2010 October 22 Friday
Yet Another Report On California Financial Disaster

Mish Shedlock takes a look at a new Milken Institute report about California's massive unfunded pension liabilities. The disaster is epic in scope. What is most important about this problem: Governments are losing the ability to pay off all their major interest groups. Governments are going to be forced to deliver less year after year.

  • By around 2012 or 2013, the three major state pensions’ obligations will be more than five times as large as total state tax revenue.
  • Not only will California’s growing senior population depend on Medi-Cal and other state services, but public school enrollment is likely to rise in the coming years. The state can ill afford to fund pensions by cutting back on these services.
  • In 2009, the pension liability came out to $3,000 per working-age adult in the state. By 2014, it will triple to over $10,000 per working-age Californian.
  • Raising employee contributions alone will be less effective over time as the ratio of actively contributing members to benefit recipients continues to decrease.
  • Currently, the average state employee contributes to the system for 25 years, but will receive benefits for 26 years — and the number of benefit-receiving years is increasing as longevity improves.

Obviously retirement ages must be raised. People can't work for fewer years than they collect benefits. That's ridiculous and should be stopped pronto. You might think that the state pension funds deny the size of the problem and that maybe the outsiders complaining are just anti-government rabble-rousers. But no. The chief actuary of CalPERS (one of the 2 big Cal state pension plans) says the system is not sustainable. He's the chief actuary saying this. The unfunded liabilities hole can't be filled just with taxes.

The problem is not limited to just one state government. A former mayor of LA says the bankruptcy of Los Angeles is inevitable. Many state and local governments underfunded their public employee pension programs. Since state pension funds use unrealistic assumptions of 7.5% to 8.5% yearly average returns on their investments their underfunding is worse than their official claims. Imagine we go thru a 10 year period with near 0 returns on stock market. The unfunded liabilities of the states would balloon so large that bankrupcty would be hard to avoid. I expect The Impending World Energy Mess to slash state and local government tax revenues while also turning stock market returns negative.

So which interest groups will take the biggest hits? The hits might not be proportional to how much each group is getting now. Current government employees, retired government employees, poor folks, children, car drivers, firemen, school administrators, school teachers, bureaucracies that build low income housing, and assorted other groups will all lose something. How will the hits fall? Which groups have less defensible positions? Which groups are least sympathetic?

Government outlays could rise even as their perceived levels of delivered benefits decline. How? Partly because of interest payments. When interest payments rise faster than tax revenues then outlays for services today go down.

Also, retirement benefits deliver large numbers of tax dollars to a small fraction of the population (e.g. Cal state government retirees). So the surge in outlays for retirees means that a far larger number of direct and indirect recipients of smaller amounts of government outlays will feel the pinch. Everyone will experience worse roads for example. Parents will watch their local schools get their budgets cut for expenditures on current teachers, administrators, supplies, and buildings. Fewer police will mean more crime.

The fiscal disaster of US states such as California and Illinois has a lot of parallels with that of Greece and other PIIGS. What we see in California and Greece presages a much larger government funding crisis that is building up. This crisis is obviously important because of its impact on taxes and government services. But it is even more important because it effectively is a wall that the growth of the welfare state is running into.

Hitting the wall of government growth means resentment of elites will grow. It also means the elite factions and other factions will come into more direct conflict and settled issues will become unsettled again. Fixed entitlements will become unfixed. Decades long promises will be broken. As governments approach bankruptcy old settlements of political battles will be repudiated out of necessity.

Firemen have always been popular with citizens. But government employees are coming to be seen as having it much better than the masses. Conor Friedersdorf points to a great xtranormal video on extremely well-paid fire fighters in California.

Resentment of fire, police, housing agencies, and assorted pieces government will grow as people feel more economic pain. Lots more mocking and angry videos to come. On the bright side, we should get to watch some really good biting satire.

Share |      By Randall Parker at 2010 October 22 08:08 PM  Economics Sovereign Crises

Engineer-Poet said at October 25, 2010 5:06 PM:

Non-citizens don't (or at least aren't supposed to) vote.  As Los Angeles goes bankrupt, citizen taxpayers are bound to scream for Proposition 187 to be re-instated and all the illegal aliens and their parasitic anchor babies to be sent packing.

Mercer said at October 26, 2010 6:31 PM:

I live in a small town outside CA. Our firefighters are volunteers. It may be impossible to have an all volunteer department in an urban area but you don't have to pay lavish salaries. There are plenty of men who like to work with big expensive equipment and don't have a college degree.

no i don't said at October 26, 2010 6:40 PM:

Man, this "extranormal" guy is sooooo deep... In the end I couldn't understand if the point was to blame (and insult) firefighters or corrupt politicians. Nor if the suit was angry at the firefighter because he makes more money and gets more benefits... Nor in what part of the immensity of the "private sector" does the four-eyed work.

It's not that the firefighter makes a lot. It has to do with a few sucking big the work of the many.

As far as Engineer-Poet... Well, yet another dummy who thinks the U.S. is crumbling because of immigration, while in fact it might just be immigration -legal and illegal- one of the few pillars still bearing the dumb weight of the U.S.'s lazy bulk. Immigrants are usually the hardest working people, specially illegal immigrants. Let's see how many hours of field and farm labor can Engineer-Poet put up with.

I suppose hard-working tax-paying immigrants are more dangerous than today's legal politicians and white-collar long-fingered wall-street thieves.

Nope, the collapse of empires has to do with lack of culture, lack of historical context, lack of anthropological perspective, lack of global vision, lack of education, but first of all it may have to do with generalized malnutrition.

Engineer-Poet said at October 26, 2010 9:11 PM:
Immigrants are usually the hardest working people, specially illegal immigrants.
Yet they are still a net drain on the taxpayer (especially if they have children), and their "hard-working" nature turned into a very high rate of dependence on public assistance if they're legalized.

Send them home.  If you like them so much, go with them.

Mthson said at October 27, 2010 8:13 AM:
Immigrants are usually the hardest working people, specially illegal immigrants.

Much of the low-IQ work is only useful because there's an oversupply of low IQ people to do it. With a high average national IQ, it'd become economic to create automated systems for mindless tasks. That's why the US doesn't use some innovative agricultural technologies in use in countries with a smaller low IQ population.

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