If you’re a homeowner, you’ve likely had someone suggest that the easiest way to lower your long-term debt is to make an extra mortgage payment. Thanks to the miracle of compound interest, your total costs in the long run go down.
Last week, Gov. Jerry Brown essentially decided that it was worth applying the same principle to the state government’s debt for the pensions of its employees.
To do so, the governor’s newly revised state budget includes an almost $12- billion payment in the coming fiscal year to the California Public Employees’ Retirement System (CalPERS). Part of that amount is mandatory: a $5.8- billion payment required by law to cover retirement promises that were made to workers, in some cases, decades ago.
The mandatory portion is about 75% more than what the state was paying just five years ago. And for all of the complexity involved with pensions, there’s a simplicity to the math. There are only three pots of money from which to pay pension commitments: employee contributions; employer contributions (which is the state government and, thus, means taxpayer money); and investment returns on CalPERS’ $320-billion portfolio.
Brown’s budget team said last week that a $12-billion infusion of cash now will result in a savings to taxpayers of $11 billion over the next 20 years. A similar prepayment idea to improve the bottom line for county retirement systems has been introduced in the Legislature by state Sen. John Moorlach (R-Costa Mesa).
Read the whole story in the LA Times