“California is presented with a unique opportunity to reduce its pension obligations by more than $11 billion over the next 20 years, without having to reach deeper into the pockets of taxpayers or the public workforce that serves them.
“Faced with the stark reality that the state is on a trajectory to increase its pension payments from the current $5.8 billion to $9.2 billion in a mere six years, the Governor and I are partnering on a fiscally prudent plan to buy down our pension debt using what Albert Einstein once called ‘the eighth wonder of the world,’ compound interest.
“We accomplish this by strategically over paying our pension bill to CalPERS by $6 billion dollars using state monies that currently earn less than 1%. Given that CalPERS has averaged an investment return of nearly 7% over the past 20 years, the additional interest earnings generated by the mega-payment represents a win-win for state workers and taxpayers. For every dollar we will put in today, the unfunded liability will be reduced by $2 over the next 20 years.
Pension payment due years from now cost 7% per year to state government, a charge they think can be reduced by paying up front.
W do not compound, we quantize, and no time bet out 20 years by the state is measurable in terms of interest charges. In fact, the pension payments will be set according to the states ability to pay, the other way around. As the interest charges spend time in high digits (and they will) the state loses all that savings in bailouts, being cash strapped.
The bounds on volatility get explored, they are not theoretical, but traversed during price discovery. It is like super position, once the boundaries conditions established, the possible orbits accentuated for action. The state will pay for its cash shortage.
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