CalPERS Admits 52% Underfunding on State Employee Pensions



SACRAMENTO – The California Public Employees Retirement System (CalPERS) just admitted that the state-managed pension plan, that provides retirement for the state and almost 1,600 local government agencies, is 52% underfunded and will be forced to jack up taxpayer-funded contribution rates by about $1.518 billion.

But this increase will still leave the pension plan $986.1 billion underfunded. To adequately fund pensions, the state and local governments need to more than quadruple annual taxpayer-funded contributions by $11.3 billion.

As the nation’s largest public employee pension plan, CalPERS stands out as the most irresponsible for having failed to prevent government pension spiking and for not forcing their government clients to pay for the spikes. But the pension fund’s $277.2 billion of investments leaves a $144.3 billion unfunded debt to cover 1.6 million state employees and retirees’ pensions, according to CalPERS’ October 31, 2013 report.

California public employees now enjoy the highest benefits of any state in the nation. To pretend to fund this largess, CalPERS has become the worst “outlier” among public pension plans in using creative accounting to blur their grossly underfunded status. This has allowed its government clients to short-check their annual payment for the nation’s most lucrative pension benefits.

CalPERS creatively makes the “assumption” it will have 30 years to compound investment returns to fund their 52% funding shortfall to pay for the retirement of “current” employees. CalPERS then guesstimates they will compound investment returns every one of those 30 years at a 7.5% rate. This allows CalPERS to “assume” investments will grow by over 900% in 30 years.

Most people attack CalPERS’ assumption that they will make the 7.5% compounded return, but CalPERS did earn 16.9% last year; and a 2011 study found the plan had earned an average of 3.41% for five years, 5.36% for ten years, 6.97% for 15 years, and 8.38% for 20 years. Although this would seem to justify the 7.5% assumption, the returns took place during a period of record inflation. Given CalPERS’ guaranteed inflation increase protection for benefits, the taxpayer obligation would rise and wipe out most of the investment performance gain.

But the real scam in CalPERS’ “assumptions” is not just the highly dubious estimate of superior investment returns; it is the scam of the public pension plan having 30 years to compound those returns by that 900% to pay for the pension funding shortfall. The “current” average for California government workers seniority is more than 16 years. That means that CalPERS only has 14 years of investment return opportunity to make up their funding shortfall.

Assuming CalPERS makes 7.5% per year, their compounded investment return will only go up by 300% in 14 years. Consequently, CalPERS needs to triple their pension funding to get to that 900% growth of assets. Tripling the number of assets means CalPERS’ pension underfunding is not the admitted $260.9 billion. They actually have a $986.1 billion underfunded pension.

To adequately fund the pension plan, the state and local governments would have to more than quadruple their current $3.7 billion annual cash contribution to $15 billion. The Democrat politicians that control the State of California could care less about the $986.1 insolvency of the pension plan. But could you imagine the firestorm if state and local governments were forced to cut spending by $11.3 billion to pay for their pension promises?