California’s state and local governments face billions of dollars in debt – the official term is “unfunded liabilities” – for employee pensions not now covered by pension fund assets.
But how many billions?
It could be about $300 billion, according to new calculations by Stanford University researchers, but that assumes that projections of future investment earnings used by pension trust funds, around 7.5 percent a year, are accurate.
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Or the debt could be three-plus times as much, close to $1 trillion, if the earnings assumptions track federal treasury notes, according to Pension Tracker, a research project headed by former Democratic Assemblyman Joe Nation.
If nothing else, the newly released Pension Tracker data demonstrate that an earnings assumption – the “discount rate” – is the most important factor in judging whether pension debt can be reasonably managed, or a crisis that could drive government agencies into insolvency.
Three cities have been forced into bankruptcy, largely due to soaring pension costs, and others are feeling the pinch as costs rise.
The tendency among California politicians, both state and local, is to acknowledge that there is debt, but accept the optimistic earnings projections that minimize its dimensions.
A few years ago, at the behest of Gov. Jerry Brown, the Legislature adopted a mild pension reform that will, it’s said, reduce the debt over the next several decades – but once again, that assumes that the official discount rates are valid.
The unspoken reasons why relatively high earnings assumptions are used – much higher than those used by corporate pension plans – are not only that they minimize debts and thus lessen political pressure to address them, but that public pension systems can always tap taxpayers if their earnings fall short of expectations.
High short-term earnings during the dot-com boom of the 1990s led the California Public Employees’ Retirement System to tell legislators that it could easily afford a major boost in state pension benefits – and when it was enacted, most local governments followed suit.
A few years later, during the Great Recession, investment earnings tanked. CalPERS has since ramped up demands on state and local governments for more money to cover shortfalls, but has made only minor downward adjustments in its discount rate.
Actual CalPERS earnings vary widely – in recent years from a loss of 23.6 percent in 2008-09 to a gain of 18.4 percent in 2013-14, followed by 2.4 percent in 2014-15.
If, in fact, California’s pension debt is closer to $1 trillion than $200 billion, the real-world impact on taxpayers and other public spending will be massive and unsustainable.
But, one might wonder, how does California compare to other states? That’s also covered in the research. It reveals that on the official “actuarial” basis, California’s pension debt is the ninth highest at about $5,100 per Californian, but using the lower discount rate tied to treasury notes, the “market” basis, it’s fourth highest at $25,325 per capita.
So it’s relatively high either way, but on the market basis, downright scary.