ARTICLE
Pension Reform and a Growing Tax system are Cause for Concern Governor Jerry Brown has been a strong governor and a moderating force on budget issues. He navigated the state’s looming budget deficits in his first term through effective budget cuts and tax proposals that saved a slumbering economy. Recently, the Governor reached into his legislative bag of tricks to pull off a gas tax increase (the first in a quarter century) and obtained the necessary votes to pass Cap and Trade legislation extending that funding tool into the distant future. That fund is utilized for environmental offsets to address Climate Change. Our weekly E-News covered these two items last month. But when it comes to pensions, the new state budget projects that California has nearly $206 billion in “unfunded liabilities” for the state’s two public pension funds. Over the last eight years we have added $100 billion in unfunded retirement liability for these funds. This is the elephant in the room of state finances, and it is time we got serious about it. You haven’t heard much about the looming pension crisis because elected officials all over the state don’t like talking about it. The usual policy response: kick the problem down the road. However, growing pension costs are now crowding out public investments in other areas including education, environmental programs, social services, and public transportation. The state is being forced to default on its social obligations to pay for its pension obligations. If you’re a progressive, fixing this problem may be the most important issue facing the state. California’s state employees’ pension fund (CalPERS) manages close to $330 billion, making it the largest public pension fund in the nation. Unfortunately, it’s only funded at 65 percent of the amount needed for its commitments to retirees. We’re already seeing pension liabilities crowd out other spending. General fund revenues have grown 28 percent over the past six years, but the share available for discretionary spending outside of public safety has declined from 21 percent of the budget to 12 percent. Over the same time frame, spending on pensions increased 99 percent. We’re also pushing some pension obligations onto the next generation: this year alone, we’re deferring $4.5 billion in obligations. Without changes, millennials and their children will face an enormous tax burden and/or severe cuts in public services. While the pension costs are slowly creeping up, so are our tax obligations. Taxes make it expensive to live in California. According to the Tax Foundation, California has the third-worst business tax climate in the United States. A Legislative Analyst’s Office of California report estimates the legislature’s decision to extend California’s cap and trade program will raise gas prices by up to 63 cents a gallon by 2021 and up to 73 cents a gallon by 2031. California is particularly dependent on high earners and the tech industry. Our proximity to Silicon Valley has a bubbling effect on the Central Coast. That is why many Santa Cruz residents work over the hill - because of the economic opportunities there. 70% of California’s $125 billion general fund comes from state income taxes, and half of income taxes come from the top 1% of taxpayers. In the last five years, California has further increased taxes on the highest earners. Proposition 30 changed the top marginal tax state to 13.3%, the highest tax rate in the United States. This was supposed to be a temporary increase, but Proposition 55 in 2016 extended the tax increase to 2030. California’s high marginal tax rate increases its revenue volatility. Between 1995 and 2013, California had the fifth-highest revenue volatility in the United States. With the higher taxes on top earners, volatility will only increase. Market forces also indicate that the wealthy will be a smaller source of revenue in the future. Studies show that venture capital investments have slowed. Consequently, confidence in the Bay Area’s economy has tapered off. In a recent poll, 56% see a Bay Area recession within 2-3 years. As a result of the Bay Area’s business climate, net migration was negative in 2016. Given California’s reliance on the wealthy to fund our budget, this can have a looming impact for the state. Again, statistical analysis provides a snapshot. When policy shifts and reality hit at the same time — something has to give. What does this mean for our Central Coast? We are straddling the middle of Silicon Valley’s economic growth (tempered compared to 2014-2015) while also seeing out migration because of the overall high cost to live and work on the coast. Since 2000, more people have left California than have arrived from other states every year. Although that trend had slowed earlier in the decade, migration losses accelerated to 110,000 in 2016. This has cost California $36 billion in net personal income since 2010. These losses are also fueled by California’s restrictive housing policies, something that we know well in Santa Cruz. The greatest population outflows have come from the most expensive areas. The least well-off have been hit the hardest –– the poor have disproportionately been chased out of California. Citizens from other states don’t want to move to California. Low net migration numbers are primarily the result of California’s inability to attract immigration. According the U.S. Census data, 1.3% of residents recently arrived from other states, the lowest rate in the United States. The flow of people out of California indicates the state’s poor financial environment compared to other states. The outflow suggests that California is currently not as desirable a place to live and work as it seems in the past. Yet, with the cost of living coupled with new taxes and the non-response to the elephant in the room — growing costs of pensions — we need to start serious conversations soon to address this compounding issue. Elected officials have three choices: raise taxes, reduce pension benefits or raise the retirement age. With the new increases in gas taxes, the suggested additional gas tax increase with Cap and Trade legislation and the extension of Prop 30 tax on the wealthiest in our state, there seems to be no appetite to tip the tax scale again. These are tough decisions that few politicians want to touch, but we need to make hard choices now. There is a first step we can take: lower the assumed rate of return on pension investments. When we lower the rate of return that we expect from investments, we require those who receive pension benefits to pay more up front. It isn’t an easy step but it is a necessary one… let’s see if our leaders in our State Capitol are willing to make hard choices.
Pension Reform and a Growing Tax system are Cause for Concern
Governor Jerry Brown has been a strong governor and a moderating force on budget issues. He navigated the state’s looming budget deficits in his first term through effective budget cuts and tax proposals that saved a slumbering economy.
Recently, the Governor reached into his legislative bag of tricks to pull off a gas tax increase (the first in a quarter century) and obtained the necessary votes to pass Cap and Trade legislation extending that funding tool into the distant future. That fund is utilized for environmental offsets to address Climate Change. Our weekly E-News covered these two items last month.
But when it comes to pensions, the new state budget projects that California has nearly $206 billion in “unfunded liabilities” for the state’s two public pension funds.
Over the last eight years we have added $100 billion in unfunded retirement liability for these funds. This is the elephant in the room of state finances, and it is time we got serious about it.
You haven’t heard much about the looming pension crisis because elected officials all over the state don’t like talking about it. The usual policy response: kick the problem down the road.
However, growing pension costs are now crowding out public investments in other areas including education, environmental programs, social services, and public transportation. The state is being forced to default on its social obligations to pay for its pension obligations. If you’re a progressive, fixing this problem may be the most important issue facing the state.
California’s state employees’ pension fund (CalPERS) manages close to $330 billion, making it the largest public pension fund in the nation. Unfortunately, it’s only funded at 65 percent of the amount needed for its commitments to retirees.
We’re already seeing pension liabilities crowd out other spending. General fund revenues have grown 28 percent over the past six years, but the share available for discretionary spending outside of public safety has declined from 21 percent of the budget to 12 percent. Over the same time frame, spending on pensions increased 99 percent.
We’re also pushing some pension obligations onto the next generation: this year alone, we’re deferring $4.5 billion in obligations. Without changes, millennials and their children will face an enormous tax burden and/or severe cuts in public services.
While the pension costs are slowly creeping up, so are our tax obligations. Taxes make it expensive to live in California. According to the Tax Foundation, California has the third-worst business tax climate in the United States. A Legislative Analyst’s Office of California report estimates the legislature’s decision to extend California’s cap and trade program will raise gas prices by up to 63 cents a gallon by 2021 and up to 73 cents a gallon by 2031.
California is particularly dependent on high earners and the tech industry. Our proximity to Silicon Valley has a bubbling effect on the Central Coast. That is why many Santa Cruz residents work over the hill - because of the economic opportunities there.
70% of California’s $125 billion general fund comes from state income taxes, and half of income taxes come from the top 1% of taxpayers. In the last five years, California has further increased taxes on the highest earners. Proposition 30 changed the top marginal tax state to 13.3%, the highest tax rate in the United States. This was supposed to be a temporary increase, but Proposition 55 in 2016 extended the tax increase to 2030. California’s high marginal tax rate increases its revenue volatility. Between 1995 and 2013, California had the fifth-highest revenue volatility in the United States. With the higher taxes on top earners, volatility will only increase.
Market forces also indicate that the wealthy will be a smaller source of revenue in the future. Studies show that venture capital investments have slowed. Consequently, confidence in the Bay Area’s economy has tapered off. In a recent poll, 56% see a Bay Area recession within 2-3 years. As a result of the Bay Area’s business climate, net migration was negative in 2016. Given California’s reliance on the wealthy to fund our budget, this can have a looming impact for the state. Again, statistical analysis provides a snapshot. When policy shifts and reality hit at the same time — something has to give.
What does this mean for our Central Coast? We are straddling the middle of Silicon Valley’s economic growth (tempered compared to 2014-2015) while also seeing out migration because of the overall high cost to live and work on the coast. Since 2000, more people have left California than have arrived from other states every year. Although that trend had slowed earlier in the decade, migration losses accelerated to 110,000 in 2016. This has cost California $36 billion in net personal income since 2010.
These losses are also fueled by California’s restrictive housing policies, something that we know well in Santa Cruz. The greatest population outflows have come from the most expensive areas. The least well-off have been hit the hardest –– the poor have disproportionately been chased out of California.
Citizens from other states don’t want to move to California. Low net migration numbers are primarily the result of California’s inability to attract immigration. According the U.S. Census data, 1.3% of residents recently arrived from other states, the lowest rate in the United States. The flow of people out of California indicates the state’s poor financial environment compared to other states. The outflow suggests that California is currently not as desirable a place to live and work as it seems in the past.
Yet, with the cost of living coupled with new taxes and the non-response to the elephant in the room — growing costs of pensions — we need to start serious conversations soon to address this compounding issue.
Elected officials have three choices: raise taxes, reduce pension benefits or raise the retirement age. With the new increases in gas taxes, the suggested additional gas tax increase with Cap and Trade legislation and the extension of Prop 30 tax on the wealthiest in our state, there seems to be no appetite to tip the tax scale again. These are tough decisions that few politicians want to touch, but we need to make hard choices now. There is a first step we can take: lower the assumed rate of return on pension investments. When we lower the rate of return that we expect from investments, we require those who receive pension benefits to pay more up front. It isn’t an easy step but it is a necessary one… let’s see if our leaders in our State Capitol are willing to make hard choices.