The County of Humboldt has been looking closely at ways to reduce the future impacts of our estimated $220 million worth of unfunded pension liabilities. The bad news is that very little progress has been made at dealing with the issue.
The worse news is that the actual amount of unfunded liabilities may be way, way higher than originally thought.
In case you hadn’t noticed from previous posts, THC frickin’ loves the Legislate Analyst’s Office and the reports they publish. Mostly because the reports seem straightforward, factual, and really demonstrate that our state and local officials have no idea what’s going on. We also think the LAO is an objective body, but please let us know if you disagree.
The LAO originally pegged California’s unfunded liabilities ringing in at around $340 billion, but that was back in 2014. A link provided along with the LAO’s most recent budget report leads us to the Pacific Research Institute, an “independent” think tank that has some questionable ties to some shady folks. That being said, their take on the pension situation from January of this year is worth noting.
You can read that report in full here, but in true THC fashion, we’ll provide some tidbits. Specifically, we’re interested in how California didn’t properly account for the risk associated with their liabilities. Although this part did get our hackles up:
No, the thing about the unfunded liabilities that should concern everyone is they’re tied to assets that aren’t all that stable, and have vast potential to turn the problem with pensions into a full-blown disaster. We ain’t so good at smarty financial mumbo-jumbo, so we highly suggest you read the report in full, but take this rather telling portion from the report as an indication of what could happen:
“If the riskless nature of the liabilities are properly taken into account, California’s estimated unfunded pension liabilities increase significantly. Instead of California’s public pension funds having an unfunded liability of $170 billion, analyses that account for risk estimate that California’s unfunded liabilities are between $300 billion and $600 billion. Such pension debt levels are the equivalent of between 13 percent and 28 percent of total California state GDP in 2014.”
And here’s the especially scary part, and one that really pisses us off.
“Given the excessively large public pension debt burden, the current policy that public pension promises, once made, are inviolable will impose severe economic costs on Californians for years to come.
Covering the debt burden exclusively through tax increases would require the largest tax increase in California’s history – an annual $28.3 billion net tax increase over the next 30 years. Higher taxes are an impediment to working, saving, and investing. As detailed in the Appendix, there is a robust economics literature linking higher tax rates and higher tax burdens to slower overall economic growth. In the case of California’s unfunded pensions, the necessary increase in the state and local tax burden to fully fund the state’s As detailed in the Appendix, there is a robust economics literature linking higher tax rates and higher tax burdens to slower overall economic growth. 11 current pension system will cause California’s economy to be 21 percent smaller over the next 30 years compared to its current economic growth path due to the adverse impacts on economic growth.
Alternatively, the state can maintain its current 4th highest tax burden in the country, but cut total state and local spending by more than 8 percent across the board. Such an expenditure reduction would, among many other significant spending cuts, entail: a $5.4 billion cut to the school budget, a $4.9 billion cut in spending on income support programs, a $2.9 billion cut to the higher education budget, and a $1.9 billion cut to California’s hospital systems (all compared to the 2012 state and local expenditures as reported by the U.S. Census).”
Neither are good options, huh? We’re all for trimming the fat when it comes to government spending, but we’re also realistic. Such cuts to schools and other things would be tough for our state to absorb. And those potential huge tax increases? So, can we start accelerating pension reform now or nah?