It's that time of the year again.
No, not Christmas. It's the time of the year when the state of California starts paying its bills in IOU's.

California lawmakers passed a bill to let recipients use state IOUs to pay fees and taxes owed to the government in Sacramento, if the warrants are issued.
The bill, from Assemblyman Joel Anderson, a San Diego Republican, passed the Senate unanimously. It requires all state agencies to accept registered warrants issued to pay for goods and services. The Assembly unanimously approved the measure in September.

The state could start handing out these IOU's as soon as two weeks from today.

One thing you can count on is that blame and suggestions on how to fix the budget mess will start flying fast and furious. Some ideas will be crazy. Some reasonable, but long on image and short on impact. Many good ideas will never be considered.
What is also sure to happen is you will see a blizzard of numbers. Some will be created out of thin air. Most will be half-truths. Almost none of them will give you an honest perspective on what the actual problems are.

That's why I am presenting this essay, so that you can make a rational judgment for yourself.

Let's blame it all on public employees!

As the California budget process drones on there is a lot of uninformed dialog blurring the true facts. There are a few numbers that can be taken at face value such as the states $19B deficit. But what about other things I have heard? Like half the states budget goes to pay salaries, or CA state pensions are $100K.

So lets start with some facts. The independent CA Budget Project (2010) came up with some very interesting statistics. Compared to other states CA ranks near the bottom of state employees relative to population. In 2008, California ranked 48th out of the 50 states with respect to the number of state employees per 10,000 residents.

Can you name the top 4 departments for the State of CA? They are, in descending order. University of CA (UC), California Department of Corrections (CDCR), California State University (CSU), and Department of Transportation (DOT). Can you identify how much of the state budget goes to salaries? In 2009-10, the state will spend an estimated $22.2 billion on state employees' salaries, equal to 17.8 percent of total spending. More than two-thirds (68.1 percent) of state salaries goes to workers in the UC, the CSU, the CDCR, and transportation departments. UC and CSU account for 37.8 percent of all state employees.

In the last 20 years the CDCR has grown from #3 to #2 largest employer. CDCR the second largest employer accounts for 17.4% of the state workforce. In that time period the CDCR grew at four times the rate of the rest of state employment at 123% to 31.2%.

Remember I said above that CA ranked 48 out of 50 in terms of state employees/10,000 residents? In the last 20 years state employment has only increased 0.6% per 1000 CA residents. When you remove CDCR from the equation state employment actually drops from 7.8% to 7.6% per 1000 CA residents.

What is this telling you? That CA spends the bulk of its budget in two areas education and incarceration. Where do we find some of the highest salaries and pensions? At the administrator, executive and badge carrier levels. However the Governor lacks direct budget authority for UC. What's more, many UC employees are paid solely by federal and private grants.

What is going on with these two areas? According to the Sacramento Bee (2/28/2010) in 1980, 10% of the general fund went to UC and CSU and 3% to CDCR. Today 11% of the general fund goes to CDCR and 7.5% to public universities. Within our university system has been an explosion of assistant and associate vice presidents, deans and directors that typically earn $100K or more.

Over the last 10 years enrollment has increased by 40% and employment has increased by 30%. On the surface that doesn't seem out of line. Digging deeper we find the breakdown to be most revealing. In the mid 1990's the number of faculty/ admin was roughly 2:1, today the ratio is nearly 1:1.

In the last 15 years full time senior admin. has increased by 97% (4,299 to 8,470) while full time faculty has only increased by 23% (7,175 to 8,851). Is it any wonder why tuition in CA has skyrocketed? Our children are mortgaging their future by borrowing heavily so that senior administration can get bigger bonuses.

On a intersting side note current Governor candidate Meg Whitman has used the popular meme of state employee bashing in an attempt to win votes. Stating that, if elected, she would reduce state workforce by cutting 40,000 government jobs.

We have already noted that the Governor has no direct authority over the university budget. In addition the governor does not control any of the constitutional officer departments as well. This explains why over 87K state employees have not been furloughed. The governor's authority over the state workforce only extends to 57% of total employees or currently 202K.

Of that number 77K work for CDCR or CHP which Whitman said she would avoid cuts to even though this is where the largest increase has been in recent years. In the last 5 years CDCR and CYA have added 17K more employees. CHP has grown more than 12% in the size of their workforce.

Eliminating these areas Whitman intends to cut 40,000 employees from the remaining 125K employees under governor control, or by roughly 1/3, in the areas of transportation, health and human services and environmental protection.

Let's blame the public pensions!

I am not going to deny that there may be a problem with CalPERS pension system because I do not have access to certain proprietary data. There is a number of reports that have been published that are available which can help clear up much of the misinformation and partisan agenda hackery that is trying to pass as 'journalism'.

The primary source of grinding misinformation and union bashing comes from the Stanford Institute for Economic Policy Research. This report was initiated by GAS and set out to prove an already predetermined outcome as evidenced by this statement.

"Complying with Governmental Accounting Standards Board (GASB) Statement #25, public pension funds discount future pension liabilities at the same rate they expect to earn every year on invested assets.2 We believe this rule leads to understated publicly reported pension liabilities."

What they have just admitted to is that CalPERS is following government accounting standards. They then go on to support this disagreement by creating their own set of data to support the GAS agenda.

Outside of crunched numbers to fit a predetermined outcome lies this little fact.
Ironically, it's the states themselves, and not investment performance, that are primarily responsible for the growing deficit in pension funding. According to the Pew Center, only about one-third of states in fiscal year 2008 were consistently putting in 90% or more of what was required to get their plan to a fully funded status. That year, states and participating localities should have paid about $108 billion. Instead, they contributed just $72 billion.
How states could get away with this is simple: there are no federal regulations that require them to make their
full contribution. Just two states, Arizona and New York, have statutes or constitutional requirements that require them to make those payments.

"Those that have tied their own hands to do that are the ones that have not found themselves in trouble despite the recession," Urahn says.

But the state payment to CalPERS, $150 million in 2000, is $3.9 billion in the new fiscal year.
Much of the dramatic increase is because CalPERS, with a surplus from a booming economy, gave the state a contribution "holiday" in 2000, dropping the state payment from $1.2 billion several years earlier.

What does the highlights of the Stanford Study "Going for Broke"have to say:

"Since pension liabilities are effectively riskless, we believe they should be discounted and reported at riskfree rates."

What is SIEPR discount rate?
"As a proxy for the risk-free rate we use the yield-to-maturity (YTM) of 10-year US Treasury Bills in February 2010"
Reviewing the yield of TNX for February 2010 runs roughly 3.5% to 3.6%. Roughly half the return of CalPERS target of 7.75%. So what have been CalPERS returns?

"using CalPERS as an example, as we can observe in Figure 6, the CalPERS portfolio has had returns averaging 7.91 percent over the last 25 years,"

By SIEPR own admission CalPERS has beat their own target for over two and a half decades.

"Between June 2008 and June 2009, these three public pension funds lost a combined $109.7 billion in portfolio value."

This isn't some groundshaking revelation as all portfolios during this timeframe lost value. In fact during the '08-'09 crash all major indicies lost between 35% and 40%, only one asset class went up during this time period.

SIEPR only considers a pension fully funded if it has 100% of the funds on deposit at all times. They do not bother to mention that only Arizona and New York are the only two states required by law to fully fund their pensions and neither consider 100% to be fully funded.

By far the most disingenuous data in the report comes from this statement.

"Adjusting the discount rate used on liabilities to a risk-free rate, we estimate the combined funding shortfall of CalPERS, CalSTRS, and UCRS prior to the 2008/2009 recession at $425.2 billion."

SIEPR has used figures from 2001-June 2009. Why did they choose these dates? Because 2001 was the peak of the Tech boom and June 2009 was the trough of the 08/09 crash. By taking these extreme highs and lows and compounding it with a return of one-half you can easily see how they arrived at these skewed numbers.

What has happened to the CalPERS trust fund since June 2009? A press release from CalPERS 1/20/2010 states:
The California Public Employees' Retirement System (CalPERS) said today that it earned an 11.80 percent return on investments for the 2009 calendar year.

Since March 2009, when global financial markets plunged amid a historic worldwide economic recession, the CalPERS market value of assets has come back by more than $46 billion. Total fund assets closed 2009 at $203.3 billion. Today they stand at more than $206 billion, up more than $3 billion in just the first three weeks of the new year.

It should be noted to clear any confusion that benefit payments are made from the CalPERS pension trust fund not from the State's general fund. Ironically the millions that have been spent by GAS for court costs and attorney fees regarding his proposed minimum wage and furlough scheme does come out of the general fund.

A study released by the Applied Research Center, California State University, Sacramento Every taxpayer dollar invested for pensions at CalPERS generates a return of $8.55 to the California economy. Each dollar invested with CalSTRS generates $6.71.
CalPERS earned a 9.31 percent rate of return during the past decade. These earnings pay an average of 76 percent of the retirees' monthly checks. CalSTRS has achieved a 9.11 percent rate of return over the past decade, with an annual rate of 13.21 percent in 2006. These earnings pay almost 75 percent of the retirees' monthly checks.

This essay was written with the help of joeshwingding