living longer than expected — and investments are coming in with only a 4 percent return versus the 7.5 percent that actuaries had predicted.

Standard & Poor’s attributed California’s improving budget outlook more to reduced discretionary spending than to tax increases passed in 2012. The fourth-term governor, a relatively moderate Democrat, is under pressure from social service advocates and some lawmakers of his own party to restore services cut during the recession.

This is a crucial point. Many Democratic lawmakers cite Proposition 30’s temporary sales- and income-tax increases as putting the state on the path toward fiscal stability. But to outsiders crunching the numbers, what’s been even more important is Brown’s refusal to go along with the old theory of “baseline budgeting,” which holds that state agency spending must go up by at least the amount of inflation every year, no matter what.

The Bee, unlike most papers, also noted an S&P warning:

“For California, a future revenue slump isn’t only possible, it’s expected,” the credit rating agency Standard & Poor’s said in a report.

An over-optimistic assessment of the state’s future revenue growth, the report said, would be “the most significant identifiable threat to the state’s ongoing fiscal recovery.”

S&P wary of pension bailout costs

But what got no coverage that I saw was S&P’s warning about the immense headaches that state leaders will face as the CalSTRS bailout costs kick in. Here’s the short version: “the state teachers’ retirement system (CalSTRS) is in need of a long-term funding strategy. ”

The bailout mandates that total annual contributions to CalSTRS go from $5.9 billion in 2014 to at least $10.9 billion in fiscal 2020-21. Of the additional $5 billion, 70 percent is to come from school districts, 20 percent from the state general fund and 10 percent from teachers. But since school districts get nearly all their money from the state, the deal actually is likely to require that the state come up with an extra $4.5 billion a year in fiscal 2020-21. The prospect that school districts will be forced to cut elsewhere to pay for the bailout is unlikely.

This is from a May 2014 Cal Watchdog look at the daunting long-term budget numbers:

[We will see] perpetual junkyard-dog budget fights in which the CTA and CFT — determined to grab every last dollar to maintain the status quo of teacher pay raises — fight constantly over funding with every competing lobby or interest group.

Why? Because the bailout is going to cost so much, and in the zero-sum game of state budgeting, the question is whether the cost is absorbed in the larger K-12 state budget — or out of the hides of other state programs. … 

The CTA and the CFT didn’t achieve their dominance of Sacramento by playing nice. Covering the cost of the CalSTRS bailout going forward is going to be the Sacramento version of the federal budget sequester for non-education budget categories. Spending on just about everything but K-12 is going to be curtailed.

It the next year or two, as this sinks in, the push to make the Proposition 30 sales- and income-tax hikes permanent is likely to go from background noise to the biggest issue in Sacramento.

By Chris Reed

California Attorney General Kamala Harris is among the many Americans of all political persuasions who are outraged that few are taking the fall for the grotesque irresponsibility that led to the housing bubble, its collapse, and the recession of the past six years.

She sued quasi-federal mortgage-issuing giants Fannie Mae and Freddie Mac in December over their foreclosures of 12,000 homes in California. Last week, she targeted Standard & Poor’s over the credit-ratings agency’s high marks for many firms involved in the bubble.

But Harris, who is half black and half Indian-American, is doing more than a little grandstanding here. Like most politicians and most of the media, she chooses to ignore the coarse racial politics that led both George W. Bush and Bill Clinton to push policies that inevitably inflated the housing bubble. It’s the uncomfortable back story that is usually ignored in favor of the tidy narrative of evil Wall Street and supine regulators.

On June 17, 2002, Bush announced a drive to get 5.5 million minorities out of apartments and into their own homes. The primary method amounted to affirmative-action lending — eliminating down payments and loosening income requirements. As The New York Times noted in a 2008 analysis, Bush’s primary means of achieving this end was insisting that “Fannie Mae and Freddie Mac meet ambitious new goals for low-income lending.”

Against this backdrop, Harris’ insinuation that Fannie Mae and Freddie Mac were racially predatory looks grossly demagogic. This is from a Huffington Post account of her lawsuit:

“Harris also called on Fannie Mae and Freddie Mac to disclose whether they have complied with civil rights laws protecting minorities and members of the Armed Forces against unlawful convictions and foreclosures.”

So if affirmative action backfires, the quasi-government agency pursuing affirmative action under pressure from the president faces civil liability?

Clinton’s role in inflating the housing bubble was every bit as direct as Bush 43’s. In 1997, he appointed Andrew Cuomo, the current New York governor, to be secretary of housing and urban development. Cuomo had little banking or lending expertise, but he had a broad banking and lending agenda. Veteran journalist Wayne Barrett laid out his folly in a 2008 analysis in Village Voice:

“Cuomo, the youngest Housing and Urban Development secretary in history, made a series of decisions between 1997 and 2001 that gave birth to the country’s current crisis. He took actions that — in combination with many other factors — helped plunge Fannie and Freddie into the subprime markets without putting in place the means to monitor their increasingly risky investments. He turned the Federal Housing Administration mortgage program into a sweetheart lender with sky-high loan ceilings and no money down, and he legalized what a federal judge has branded ‘kickbacks’ to brokers that have fueled the sale of overpriced and unsupportable loans. …

“Perhaps the only domestic issue George Bush and Bill Clinton were in complete agreement about was maximizing home ownership, each trying to lay claim to a record percentage of homeowners, and both describing their efforts as a boon to blacks and Hispanics. HUD, Fannie, and Freddie were their instruments, and, as is now apparent, the more unsavory the means, the greater the growth.…

“Cuomo … did more to set these forces of unregulated expansion in motion than any other secretary and then boasted about it, presenting his initiatives as crusades for racial and social justice … .”

Somehow I doubt this coarse and depressing history will be mentioned by Kamala Harris, who is an utterly conventional California Democrat despite her exotic background and moralistic rhetoric. Wall Street did behave with gross irresponsibility, Standard & Poor’s did fail as a credit-ratings analyst, and thousands of other white-collar types did behave unethically. But the ethical failing that started it all was bipartisan racial pandering dressed up as the pursuit of “social justice.”

The result here in the Golden State:

“Latino and African-American homeowners in California have experienced foreclosure rates 2.3 and 1.9 times that of non-Hispanic white borrowers.  Latino borrowers alone make up 48 percent of all foreclosures.”

That is from a 2010 report by the California branch of the Center for Responsible Lending. How perverse that from 1997 to 2006, the Center for Irresponsible Lending was at 1600 Pennsylvania Ave.

By Katy Grimes

This morning Assembly Speaker John Perez, D-Los Angeles, and Senate President Pro Tem Darrell Steinberg, D-Sacramento, anounced big solutions for the state’s budget problems. They said the Senate and Assembly budget proposals, due on Friday, will close the deficit this year, erase $200 billion in debt, create a structural balanced budget and provide the state with $2 billion in reserves by the 2015-16 budget year.

Steinberg and Perez told reporters that, because they stand for the middle class and the poor, they’ve made tough choices, and it’s time that California ended its chronic budget problems.

And they are going to perform all of this budget magic without any additional borrowing.

Miracle of all miracles–California will be in the black by the end of the 2011-12 budget year, which ends on June 30, apparently just because it’s the right thing to do.

Ahem…not so fast.

After years of record deficit spending, why did Steinberg and Perez pick now to pass a balanced budget? Why would the state start disciplining itself now?

I always look at motive when I am seeking answers.

The answer

Standard & Poor’s is threatening to downgrade California’s outlook if lawmakers don’t balance the budget without gimmicks. “We are  being disciplined by our lenders who will downgrade us for fudging,” said Assemblywoman Diane Harkey, R-Dana Point.

Bad old  Wall Street bankers are forcing California to clean up its financial mess in order to prevent a catastrophic economic tsunami.

California’s economy is nearly one-eighth of the entire country’s gross domestic product. It totals 30 percent of the debt carried by all 50 states, according to Gabriel Petek, an S&P analyst. Petek, interviewed by FOX Business, said that California is overly reliant  on personal income taxes, and that the state’s tax structure is behind the deficit because of this reliance.

In 2009, the Legislature voted to allow the state to pay up to 12 percent on short-term variable borrowing,  instead of the 5 percent the state had been paying.

“This is junk bond debt,” said Harkey, who fought against the debt authoriztion bill, SB 116, by state Sen. Ron Calderon, D-Montebello.

California needs a $1.8 billion cash flow in short term borrowing this July, but S&P is requiring the money to be repaid by the end of the budget year.

Steinberg and Perez said that they don’t want to fight with Brown, but are prepared to. They plan to bring a vote on the budget Friday.

“You don’t need to cut deeper when you have a structural balance in one to two years,” Steinberg said. “Cuts are a necessity, but not a virtue.”

According to legend, fabled bluesman Robert Johnson made a pact with the devil at a “crossroads” in Mississippi where he sold his soul to gain mastery of the blues. Eric Clapton long has played a version of Johnson’s song, “Crossroads.”

Now, reports the Bee:

Standard & Poor’s said Thursday that California sits at an “important crossroad” for its credit rating depending on how it deals with its structural deficit problems in the coming weeks.

California has never defaulted on general obligation bond repayment, but the state’s A- rating already ranks lowest in the nation in the wake of annual budget woes.

Indeed. For decades, California has made a pact with the Devil: Increase spending infinitely, without having to pay for it. But the Devil always lies.

It’s like in that classic “Twilight Zone” episode, “Escape Clause,” where they guy makes a pact with the Devil for immortality. The guy gets immortality, then goes out and tests it various ways, such as by trying to get involved in fatal accidents — which he always survives.

After his wife dies accidentally, he confesses that he mudered her. He wants to test the electric chair. But instead of getting a death sentence, he gets — life in prison.

That’s California. It’s supposed to be the Golden State. But the government, run by the government unions, has stuck is in a fiscal prison for eternity.

Click here for Part 1 of “Escape Clause”

Click here for Part 2.

Click here for Part 3.

May 19, 2011