California’s Hidden Expenses: Part IV

$3.5B YOY Growth In Unfunded Teacher Pensions

California’s Teacher Pension Fund (CalSTRS) recently released its latest CAFR (Comprehensive Annual Financial Report) showing the state’s Unfunded Liability for Teacher Pensions grew to $76.2 billion from $72.7 billion the year before:

Page 124 CALSTRS COMPREHENSIVE ANNUAL FINANCIAL REPORT 2016

How did the state quietly add $3.5 billion of debt in a single year without voter approval or disclosure in the state budget?

The answer: The state employs a form of cash-basis budgeting that ignores growth in unfunded pension liabilities. It works as described here. From 2010–2015 the state quietly added $20 billion of teacher pension debt.

Note that CalSTRS’s figure is 18 months old. The liability has grown since then. Note also that CalSTRS understates the liability by using an inappropriate discount rate for the purposes of present-valuing obligations owed by high quality credits such as California (see More Alternative Facts From CalSTRS).

California’s budget this year will ignore more than $16 billion of costs.

Combined with other off-budget items described here, here and here, California’s budget this year will ignore more than $16 billion of costs. Those costs automatically become debt without disclosure in the state budget or voter approval. Past off-budget non-disclosure has already led to the quiet, unapproved accumulation by the state of more than $200 billion of pension and retiree healthcare (OPEB) debt, more than twice the amount of state General Obligation Bonds. The service of that off-budget debt is already crowding out public services. Over the next 30 years another $500 billion will get crowded out and new undisclosed liabilities are being added every day. This is why Paul Volcker, Alice Rivlin and other budget experts have called on states to adopt transparent budgeting practices that accurately reflect in budgets the creation of expenses at the time of their creation.