State pensions in the red (California - $500 BILLION, the country - over $3 TRILLION)

Madera Tribune ^ | 4/06/10

[Libloather]

State pensions in the red
Underfunded by as much as $500 billion, study says
Tuesday, April 06, 2010
By The Associated Press

SACRAMENTO (AP) - California's public pension funds are underfunded by as much as $500 billion, according to a Stanford University study that was commissioned by Gov. Arnold Schwarzenegger and released Monday.

The shortfall could create major financial crisis for the state. And California is not alone: states around the country are facing massive shortfalls in their pension and retiree health care obligations that academics have estimated surpass $3 trillion.

The estimated California shortfall applies to the retirement systems for its state and local government workers, teachers and University of California employees. Together, they serve about 2.6 million retirees.

"This study reinforces the immediate need to address our staggering pension debt," Schwarzenegger said in a statement. "According to the study, California taxpayers are on the hook for over a half-trillion dollars. That's nearly six times the size of our entire state budget."

Analysts at those retirement funds estimated their unfunded liabilities to be much lower. CalPERS put its unfunded liabilities at $38.6 billion on July 1, 2008, and CalSTRS estimated its own rate at $16.2 billion. The Stanford researchers tallied those unfunded liability figures at $239.7 billion for CalPERS and $156.7 billion for CalSTRS.

The researchers also estimated those figures would be even higher today, because those two funds and the UC retirement fund have lost a combined $109.7 billion since then.

David Crane, an economic adviser to the governor and former CalSTRS board member, explained the difference, saying the state's pension funds have been underreporting the gap between revenue and obligations.

[Earthdweller]

"Politicians are politicians because they wouldn’t make it in the real world because they don’t know how to make an honest living."

Sure they could. There is always a need for BS artists in the law and used car sales fields.

[detective]

California is almost beyond saving. The politicians keep punching holes in the hull as the ship is sinking. The only question is how long will it be until enough of the suckers(taxpayers) figure it out and do something about it.

[detective]

California is almost beyond saving. The politicians keep punching holes in the hull as the ship is sinking. The only question is how long will it be until enough of the suckers(taxpayers) figure it out and do something about it.

[LoneRangerMassachusetts]

First of all I think all pensions should be eliminated.. BUT if you just must have them, then you should only qualify for one after working someplace like 30+ years and you should only be allowed to collect ONE.

They should also pay back social security like all us private sector commoners had to.

[Orange1998]

15 years ago Pension funds were taking back commercial real estate at the courthouse at huge losses. At the time I was wondering “how can they absorb these kind losses”. Seems it is finally catching up with them.

[Irenic]

So sad, too bad!

Guess those state pensioners will just need to bugger off.

Looks like that teat dried up...

[ExTexasRedhead]

http://www.nctpp.net/

Sacramento Tea Party

California is in the toilet because of the morons in the CA Assembly; RAT corrupt Morons.

[kaila]

I have read that the unions eventual solution to their pension problems is to raid private 401K plans.
If they try to do this, I predict revolution.

[Bean Counter]

The problem is that many times the Administrators and people who are supposed to be in charge of these funds are recipients of the funds themselves, and have no motivation to protect the taxpayers, since most of them are the taxpayers.

In the State of Oregon, the biggest voting bloc in the State is present and former state employee union members. Figure the odds that any of them will ever agree to any meaningful reforms to their own pensions...

[freekitty]

LOL I wouldn’t say there was a real need for them.

[Flavius]

this should end the ride

[boomstick]

Since the government is in charge of the inflation statistics used by most of the public pensions, they can just change the methodology of CPI so that we never have any inflation ever again. Huzzah!

[boomstick]

I took a look at the report — their methodology does overstate the gap a bit, but doesn’t change the verdict.

The crux of the issue is figuring out the difference between the value of the assets with the value of the liabilities. For the most part, the former is easy: just add up the stock and bond prices and voila. Private equity, hedge fund, and real estate investments are a bit harder to value, but are still relatively straightforward.

The present value of the liabilities is tougher. If the pension has to pay out a dollar in fifteen years, how much value should we assign to that obligation today? In other words, what annual rate of return should be assumed? The higher the assumed discount rate, the lower the present value of the obligation.

The authors used the yield of the 10y Treasury bond (4.4%), while the state uses their expected average annual return (7.5-8%). In my opinion, they should use the yield of their own state-issued general obligation bonds — that’s what the market is saying is the value of the state’s future obligation to pay. For California, that’s around 5.1% for a bond due in ~15 years. So rather than the $425bn shortfall, maybe it’s more like 375bn.

Note that this is relative to asset values as of July ‘08. The three pensions in question are down about 50bn since then, so the “headline” number should be roughly 425 bn rather than 500 bn.