California Dreaming

The latest Public Policy Institute of California poll shows Gov. Brown’s proposed tax initiative – which hasn’t yet qualified for the ballot – currently has 54 percent support among likely voters. Historically in this state, ballot initiatives lose support over time, so it looks like an uphill climb. If the unscientific San Francisco Chronicle readers’ poll accompanying the article is any indication, the opposition is just getting warmed up.

Leaving aside the usual back-and-forth over tax increases and spending cuts, there is the question of what exactly the new tax revenue will be spent on. David Crane thinks he has the answer.

Crane is an investment banker and a Democrat. He was appointed by Gov. Schwarzenegger to sit on the board of the California State Teacher Retirement System (CalSTRS). He did for a year, until he was refused confirmation by the state legislature, which disliked his repeated concerns about the future health of the state’s pension funds. Crane says whatever new money is raised by the Brown ballot initiative will have to cover pension contributions:

Because CalSTRS has earned only 60 percent of its forecasted investment return since 1999, it needs school districts to boost contributions by more than $100 billion. Worse, CalSTRS waited so long to seek more contributions that its request is now for an extra $4.5 billion a year, almost double the $5 billion a year it already receives in contributions.

…To compound the problem, during the real-estate bubble the CalSTRS board bet more on ever-rising home prices, even purchasing land for prospective development. Since then, it has earned less than zero on its substantial real-estate portfolio and, more important for the school districts on the hook for shortfalls, suffered a loss of more than 10 percent a year as compared with the return the fund must earn to meet its forecasts.

CalSTRS is now so far behind its forecast that the stock market would have to be almost 2.5 times higher than it is today in order for the system to meet that forecast, and from that point would have to double every nine years to keep pace. As a result, 6 million schoolchildren will get no benefit from the proposed tax increase. Worse, unless accompanied by a systemic solution, the tax increase will simply mask the problem and enable it to grow.

None of this should come as a shock to anyone. Crane and others have warned about this inevitability for years. Here’s an excerpt from an August 2006 Los Angeles Times story:

Democratic legislators, who receive millions in campaign donations from teachers unions and other government labor groups, said it wasn’t Crane’s job to meddle in investment forecasts. California’s numbers are in line with those of other states, they note, and its pension investments have beat projections over the last 20 years.

But Crane, a close friend of Gov. Arnold Schwarzenegger, represents a cadre of market gurus who see investment profits flattening. They worry that state pension systems are heading down the same path as corporate retirement plans that hit trouble after failing to meet rosy earnings projections.

…The stakes are huge — especially for California, which has more than $350 billion in retirement funds covering teachers and other public employees. Falling short of the nearly 8% return that state money managers project for those funds could create deficits of tens of billions of dollars.

Taxpayers would have to ante up; retirees’ benefits are locked in by contract. Elected officials could be forced to raise taxes, cut services or borrow money. California’s teacher retirement fund already has a projected $20-billion shortfall.

Let’s laugh and cry at the same time at that last figure – $20 billion. CalSTRS just announced its current shortfall is $64.5 billion.