Last week, Governor Jerry Brown announced expectations of a $891 million budget surplus in California for the coming fiscal year. It is premised, of course, on higher tax receipts after the referendum that was passed back in November. I am planning to do my own research on the budget to assess how realistic it is, but let me offer at least one potential point of contention up front.
As we know, the state of California has a simply humongous public pension system. To the extent that there is ever a shortfall, the onus falls on the taxpayers to cover it. Currently, CalPERS assumes a 7.25% annual return. That target (which only reflects the most recent reduction in the discount rate) has not been hit in a great long while. Partly because of terrible management, partly because we live in a ZIRP world. At this point, the accumulated shortfall is projected to be anywhere from $162 billion to almost $900 billion.
So, when you hear about budget surpluses, keep in mind that it is relying on some pretty optimistic expectations for a pension program that has been a terrible underperformer.
