Gov. Jerry Brown's claim that he balanced his proposed 2013-14 budget ignores that he's driving the state teacher pension system deeper into debt by shortchanging it at least $4.5 billion.
Teachers will almost certainly receive retirement payments they have earned. It's our children, the next generation of taxpayers, who will suffer. They will be stuck with an astronomical bill we should be paying now.
Blame state lawmakers, who continue to ignore a crisis that's been building for a decade. The California State Teachers' Retirement System, which has warned about the shortfall, will this coming week report to the Legislature that the pension plan is underfunded by $64 billion.
An improving economy will not solve the problem. According to a recently released draft of the report, erasing that debt through investment returns would require 17 percent annual returns for the next five years followed by 7.5 percent each year for a quarter century.
Nor will last year's much-touted, so-called pension reform provide meaningful help, according to CalSTRS. A forecast that the system will go broke in 2046 has been extended to 2047 thanks to the "landmark" legislation.
CalSTRS' talk of insolvency stems from its inability to control its destiny. As underfunded as other systems are, they can at least impose a payment plan to eliminate their debts. It's common to amortize liabilities over 18-30 years and force state and local governments to pay more each year.
But CalSTRS, which serves K-12 school districts and community colleges, lacks the legal authority to raise contribution rates. It must turn to the political arena, to the Legislature and governor, who have thus far done nothing. As a result, the problem has gotten worse.
Currently, for every dollar of teacher payroll, school districts contribute another 8.25 cents to the pension system, teachers pay 8 cents and the state kicks in about 2.8 cents. That total of about 19 cents roughly covers the future cost of the pension benefits workers are currently earning.
But that assumes the pension system investments earn 7.5 percent annual returns long into the future. Past CalSTRS investment projections have fallen short. That's a major reason for the $64 billion unfunded liability.
To pay that off over 30 years would require the additional $4.5 billion annually, according to CalSTRS. It's the bare minimum payment that should be made now. It would add another 15 cents to every dollar of payroll, bringing the total to 34 cents.
In fact, that's probably not enough. For starters, CalSTRS figures it has only about a 50 percent chance of hitting its investment target. If it falls short, more contributions will be needed.
Second, the notion of paying off debt over 30 years is antithetical to the idea of a prefunded pension system. Public employee retirement plans like those offered by CalSTRS are supposed to be funded like other compensation -- when the employee performs the labor, not years down the line.
Each year, workers earn salaries, current benefits like health insurance, and future compensation through pension benefits. To pay for those future benefits, the employer and employee are supposed to set aside enough money now so that, after investment earnings, there are sufficient funds to cover retirement payments when they come due.
If those investment earnings fall short, they should be made up quickly. By deferring payments up to 30 years, we are making future taxpayers cover the cost of labor that has already been provided. It's intergenerational theft.
At a minimum, that debt should be paid off in far less than 30 years, as many pension systems do. That would mean higher annual payments now, but savings over the long term.
CalSTRS, in its upcoming report to the Legislature, proposes just the opposite. It suggests a 30-year repayment option and, amazingly, a 75-year alternative. Our great-grandchildren would be paying our debts.
That's morally and fiscally wrong.
Although Brown mentions the huge unfunded pension liability in his proposed budget and the Legislature will hold hearings on the problem, neither has offered a solution.
In the meantime, they should stop claiming the budget is balanced when they're not even paying their bills.