Unfunded Liabilities in California Pensions to Weigh Heavy on Taxpayer | Financial Buzz

Unfunded Liabilities in California Pensions to Weigh Heavy on Taxpayer

Data from emerging from research at Stanford University could indicate tough times ahead for the California taxpayer. With unfunded liabilities in the pension system heading north, shortfalls will need to be bridged by the taxpayer.

Healthy state finances, but unfunded pension liabilities rise USD 24 Bn

The unfunded pension liabilities in California have been on the rise, in spite of a good run. While the state budget has seen a surplus and the economy is growing at a steady lick, that hasn’t been enough to avoid a darker outlook on the pension front.

In the fiscal year 2014-15 alone, the jump in unfunded liabilities in the retirement system was USD 24 billion – nothing to sniff at. Of this over half came from the California Public Employees Retirement System that clocked an increase of USD 15 billion. The California State Teachers Retirement System saw unfunded pension promises up by USD 9 billion. This amounts to a total of USD 140 billion between them. Earlier numbers were a more modest USD 72.7 billion and USD for 43.3 billion for the former and latter respectively. CalSTRS and CalPERS are among the largest pension funds in the country.

Interest rate to increase burden

A rate of 7.5 percent is applied to such unfunded liabilities, which when viewed in the context of the USD 24 billion figure is daunting. Californian residents and taxpayers will need to prepare for some significant tax increases as well as service cuts as the state administrations manages this commitment. The researcher from Stanford University estimates these cuts and increases will need to make USD 50 billion available over the next 30 years.

Under California law, if such unfunded liabilities exist in the pension system, taxpayers must be held liable for bridging the gap. This has highlighted another long standing issue on the need for changes in the area of pension funds, at both the state as well as the local level.

San Diego is heading this reform movement for now, and Carl DeMaio, a councilman from the city, is leading the charge. He is working for a reform in the system that could require voters to approve any rise in pensions. In addition the changes he is pushing for will mean new public employees may see their pension as well as health care benefits being limited.

Funds face threat of dipping value

To add to the already challenging times ahead, it appears that both funds may also have experienced a drop of 9 percent in their value since the data in the report that stops at June 2015. The reality of how it plays out will only be revealed by early July this year, as data and analysis comes in for the current fiscal year.

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