California’s Debt to Its Teachers Is Growing by $22 Million a Day

That’s a frightening statistic David Crane, a former economic adviser to Governor Arnold Schwarzenegger, cites in a useful Bloomberg View column on the huge gaps in funding for California’s teacher pensions.

The pension system, CalSTRS, is currently about 70 percent funded, meaning that it has assets that, if projections prove correct, can cover 70 percent of projected payments — the 30 percent that’s unfunded is growing by $22 million a day, or $255 a second.

An unfunded liability, like what the state of California has to the CalSTRS system, isn’t the exact same thing as the normal debt that the state of California carries, but it’s a liability that’s almost as worrisome.

Crane analogizes it to a (terrible) financial instrument called a zero-coupon bond: one that doesn’t require any interest payments until the term of the bond finally comes to an end, and all the interest is paid then. The “bond” that is CalSTRS ends in 2043, when the assets in the fund will be totally depleted, according to current projections — then the state of California will have to start making payments to pay current benefits, and the present value of those obligations at that point would be $600 billion. The sheer size of that amount, which is 13 times what California will spend on K–12 education this year, is why municipalities aren’t really allowed to issue zero-coupon bonds.

But with pensions, the state of California effectively is. The gap right now — the size of the zero-coupon bond — is about $80 billion. And that’s by government accounting, of course, which makes pensions look much more healthily funded than they would if the same financial situation was held by a corporation.

That debt has grown an impressive $25 billion since Governor Jerry Brown took office in 2011. He hasn’t spent one penny on reducing the funding gap — the hook for Crane’s column is that the state assembly’s speaker, Democrat John Perez, has said that California lawmakers need to get cracking on this problem. (To be specific, the unfunded liability is the gap between the payments local governments, community colleges, and teachers themselves have been required by statute to make and the benefits that they’re owed — the state, as sponsor of the pension plan, is the entity legally responsible for filling it.)

Otherwise, it just keeps growing, like “a gigantic financial tapeworm” — the way Warren Buffett’s 2013 investor letter described America’s public-pension problem. This year, California, thanks to a stock-market and tech-investing boom, should have a surplus, and Perez rightly thinks now is the time to start devoting that to unfunded liabilities. CalSTRS’s suggested 30-year plan for fixing the gap would require $4.2 billion next year. There are surely plenty of things Jerry Brown would rather spend $4.2 billion on than an unfunded pension liability — some of them no doubt valuable, some of them worthless. But if he doesn’t do that now, then future governors and legislatures will have to devote even more to fixing the situation in future years, when they would like to be spending on other things, too. Kicking the can is bad financial management and dishonest political maneuvering.

Via the Manhattan Institute’s @PublicSectorInc.

Patrick Brennan — Patrick Brennan is a writer and policy analyst based in Washington, D.C. He was Director of Digital Content for Marco Rubio's presidential campaign, writing op-eds, policy content, and leading the ...

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