The state has set aside more than $1 billion to deal with a crisis that is driving pension costs skyrocketing, according to a new report from a leading retirement consulting firm.
The report from the Boston Consulting Group (BCG) says the California Public Employees’ Retirement System has about $1.3 trillion in unfunded pension liabilities.
The state is also on track to run out of money by 2024, the report said, which would mean it would have to pay down the pension liability by about $2.6 billion in the first three years of its next budget.
The state, which was forced to cut $1 trillion in state aid and tax revenue by ending a $5 billion tax hike last year, is expected to run short of money this year as well.
If the shortfall is not plugged by 2024 at the latest, it could result in a state default, which could lead to the loss of the pension system’s tax-exempt status, the study said.
As the pension shortfall grows, it will be easier for the state to reduce pension benefits to keep up with costs, the BCG said.
In fact, the state has already cut $9 billion from its pension payments and the rest will be phased out over a few years.
“The California Public Employee Retirement System (CERS) is not sustainable.
The system will be unable to pay the $3 billion pension shortfall, and its ability to do so will be significantly reduced by 2024,” the report reads.
BCG, a Boston-based investment firm, released the report Monday as lawmakers are scheduled to meet this week to discuss a plan to cut spending and raise revenues to pay for a state budget deficit that has grown to $16 billion.
It found that California is on track for $1,842 in unfightable pension costs, which is more than double the $837 million the state budget was forecasting when it was first enacted in 2020.
The $2 billion shortfall is the largest of any state.
In addition to the unfundable costs, BCG estimates that the state could have to cut more than 2,600 public workers and retirees from the workforce in 2018-19, including some of the state’s most senior public employees.
Cuts have already occurred in state services, such as the public schools system, and in social service programs, including unemployment benefits and child care.
It estimates that $1 in every $2 raised by the state from its 2018-2019 budget will be used to pay off unfundated pension liabilities, even if the state does not reach its goal of raising taxes.
The costs are expected to increase to $1 by 2021.