Wednesday, January 30, 2013

How Big is California’s “Wall of Debt”?

How Big is California’s “Wall of Debt”?

 
(DP: This is an excerpt from the linked article)

...First of all, the $181.2 billion of debt recognized in Brown’s budget plan does not include unfunded pension and health care debt incurred by any of California’s cities or counties who do not participate in either CalPERS or CalSTRS. Since these two biggest pension funds only cover about two-thirds of California’s state and local government workers, you have to increase this officially recognized unfunded amount by 50%, which adds another $90 billion to the tab. Next, as exhaustively analyzed in a 2011 study authored by Stanford Professor (and former Assemblymember) Joe Nation, entitled “PENSION MATH: How California’s Retirement Spending is Squeezing the State Budget,” if the rate of return on investment currently used by the major pension funds is dropped from 7.5% to 5.5% or even 4.5%, the size of these unfunded liabilities could increase by another $200 to $300 billion.
To summarize, here a very rough estimate of the real “Wall of Debt” confronting California’s taxpayers:
  • $34.7 billion for short-term borrowing by the state
  • $30 billion for short-term borrowing by local cities, counties and agencies (very rough estimate, probably conservative)
  • $80.7 billion for State General Obligation Bonds
  • $177.6 billion for Local General Obligation Bonds
  • $28 billion for Trust Fund Loans
  • $181.2 billion for unfunded retirement and health care liabilities – CalPERS & CalSTRS participants only
  • $90 billion for unfunded retirement and health care liabilities – independent pension plan participants
  • $250 billion – impact of lower investment returns on retirement pension funds (quite likely a conservative estimate)
Grand total: $872 billion, or $23,000 per California resident, or $87,000 per California household.
It is important to emphasize that even using official estimates, about half of the total state and local government debt in California is to fund retirement benefits to government workers. And for anyone who is skeptical that it may be necessary to recognize (and eventually pay) an additional $250 billion in unfunded retirement health care and pension liabilities for California’s state and local government workers, please review the new GASB accounting regulations and the new Moody’s credit rating criteria, both set to take effect in 2014.
When Gov. Jerry Brown suggests that California’s state government is positioning itself to eliminate the so-called “Wall of Debt,” he’d be well advised to consider just how big that wall really is – especially when you remember that the only meaningful calculation of how much California state taxpayers owe must also include the amounts they owe its local governments.
 
 

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