Transcript: Press briefing Q&A w/ LAO Mac Taylor on California’s fiscal outlook for 2014-15 – Part V

Part V – Partial transcript of the press briefing Q&A with Legislative Analyst Mac Taylor on California’s fiscal outlook for 2014-15. The press conference was held on Nov. 30, 2013:

Question:
…What’s your best take on how much money the state actually owes for retirement, health services, et cetera?

Mac Taylor:
Well, yes, the biggest decision – the biggest sort of variable is what is the investment earnings rate. The system’s tend to be around 7.5%, and you’ve had other groups suggest they should be in this sort of risk-free rate of 4% or 5% and it makes a huge difference on those liabilities.

I think, you know, we feel that the systems that have tried to bring down those investment earnings rates slightly over time was an appropriate thing to do. Over the longer run, we probably would like a little bit more conservative estimates on returns.

But I think it’s more important that we do just set aside and we start having financing systems for the things that are now either pay-as-go systems like retiree health, put aside something, have a plan, or CalSTRS reach agreement with the school districts and with teachers on what they’re going to bear and what the state should bear and start setting aside money to address those.

If you find that your investment earnings aren’t matching what they said they would – what the systems said they would – they should start bringing those down. That will increase the unfunded liabilities, and it just makes it more important that you have money set aside and it may be that you have to divert a little bit more money to that category as opposed to the others. But that’s something that I think you can do over time.

Question:
What’s your estimate of how much?

Mac Taylor:
We’ve gone with the system’s estimate, so it’s in the $170 billion range. But there is upside risk to that.

Question:
…You talked about this net final payment accrual process. Is that only going backward? I’m trying to figure out what the 12-13 revenues were. Is that a going backward issue?

Mac Taylor:
Yeah. The new process for Proposition 30 revenues and other revenue increases enacted after 2012 have a different accrual process, and frankly it’s a bit of a mess now. We have two accrual processes for revenue, and it’s not a real transparent process. It means that you have adjustments that can be made going back a couple of years for a long period of time. You’re kind of constantly looking backwards. And what we’ve called for is just we think it should be transparent is what those changes that the administration makes to their accrual adjustments.

Question:
…Is there really then any basis upon which the legislature can make decisions about how much money they think they have to spend?

Mac Taylor:
Well, I mean, it’s at the margin. It could be significant because you could move hundreds of millions of dollars around. I think our concern is that when it’s not real transparent, it’s hard for us to know exactly what our accrual should be, and they’re key in determining, for example, the Prop. 98 obligations in past years. And so we just think it should be transparent. They should lay out exactly what adjustments they made.

We would hope going forward after Prop. 30 if those tax rates kick off, we’d like to see the state go back to a simpler, more understandable accrual process.

Question:
Can you comment on the Twitter IPO?

Mac Taylor:
…We didn’t make a specific assumption regarding that IPO in part because it was very difficult to do the Facebook one. Jason and his colleagues spent a lot of time and it’s very difficult to know because you’re trying to judge when people are going to sort of cash out on their options and their stocks. The Twitter is while very large, it’s nowhere near as large as Facebook so we just didn’t make specific adjustments.

Question:
[Inaudible]

Mac Taylor:
That’s why we always have an assumption implicit that there is a type of IPO activity. We may be understating it, and as I said earlier, to the extent that we are, there is a little bit more upside in that case to our numbers.

Question:
So far, if I read this right, there’s been not much of an impact with some of the mess back in Washington with the shutdown, sequestration, and et cetera.

Mac Taylor:
Very, very little so far. And absent a big blow-up in early next year either over the government shutdown or the debt ceiling is the one that we worry most about because that can disrupt the economy in general. We don’t factor in any really large significant effect from that. We assume that they will address the problems.

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2 Comments on “Transcript: Press briefing Q&A w/ LAO Mac Taylor on California’s fiscal outlook for 2014-15 – Part V

  1. Pingback: Transcript: Press briefing Q&A w/ LAO Mac Taylor on California's fiscal outlook for 2014-15 - Part I | What The Folly?!

  2. Pingback: Transcript: Press briefing Q&A w/ LAO Mac Taylor on California’s fiscal outlook for 2014-15 – Part II | What The Folly?!

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