California's three biggest pension funds face a shortfall of $500 billion, according to a study published by the Stanford Institute for Economic Policy Research.
That's more than eight times larger than the $55.4 billion unfunded liability reported by the California Public Employees' Retirement System, the California State Teachers' Retirement System and the University of California Retirement System at the end of fiscal 2009.
The Stanford scholars are among a group of academicians who argue that governments should use so-called risk-free rates, not expected rates of return, in discounting future liabilities. That dramatically increases the present value of the pensions' future payments to members.
"California's public pension liabilities are substantially understated," the authors said in a policy brief titled "Going for Broke: Reforming California's Public Employee Pension Systems."
"Given the consequences of underfunding, we believe every effort should be made in short order to implement policy changes to reverse the current shortfall and to prevent a similar shortfall in the future," they wrote.
The study made headlines across the state and prompted renewed calls for pension reform from elected officials and candidates for public office.
"The study reinforces the immediate need to address our staggering pension debt," Republican Gov. Arnold Schwarzenegger said in a statement calling for pension reform. "We cannot wait any longer. I look forward to working with the Legislature on a solution that will stop the growth of pension debt, increase transparency, enforce strict funding rules and protect California's budget priorities."
CalPERS, the nation's biggest public employee pension fund, disputed the findings, saying the report "relies on outdated data and methodologies out of sync with governmental accounting rules and actuarial standards of practice."
The fund says its portfolio alone has risen $45 billion to $206 billion from the lows the study authors used to compute the $500 billion liability for the three California funds.
CalPERS also said its returns have averaged 7.9% over the past 20 years, despite the big hit taken in the recession, suggesting its long-term earnings assumption of 7.75% are "valid."
Even if one were to accept the need to value its liabilities using a risk-free rate, the pension fund said the scholars picked the wrong one. The study used the 10-year Treasury rate as the discount rate for CalPERS' liabilities, but the pension fund said its liabilities are of a much longer duration, suggesting the higher 30-year Treasury rate would be a more appropriate risk-free rate. Using the higher rate would decrease the present value of the liabilities.
To read the Stanford study, go to:
For CalPERS' response, go to:
