LAO: California Needs to Address $340B in Debt

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LOS ANGELES - California is facing $340 billion in long-term debt obligations, of which only a small portion is being addressed, the state's nonpartisan Legislative Analyst's Office said in a recent report.

The LAO separates the state's liabilities into three main categories, including budgetary, retirement, and infrastructure liabilities.

Of those, the state is addressing all of its infrastructure liabilities, which include the outstanding $75.1 billion of general obligation bonds and $10.2 billion of lease revenue bonds, issued for capital infrastructure.

The state is also addressing around $5.3 billion of its budgetary liabilities, which include repaying outstanding economic recovery bonds, and $50 billion of its retirement liabilities, which include the California Public Employees' Retirement System pension program for state employees.

However, around $200 billion of liabilities require further legislative attention, according to the report. This includes the $73.7 billion unfunded liability of the California State Teachers' Retirement System, which the LAO said should be the state's top priority in paying down.

The office is recommending that the Legislature aim to fully fund the teachers' pension system in about 30 years.

Depending on the funding arrangement, this could be done through additional contributions from the state, teachers, and districts, totaling around $5 billion per year by the early 2020s.

"Addressing this difficult challenge, however, only grows more costly the longer we wait, meaning that the most important action the state can take to minimize costs is to act quickly to increase contributions to CalSTRS," LAO analyst Mac Taylor wrote in the report, released on Wednesday.

After the CalSTRS liability, the LAO recommends making its next priority the $64.6 billion in liabilities for the retiree health benefits of state employees.

"Committing to a plan to prefund retiree health benefits for state employees over 30 years would have cost an additional $1.8 billion in 2013-14," Taylor said. "While this is a significant sum, using investment returns to pay for these benefits would dramatically reduce state costs over the long run."

Other major liabilities that merit further legislative attention, according to the LAO, include the $13.8 billion University of California pension program, $12.5 billion in retiree health benefits for UC employees, $10 billion for school and community college obligations, and $4.5 billion in special fund loans to the general fund.

The LAO said that addressing the CalSTRS liability and some or all of the retiree health unfunded liabilities would mitigate two of the greatest long-term risks to the state budget.

Doing so could mean fewer resources available for other priorities that Gov. Jerry Brown has been targeting, including building budget reserves and paying down the rest of the "wall of debt," as Brown terms it.

"Because CalSTRS and retiree health liabilities tend to have higher interest rates than the items on the wall of debt, failing to prioritize CalSTRS and retiree health will increase the state's budgetary risk in the longer run," Taylor said.

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