In a down market, “not only is the state getting less money from the way the tax structure is comprised, but it also forces them to increase their payments for their unfunded pension liability,” said Howard Cure, head of municipal research in New York at Evercore Wealth Management, which oversees $6.2 billion of investments. “It compounds the vulnerability of their tax structure.”
There is a limit to how high the state’s contributions could rise: 0.5 percent annually. That could slow the state’s progress toward eliminating the pension shortfall if the markets reverse course after a period of good years that allowed California to cut its contributions, said Ryan Miller, principal fiscal and policy analyst at the legislative office.
”We have a very volatile revenue system,” Miller said. “It’s possible that we could lose tens of billions of dollars over a multi-year period following a recession and that might cause these sorts of constraints in a budget where we couldn’t address this problem.”
As state leaders deliberate on the budget for the fiscal year that starts in July, Brown has advocated fiscal restraint. The governor “is not going to support ongoing higher levels of state spending that broadly speaking could be susceptible to a downturn in revenues,” Palmer said.
The state should act now, while revenue is surging, to make its teacher contributions simpler and less susceptible to market volatility, Miller said.
“Its role here is going to be far less certain than the districts’ role,” Miller said. “In some scenarios, the state’s share of this problem could be very, very big.”