California’s Hidden Expenses: Part III

$6B YOY Growth In Unfunded Pensions Owed State Employees

Last year Governor Brown listed the state’s liability for State Employee Pensions at $43 billion (see below and page 3 here). This year he lists that same liability at $49 billion (page 8 here). How did the state quietly add $6 billion of debt in a single year without disclosure or voter approval?

Liability for State Employee Pensions, Page 3, Governor’s FY17–18 Budget, dollars in millions
Liability for State Employee Pensions, Page 8, Governor’s FY16–17 Budget, dollars in millions

The answer: The state budget employs a form of accounting that ignores that growth. It works like this:

Let’s say you own a small business with $100,000 in net income and $1 million of debt on which you pay $50,000 per year of interest. You take a one-year sabbatical, leaving the business to your nephew to run for that year. When you return, your nephew proudly tells you that he got net income up to $150,000! When you ask how, he tells you he convinced the banks to add the annual interest expense to the balance of the loan.

Of course, you inform your nephew that the growth in income was offset by the growth in debt. But Governor Brown’s budget isn’t informing legislators or citizens. Instead, his budget ignores and quietly adds $6 billion to state obligations. Because that obligation accrues interest at 7.5 percent, it will translate into ~$18 billion of expense for future budgets.

Since Brown took office in 2011, the state has quietly added more than $25 billion of unfunded pension obligations to state employees (not including billions more in additional pension obligations to teachers). The reason for that growth is explained here. Because it accrues interest at 7.5 percent, that $25 billion will translate into ~$75 billion of expense for future budgets.

To his credit, Brown proposed a meaningful pension reform in 2012 but was blocked by the Regressive (ie, government-employee-union-controlled) wing of the Democratic Party. As a result, unfunded pension obligations to state employees have doubled since he took office. In contrast, Rhode Island under Governor Gina Raimondo (D) has halved its pension liabilities.

Absent reform, CA’s pension spending will continue rising at a rapid rate. The consequences are falling hardest on California’s most defenseless citizens. Whether or not Governor Brown chooses to pursue serious pension reform during his last two years of office, he should include the growth of unfunded liabilities in his annual budgets. He should adopt this approach in the May Revision to the budget and set a powerful precedent.