California – Budget, Taxes & CalPERS!

In USA, I have only stayed in California. It is sad to see the State detoriate as much as it has over the past few years. Over the past several weeks, I have taken a closer look at the health of the State. Why, you may ask. Well, I pay significant USD to the state every year, in terms of Personal Income Taxes and Sales Taxes etc. Similar to how a person would be careful with his/her money when he/she buys a product or invest somewhere, I would like to have a better idea of how the money I provide is being used.

References:

(a) www.ebudget.ca.gov

(b) www.calpers.ca.gov

(c) www.calpersresponds.com

(d) CBS articles

(e) NPR articles

(f) LA Times Articles

First of all, I must apologize for the thought I was carrying for a long time that most of the Public Employees get insane Pensions throughout their Retirement. The average per-year Pension in CA is 25000-36000 USD, which while being nothing to scoff at, is nowhere close to the kind of amounts I was thinking of (and getting worked up over).

I have tried to take as impartial a look as I can, into this matter. Political rhetoric may say something totally different, but it is best to block all that noise out.

There are a lot of good things my Taxes pay for. Roads, Public Schools, Libraries, Law & Order, Fire Department etc. I am very happy to pay them. I am just trying to figure out which hands are currently in the “Cookie Jar”. Obviously, there are a LOT of hands! Else we would not be in the current situation …

California Budget Highlights:

– The State is 25 Billion USD in the red.

– CA Budget runs at around 95 Billion USD per year.

– Almost 50% of the State Income comes from Personal Income Taxes. 25% comes from Sales Taxes. 10% comes from Corporate Taxes.

– 30% of the State Expenses are for K-12 Education. Health & Human Services (HHS) takes around 30% (HHS gets another 55B from “Other” sources. Not really sure what they are). Higher Education gets 10%.

Governor Jerry Brown is proposing an increase of the overall Education part (K-12 + Higher) of the Budget to 55%. I am all for investing in Education. Having used California State University myself, I appreciate the funding it gets. (Is it well used?)

California has 21 “Collective Bargaining” entities! That is a lot of pull right there, with respect to the Legislative Process. Just as Corporations milk their employees, seems to me that the Unions are no saints either.

A closer look at CalPERS:

– California Public Employee Retirement System (CalPERS), started in 1932.

– 1.6 Million State Employees contribute to it (CA State Population is 37 Million. I.e. 4.5% are State Employees!)

– Around 500K people get State Pensions and Benefits currently.

– In 2009, 11 Billion USD was paid in Retirement Benefits. I.e. Around 22000 USD (average) per Beneficiary (by my calculation).

– CalPERS has around 200 Billion USD in Assets (It was at 260B in 2007), making it by far the largest Employee Trust Fund in the Country and an Entity that holds a lot of sway. A stock CalPERS invest in is bound to go up! It is apparently called “CalPERS Effect”!

– The typical Benefits include Pension, Health Care, Death/Disability Benefits etc.

– Public Employee contributes 5-10% of their Salary. Employers (e.g. Schools) contribute a lot as well. (Where does the “Employers” get their funding? From Taxes! I.e. Us). Currently, around 16% is paid by the State. California State pays around 3-4 Billion USD every year to CalPERS.

– Of every 1$ paid in Benefits, around 64c comes from CalPERS Investments, so they claim.

– A typical CalPERS Beneficiary gets around 50% of Salary as the Pension, during retirement.

– “Spiking”! No it is not a Volleyball term. This is the name for Public Employees gaming the system by mucking around with their “Final Year Pay”, the benchmark for their future Pensions. Apparently, in 2003, a Law was passed to address this fraud. I am not sure if it has stopped this practice entirely.

– An Average Beneficiary gets around 25000 USD in Benefits during each year of Retirement, as pre CalPERS. 75% gets less than 36000 USD per year. Around a 1000 Employees get > 100000 USD per year (Typically, Cops, High Officials etc.). Such folks are said to be in the “100K Club”.

Summary:

California is in trouble. No doubt. Just look at the state of our Schools, Roads etc. Estimates are that each California Resident is paying around 3000 USD per year, to fund the Pensions, which personally, do not strike me as too bad. We are referring to folks who have worked for a lot of years for the State and I do not think anyone would want to deny them a reasonable retirement. California Pensions are guaranteed by State Law! If CalPERS cannot pay, then State has to pony up. I.e. California Tax Payers have to. Over the years, a lot of bad investments (a lot of graft is alleged), especially during 2008-10, kickbacks etc. has ensured that there is an almost 500 Billion USD in guaranteed, but unfunded Pension liabilities. Though the State is trying its best to limit the Pensions for new State Employees, the jury is out on its effectiveness.

As I mention above, I do not see the Pensions as being overly excessive. 25000 USD is the average. The Employees as well as the Employers seem to be contributing a lot to it. So, why the 500 Billion shortfall?

2 thoughts on “California – Budget, Taxes & CalPERS!

  1. Satish

    Interesting work out Atto. Its the involvement of citizens in the governence process that makes Governments accountable which results in transparency and improved governance.

  2. kapil

    thought i would take the discussion offlline from facebook to a more serious blogform.

    500k people are withdrawing from calpers now. 1.6m people would be expected to withdraw from calpers at some future time. until they withdraw, they are adding in to the pool. maybe at that time, some x number of people maybe contributing to the pool (where, x>1.6m). my point being: perhaps you are comparing apples and oranges across times. people talk about social welfare ponzi schemes and this arguments perhaps shows why that may be the case.

    you mention that avg pension is 25,000 usd/year. in your 640 bn calculation, you probably assumed a discounting rate of 0%. as you increase the discount rate, the current value of future liability should come down as well (lets say to about 350bn usd). the A-L deficit then is consistent with 64:36 ratio you mentioned in your article. by using 0% discount rate, you seem to instead corroborate my assertion that current low rate(s) environment seems to have blown up the current value of future liabilities.

    but then, this is where it gets into the nitty-gritty. more details are required before we get a comprehensive picture. to what extent is calpers mandate and capability limited is a function of backroom political and fiscal dealings as well calpers’ own asset management skills.

    my conclusion being: unless there are more facts (beyond what you presented), i will be hesitant in understanding who is culpable and by how much.

    thanx,
    kapil

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