CA Public Employee Pension Debt ACTUALLY UNDERSTATED


Inquiring minds are looking to California Public Employee Pensions where analysis shows that the $500 Billion deficit is actually understated. The shortfall is so drastic that changes in accounting methods are being considered:

The Governmental Accounting Standards Board (GASB) is considering changing the rules for government pension reporting to better reflect the financial status of the plans, but critics say the proposed changes don’t go far enough to reveal the true cost to taxpayers of pension promises to government employees.

Currently GASB-adhering pension plans are required to reduce, or discount, the cost of projected pension benefit payments based on the expected rate of return on long-term investments of the plan’s assets. In effect, the discount rate allows the plans to reduce the current level of contributions from employees, school districts and state and local governments – ultimately, it’s all taxpayer dollars – by betting that that reduction will be offset by the plans’ investment gains.

The issue is this the difference in that pension liabilities are almost a certainty:

…critics argue that because pension plan obligations are inherently without risk – retirees are legally guaranteed to be paid what they have been promised, regardless of how much money is in the plan – a risk-free discount rate should be used because it more accurately reflects the value of the plan’s liabilities (the payment obligations). Currently that’s in the area of 4 percent for high-quality municipal bonds.

The issues facing the pension funds are very straight forward:

The problem for pension funds is that using a lower discount rate would require significant increases in contributions to offset the reduction in investment gains. Studies using this risk-free discount rate standard estimate that California’s unfunded pension obligations might be anywhere from $327 billion to $500 billion – far more than the $75 billion shortfall currently projected by CalPERS and CalSTRS.

Here is just one of the three major pensions. Remember that the deficit is accumulative. Therefore the ‘total debt’ is the sum of the differences of each year:

The ‘establishment’ position sounds earily familiar:

Pension actuaries are generally content with the current discount rate standard, feeling that it is a good reflection of the value of the pension plan based on the historical rate of investment returns.

Haven’t the ‘official overseers’ been the problem throughout the process due to only looking at incorrect ‘historical’ computer modeling?

Hmmm…fool me once…

Thanks to CalWatchdog.com for keeping an eye on Californian’s money.

Advertisements
%d bloggers like this: