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State pensions face steep shortfalls, report concludes

Milken Institute conference delivers a sobering appraisal of public retirement funds and suggests ways to 'fix California.'

October 20, 2010|By Alana Semuels, Los Angeles Times

Wrapping up its State of the State Conference at the Beverly Hilton on Tuesday, the Milken Institute released a sobering look at California's public pension system.

Their conclusion: Dramatic changes are needed to cope with demographic trends and funding shortfalls.

"We're talking about a perfect storm: more state services needed for an aging population, a workforce that will spend more years in retirement than they did contributing to the funds, and a smaller ratio of working-age taxpayers and contributing state workers to pay for it all," said Perry Wong, director of regional economics at the Milken Institute.

Demographics play a big role. In the first half of this century, the number of seniors in California is projected to triple to 11.6 million, the report says.

The state's pension funds already are in trouble.

In the next two years, the report predicts that the three major state pensions will have obligations that amount to more than five times the state's revenue. The pension liability will triple by 2014, to $10,000 per working-age Californian, up from $3,000 in 2009.

And the state will face other burdens, most notably a growing public school enrollment.

To deal with these rising costs, the report concludes, the state must raise the retirement age and increase the contributions from employees. It also suggested that the state switch to a hybrid plan in which part of benefit is variable, because it is subject to market risk, and the rest is guaranteed. Utah adopted such a plan in March.

"While the funding gap continues on its current trajectory, further delay is not an option," the report concludes.

Earlier at the conference, a panel of executives talked about ways to "fix California," suggesting the state improve education, strengthen intellectual property laws and streamline the permitting and construction processes.

"I feel that we are in the process of losing the California dream," said Kellie Johnson, head of Ace Clearwater Enterprises, an aerospace supplier. Her company can't find enough skilled workers to fill positions, she said.

Her suggestion: Students should be exposed to the careers that exist in manufacturing, and community colleges and high schools should offer programs that make those career paths attainable.

The state also should tax sales that occur over the Internet, rather than just those in brick-and-mortar shops, said Art Coppola, chief executive of mall owner Macerich.

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