Around a year ago we relayed that Stanford University Professor and former Democratic Assemblyman Joe Nation had released a report on the huge unfunded liabilities of the state’s pension systems. At the time, the report, released by the Stanford Institute for Economic Policy Research, concluded that local pension systems alone were nearly $200 billion short. Nation has now released a new report in conjunction with the Stanford outfit and the organization California Common Sense. The latest report posits that California’s three major pension systems (CalPERS, CalSTRS, and UC System) under a low-risk discount rate have a total unfunded liability of $500 billion, which is 17 percent higher than the $425 billion shortfall that was projected back in 2010.
The report states that the “annual cost to the state of delaying pension solutions is $3.4 million per day.” Here are some other highlights from the report:
- Even at a 7.75 percent discount rate, the funded status for CalPERS and CalSTRS remains below 80 percent. Private-sector pension plans are labeled “at risk” if their funded status falls below 80 percent.
- The combined unfunded liability for CalPERS, CalSTRS, and UCRP under the 6.2 percent discount rate is $290.6 billion, equal to more than three state General Fund budgets. That figure represents an unfunded amount per household of nearly $24,000.
- Simulations of asset growth indicate that the probability of CalPERS assets falling short of obligations is 82 percent
- CalPERS must earn an annual average of 9.0 percent for the next 16 years to achieve even odds that its assets are greater than or equal to 80 percent of liabilities.
- Assuming a 6.2 percent discount rate and other minor demographic changes, current state spending on pensions is likely to increase from $4.8 billion in 2011-2012 to $14.6 billion, or the equivalent of 17.3 percent of current General Fund expenditures
You can read the full report here. In terms of solutions, the report argues that “pension system reforms include benefit reductions, such as prospective reductions for current employees, greater cost sharing, and governance reforms, particularly changes in pension system accounting methods and assumptions.” The report also criticizes the governor’s pension proposal as too modest in the savings it will provide.
CalPERS responded to the study with the following statement:
“The study is written from a perspective that is intended to exaggerate perceived costs and the instability of pension systems. The report's findings were based on low discount rates to artificially magnify unfunded liabilities. It is important to remember that CalPERS invests in a highly diversified portfolio that includes stocks, real estate, and other assets that have historically earned significantly higher returns than the rates assumed in the study.”
CalPERS also argued that over the past 20 years through June 30, 2011, the pension fund has earned an average annual investment return of 8.4 percent in excess of the pension fund's actuarial rate of return assumption of 7.75 percent needed to pay long-term benefits.
The study’s methodology also received criticism from State Treasurer Bill Lockyer. In fact, as a sign of Lockyer’s distaste for the study’s conclusions and process, he resigned from the institute’s pension advisory panel. The LA Times reports: “’When it comes to public pensions, maybe SIEPR should stand for 'Stanford Institute to Eviscerate People’s Retirement,' ‘ said Joe DeAnda, the treasurer’s press secretary. Lockyer said the study did not adequately consider the legal impediments to reducing benefits for current employees and ignored research indicating that retirement systems perform better when their boards include members of the retirement plan.”