California's Coming Massive Wealth Transfer to State Retirees

Among the many states which have promised state employees more in retirement benefits than they can reasonably deliver is the very Democrat state of California.  My last post discussed this problem broadly, but it did not examine the huge scale of the problem for California specifically.  That state is piling up future obligations which will come crashing down on the heads of California taxpayers more and more forcefully over the next decade.  It will act to force many more California businesses to relocate to less burdened states, such as Texas, which has created more than half of the new jobs in the country since the Socialist Recession began.

What California government admitted as of 2008 conditions was:

• The California State Teacher's Retirement System is short $40.5 billion.
• The California Public Employee Retirement System is short $35 billion.

Stuart Buck, a Distinguished Doctoral Fellow at the University of Arkansas has found that losses in the pension funds investments since 2008 has left them an additional $44 billion in the hole.  Worse yet, the state has been assuming that their investments for the pension funds will earn 7.75% to 8% per year return.  Given that we have had a decade of virtually no return on the stock market and given the huge problems which continue to plague the economy such as:

• the continuing home foreclosure crisis
• the further cost of bailing out Fanny Mae and Freddy Mac of about $300 billion
• the many states with hugely underfunded state pension funds totaling about $700 billion
• the many union multiemployer defined benefit pension funds with unfunded liabilities of about $700 billion which will destroy many unionized companies
• the much increased costs of ObamaCare which will increase everyone's premiums, increase medical taxes, greatly increase business costs, and put a huge strain on state budgets
• the increased costs of financial transactions due to the Dodd-Franks financial "reform" bill
• the increased costs of energy use planned by the EPA under its declaration that CO2 is a pollutant
• the increased costs of energy use due to ethanol, wind power, and solar power mandates, which California eagerly pushes forward
• government moves to force more unionization onto companies
• the ever increasing costs of more and more government regulations on businesses and those who pay the higher costs for their products and services
• our corporations will have the world's highest corporate tax rates beginning in 2011 and they are going up to help fund ObamaCare

the 7.75 to 8% rates of return imagined by the California accountants is totally unreasonable.  Unless the state of California is going to invest all of its pension funds in China, their wishful rate is much too high!  So, Buck says that using the more realistic rates of return used by private pension funds, the California pension funds will be $282.2 billion short.  This should be corrected for the current market values, so the real shortage is about $326.6 billion.  It turns out that the retiree health benefits program is also underfunded, by $51.8 billion.  The total shortfall for retirees health and retirement is then $378.8 billion.   This is about half the scale of the shortfalls on liabilities that caused the Socialist Recession that has brought down the entire U.S.!  This would be a disaster if the California Gross State Product were half of the GDP of the U.S.A.  It is a large fraction for a single state, indeed the largest state fraction, but it was only 12.7% in 2008.  This would imply that California will suffer for its state pension fund shortfall about 4 times more than it is suffering from the pain of the current Socialist Recession spread over the entire U.S.

When this entire burden falls on the Democrat-dominated state of California, the People of that state will know the Grim Reaper is among them.  Actions and choices have their consequences despite a peoples' refusal to foresee those consequences.  The California perpetual Christmas for retired state employees will have the characteristic of mass destruction for the people and companies of California.  Currently, the state is spending about $180 billion in 2010.  The unfunded pension liability is the equivalent of 2.1 times the annual state budget now.  If the state of California were to try to rectify the shortfall in these pensions it has a legal obligation to pay, it would require a large increase in tax revenues, which it will be hard to come by due to growth since people and companies are fleeing the already over-taxed state now.  Further tax increases will only accelerate the rate of abandonment.  The Democrats have put the people and the companies of the state of California into a very unforgiving vise, thanks to their many vices.